Luxembourg: Views on the Luxembourg tax reform

Raymond Krawczykowski

Sustainability, justice, selectivity and competitiveness, were the hallmarks of Luxembourg's tax reform approved in December 2016. Amendments and targeted tax rate reductions, for both individuals and corporations, became effective on January 1 2017. The measures should help maintain Luxembourg's competitiveness as a location for companies to do business, but the government should continue to adopt additional tax reform measures to continue its progress.

The gradual reduction of the corporate tax rate, in particular, is welcome. For taxable income exceeding €30,000 ($32,000), the rate in 2017 is 19% (reduced from 21%) and will decrease to 18% in 2018. Thus, for a company located in Luxembourg City with taxable income exceeding €30,000, the tax rate will be 27.08% in 2017 (29.22% in 2016). Taking into account the corporate tax, the municipal business tax and the contribution to the employment fund, the rate for a company in Luxembourg City with taxable income exceeding €30,000 will be 27.08% in 2017 (29.22% in 2016). This rate will fall to 26.01% starting in 2018.

New EU tax rules and international tax guidelines, such as those relating to the OECD's BEPS Project, which was launched to combat tax base erosion and profit shifting, feature prominently in an increasingly globalised world. These measures, which are focused on promoting transparency, consistency and taxation in accordance with economic substance, represent unprecedented changes to the normative framework for taxation. Because taxation is a vector for competitiveness and growth, many are predicting that these changes to the tax rules will increase competition between countries.

If a country is to remain competitive, further reduction of the corporate tax rate should be considered, in addition to other tax measures.

For an example of one such measure, consider a tax regime that benefits intellectual property, such as an IP box regime. These types of regimes, applicable in many countries, including Luxembourg, recently have been abolished in some cases where the regime was not in line with the recommendations under the BEPS Project, with the possibility for companies that benefited from the regime before a certain date with certain conditions to continue under the regime until 2021. Some countries already have adopted new regimes in line with the new international standards. Despite the fact that Luxembourg has not yet taken similar measures, the attractiveness of Luxembourg is extremely high for alternative asset managers. A number of big players in the private equity, infrastructure, and hedge funds world have recently made some announcements about setting up their platform in Luxembourg – both their management entity and their investment funds. In addition, to stable tax policies and full compliance with the OECD tax framework, those fund managers have certainly taken the benefits of EU "passporting" of their funds into account as soon as their platform is registered in Luxembourg. It is, nevertheless, expected that the Luxembourg government should quickly put the announcements made in 2016 concerning additional tax reform into practice. These measures should include, among other items, a greater reduction in corporate taxation and the establishment of a new regime favourable to intellectual property, while respecting the new international tax guidelines.

Raymond Krawczykowski (rkrawczykowski@deloitte.lu)
Deloitte Luxembourg
Tel: +352 451 454 904
Website: www.deloitte.lu

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