We’re back in Europe, today taking a look at one of the least tax-haven-like tax havens: Luxembourg.
Or, if you ask a local: Luxembourg (French), Luxemburg (in German), or Lëtzebuerg (Luxembourgish).
Somewhere between Belgium, France, and Germany is this tiny nation of many languages, businesses, EU institutions, international organizations, and the lowest VAT (sales tax) in the EU.
Geography and Demography
|Full Name:||Groussherzogtum Lëtzebuerg, Großherzogtum Luxemburg, Grand-Duché de Luxembourg|
|Official language(s):||Luxembourgish, German, French|
|Other major languages:||None|
|Type of government:||Unitary parliamentary constitutional monarchy|
|Legal system:||Civil law|
|GDP per capita:||100,000 USD|
Incorporation and Business
It is costly to form a company in Luxembourg and often takes quite a long time.
Luxembourgish companies are subject to a fairly high tax-rate on their worldwide income and diligent accounting records need to be kept.
So what exactly is the allure with forming a business in Luxembourg?
It used to be the low VAT, but due to changes in EU law for cross-border transactions whereby VAT is charged based on the consumer’s jurisdiction of residence as opposed to where the business is located, this is no longer so much the case.
Another big factor is that the corporate tax in Luxemboug – similar to Switzerland – is not necessarily written in stone. It’s negotiable, if you have tremendous amounts of money to negotiate with. The authorities in Luxembourg have decided it’s better to earn 1 million EUR in tax than 0 million EUR.
Companies that manage to negotiate favourable tax rates can then avail themselves of Luxembourg’s rich network of double taxation treaties to reach an overall low tax burden.
Another major drawing point of Luxembourg is it’s holding companies regime, which I will get to later.
Generally very good. Some particularly grumpy compliance officers might find the jurisdiction’s reputation as a former banking-secrecy haven to be problematic, but that’s rare.
No specific regulator. Companies are subject to the local courts. Financial services operators are generally answerable to the CSSF.
In addition to sole proprietorships, Luxembourg offers:
- SARL (société à responsabilité limitée): comparable to the German-law GmbH, which was the inspiration to the American LLC. Single-member SARLs are permitted. This is the most popular type in Luxembourg. Taxable entity.
- SECS (société en commandite simple): similar to Limited Partnerships, in that it has at least two partners of which one has limited liability and the other does not. Tax transparent (pass-through).
- SA (société anonyme): comparable to private limited companies and corporations. Popular with larger corporations. Can issue bearer shares. Taxable entity.
- SECA (société en commandite par actions): a hybrid between SECS and SA, a SECA is essentially a limited partnership with shares instead of a partnership agreement. Taxable entity.
- SPF (sociétés de gestionde patrimoine familial): a special type of holding company for family wealth management. Essentially a subcategory of other company types.
- Soparfi (Société de Participations Financières): a special type of holding company subject to normal corporate tax. Essentially a subcategory of other company types.
The Luxembourg government offers the following comparison with German, UK, and US company types.
|Germany||Gesellschaft mit beschränkter Haftung (GmbH)||Kommanditgesellschaft auf Aktien (KGaA)||Aktiengesellschaft (AG)|
|United States||Limited Liability Company (LLC)||Limited Liability Partnership (LLP)||Corporation (Corp.), Incorporated (Inc.)|
|Great Britain||Private Limited Company by shares (Ltd.)||Limited Liability Partnership (LLP)||Public Limited Company (PLC)|
There is no easy way to tackle Luxembourg corporate tax. But that doesn’t mean I won’t try. Just bear in mind that it’s a lot more complex.
Luxembourg is one of those jurisdictions you can go to, sit down with the government, and negotiate a tax rate. Doing this requires enormous capital and turnover, measuring in the hundreds of millions of EUR (at the very least).
Additionally, Luxembourg exercises a form of quasi-territorial taxation. Tax residence of a company in Luxembourg is determined by where its legal seat and where its central place of management is. Non-residents are only taxed on Luxembourg-sourced income.
This means that an entity formed in Luxembourg is, if not operated from Luxembourg, exempt from tax in Luxembourg.
This is by no means unique for Luxembourg, but I see a lot of confusion on this topic.
The tax rate for a resident company is often just under 30%, depending on local taxes.
Luxembourg Holding Company
The infamous 1929 law ceased to be in December 2010.
As mentioned earlier, two types of holding companies exist now.
The SPF is a passive investment vehicle that can only engage in acquisition, holding, and sale of financial assets. The shareholders of an SPF can only be family members and trustees. Corporate shareholders are not permitted for an SPF.
SPFs are exempt from corporate tax but are subject to a 0.25% subscription tax on the deposited share capital, minimum 100 EUR and maximum 125,000 EUR.
A Soparfi is a regular company which is taxed normally on commercial activities. However, on holding activities, it can be subject to an effectively low tax rate that’s especially suitable for international tax planning. That’s as in-depth as I will go here. If I take the plunge and start talking about the different dividends rules, this would quickly turn into a tax essay, which is not my intention.
Required and enforced.
Varies but ownership is generally protected.
Luxembourg has never quite held a candle to Switzerland, but it has one of the best banking sectors in the world when looking at things like quality, sophistication, and innovation. I cannot comment on the financial stability of banks, though.
Open a Bank Account in Luxembourg
It’s a mixed bag, but generally leaning towards being difficult and snobbish.
There are attempts being made to modernize and streamline the process. No longer able to rely on secrecy, banks in Luxembourg have taken to investment management (i.e. private banking, often with a minimum of 1 million EUR) but you can find banks such as ING and BIL which (from time to time and with varying degrees of success) accept non-residents quite openly. At least as long as they live in the EU/EEA or carefully selected countries.
Luxembourg desperately wants to position itself as a fintech hub. The current financial services climate is not terribly conducive to this, with an outmoded approach to risk of remote account openings.
Formerly very strict but nowadays in-line with EU standards. You can’t really hide money here unless you are EU non-resident and even then, Luxembourg has signed up for CRS/AEOI.
Banks in Luxembourg
There are 98 banks licensed in Luxembourg. This doesn’t include the 11 branches of non-EU banks and 30 branches of EU banks. Additionally, there are 13 rural banks.
The CSSF maintains a list of all banks in Luxembourg.
Living in Luxembourg
It’s surprisingly beautiful and charming. Good connections to neighbouring countries and European hubs via plane and train.
Politically stable and with high standards of living, foreigners who come to Luxembourg often stay for a long time, especially if they learn Luxembourg (and French and/or German).
The infrastructure is among the best in the world. Healthcare and education are highly regarded.
Costs of living are high.
Citizenship is attractive but, lacking any provable connections to Luxembourg, takes seven years of residence and passing an exam in Luxembourgish.
As a full-time resident in Luxembourg, taxes are quite high.
Luxembourg uses the concept of domicile and customary place of residence, which doesn’t necessarily count number of days spent in the country. The tax authorities in Luxembourg are generally lenient. A part-time resident in Luxembourg can easily qualify for very low if not zero tax.
Tremendously more costly than forming a company in for example Cyprus, Luxembourg offers similar tax benefits for non-resident companies.
Banking is of high quality in Luxembourg but opening an account can be a hassle and downright hostile. It’s getting better and that trend needs to continue for Luxembourg to remain an important banking jurisdiction long-term.