Luxembourg Tax Regime

Luxembourg taxes resident companies on worldwide income and non-residents on Luxembourg-source income. Corporate profits bear three layers — corporate income tax (CIT), a 7% solidarity surtax on the CIT, and a municipal business tax — giving a combined effective rate of about 23.9% in Luxembourg City following a 2025 reduction of the headline CIT rate. A full participation exemption on qualifying dividends and gains, an 80% IP-box exemption, an extensive treaty network and a sophisticated fund and holding-company toolkit (the SOPARFI and regulated fund vehicles) make Luxembourg the leading European domicile for holding, financing and investment-fund structures.

Individuals are taxed on a finely graduated progressive scale to 42% (plus the solidarity surtax), and there is no net wealth tax on individuals — only on companies. A company is resident if its registered office or central administration is in Luxembourg.

1.1 Sources of law and treaties

The Income Tax Law (LIR), the Municipal Business Tax Law, the Net Wealth Tax Law, the VAT Law and the General Tax Law (Abgabenordnung) govern the system, administered by the direct-tax authority (Administration des contributions directes, ACD) and the registration/VAT authority (AED). EU directives, an extensive treaty network and the OECD multilateral instrument apply, and an advance-decision (ruling) practice supports the structuring sector.

1.2 Recent developments

The most consequential recent and pending changes are:

A reduction, from tax year 2025, of the headline corporate income tax rate (to 16% for income above EUR 200,000), lowering the combined CIT/surtax/municipal-business-tax rate in Luxembourg City to about 23.87%.

Implementation of the OECD Pillar Two regime — an income inclusion rule and a qualified domestic minimum top-up tax (fiscal years from 2024) and an undertaxed-profits rule (from 31 December 2024) — for groups with consolidated revenue of at least EUR 750 million, with registration and GloBE information-return filings due by 30 June 2026 for early in-scope groups.

Continuing modernisation of the investment-fund and holding regimes and the reverse-hybrid rules affecting transparent vehicles.

Headline statutory corporate income tax rate for a resident company. Where sub-national (state, provincial, cantonal or municipal) corporate taxes apply, the combined rate reported by the OECD is shown. Projected 2026–2028 rates carry the current rate forward unless a change is already enacted or officially scheduled. As-of 2026.

Top marginal statutory personal income tax rate on employment income for a resident individual. Where sub-national (state, provincial, cantonal or municipal) income taxes are a standard part of the system, the combined top rate is shown. Projected 2026–2028 rates carry the current rate forward unless a change is already enacted or officially scheduled. As-of 2026.

2.1 Residence and the rate stack

A company is resident — and taxed on worldwide income — if its registered office or central administration is in Luxembourg; non-residents are taxed on Luxembourg-source income. From tax year 2025 the CIT rate is 14% for taxable income below EUR 175,000 and 16% above EUR 200,000 (with a transitional band between), to which a 7% solidarity surtax applies (giving an aggregate CIT of 17.12%), plus the municipal business tax (6.75% in Luxembourg City). The combined effective rate in Luxembourg City is about 23.87%. Tax-transparent partnerships are not subject to CIT unless caught by the reverse-hybrid rules.

2.2 The participation exemption

Luxembourg's participation exemption fully exempts qualifying dividends and capital gains. Dividends are exempt where the company holds at least 10% of the subsidiary (or a participation with an acquisition price of at least EUR 1.2 million) for an uninterrupted twelve months, and capital gains where the holding is at least 10% (or an acquisition price of at least EUR 6 million); the subsidiary must be a qualifying EU entity or a company subject to a comparable tax. A recapture rule applies where expenses linked to the participation were deducted. The exemption is the foundation of the SOPARFI holding company.

2.3 The IP box

Net income (royalties and capital gains) from qualifying intellectual property — patents and copyrighted software, but not marketing-related IP — benefits from an 80% exemption under the modified-nexus approach, giving an effective rate of roughly 4.8%; qualifying IP is also exempt from net wealth tax. The regime rewards IP developed through the taxpayer's own R&D and is a key incentive for innovation-driven groups.

2.4 Net wealth tax

Luxembourg levies an annual net wealth tax on companies (there is none on individuals) at 0.5% on net assets up to EUR 500 million and 0.05% above, with qualifying participations and IP excluded from the base. A minimum net wealth tax applies on a three-band scale keyed solely to the total balance sheet from tax year 2025: EUR 535 where the balance-sheet total is up to EUR 350,000, EUR 1,605 where it exceeds EUR 350,000 and is up to EUR 2 million, and EUR 4,815 where it exceeds EUR 2 million — irrespective of the proportion of financial assets held. The net wealth tax effectively replaced the former minimum corporate tax.

2.5 Income determination and losses

Taxable profit derives from the commercial accounts adjusted for tax, with depreciation at official rates and specific rules on provisions and write-downs. Tax losses arising from 2017 onward may be carried forward for 17 years (older losses are unlimited); there is no carryback. The reverse-hybrid and anti-hybrid rules, and a non-deduction rule for payments to EU-blacklisted jurisdictions, constrain certain structures.

2.6 Interest limitation

Net borrowing costs are deductible only up to the higher of 30% of tax-EBITDA or EUR 3 million, with a group escape, a standalone-entity exemption and carryforward of disallowed interest and unused capacity, implementing the EU anti-tax-avoidance directive. Financial undertakings are excluded, and the rule interacts with the participation-exemption recapture on financing of exempt holdings.

2.7 Fiscal unity

Resident companies (and Luxembourg permanent establishments of EEA companies) can elect fiscal unity (tax consolidation) where the parent holds at least 95% of its subsidiaries: group members' results are combined for corporate income tax and municipal business tax over a minimum five-year period, allowing immediate offset of profits and losses. Horizontal consolidation between Luxembourg sisters held by an EEA parent is available.

2.8 Controlled foreign companies and transfer pricing

The CFC rules (from the EU anti-tax-avoidance directive) attribute to a Luxembourg controlling company the non-distributed income of a low-taxed controlled foreign company arising from arrangements lacking economic substance and put in place to obtain a tax advantage. Transfer pricing follows the arm's-length principle and the OECD Guidelines, with documentation expectations, a specific framework for intra-group financing companies, and country-by-country reporting for large groups; advance pricing and tax agreements are available.

2.9 Investment funds and holding vehicles

Luxembourg's structuring toolkit is central to its economy: the SOPARFI (a fully taxable holding company benefiting from the participation exemption and treaty access), and a range of regulated and lightly taxed fund vehicles — the UCITS and Part II funds, the specialised investment fund (SIF), the reserved alternative investment fund (RAIF) and the risk-capital company (SICAR). Most regulated funds are exempt from corporate income tax and net wealth tax and instead pay only an annual subscription tax (taxe d'abonnement) at 0.05% or 0.01%, making Luxembourg the largest fund domicile in Europe.

2.10 Pillar Two

Luxembourg transposed the EU minimum-tax directive by a law enacted in December 2023 and amended in December 2024: an income inclusion rule and a qualified domestic minimum top-up tax (which takes precedence) for fiscal years from 2024, and an undertaxed-profits rule for years from 31 December 2024, for groups with consolidated revenue of at least EUR 750 million, with transitional country-by-country safe harbours. In-scope entities register with the authorities and file GloBE information returns by the prescribed deadlines (30 June 2026 for early in-scope calendar-year groups).

3.1 Residence and rates

An individual is resident if their domicile or usual abode is in Luxembourg, and residents are taxed on worldwide income. Income tax is levied on a finely graduated progressive scale rising to a top marginal rate of 42%, increased by the 7% solidarity surtax (9% for the highest incomes) to an effective top of about 45.8%, and applied through a tax-class system reflecting family circumstances. Cross-border commuters (a large share of the workforce) are taxed on their Luxembourg employment income.

Indicative; the scale is finely banded and indexed. As-of June 2026.

3.2 Capital income and inbound incentives

Dividends benefit from a 50% exemption (and a partial relief for qualifying holdings), interest from resident paying agents is largely covered by a final 20% levy, and capital gains on substantial shareholdings or short-term disposals are taxable while long-held private gains are often exempt. An inpatriate (impatriate) regime and a profit-sharing-bonus regime provide favourable treatment for qualifying inbound employees and talent, supporting Luxembourg's role as a financial-sector hub.

3.3 Succession and the absence of an individual wealth tax

Luxembourg levies no net wealth tax on individuals. Inheritance tax applies to the estates of residents, but transfers in the direct line (to children) of assets already part of the estate are generally exempt, with rates rising for more distant heirs; gift tax applies to notarised gifts. The light personal wealth and succession burden complements the corporate and fund regimes.

Dividends paid to non-residents bear a 15% withholding, eliminated for qualifying parents under the participation exemption and the Parent-Subsidiary Directive and reduced by treaty. Luxembourg levies no withholding tax on interest paid to non-residents (a resident final levy applies to certain resident-individual interest) and no withholding tax on royalties or on liquidation proceeds — a major attraction for financing and licensing structures. Representative outcomes:

5.1 Anti-deferral, pricing and financing

The CFC rules and transfer-pricing rules (Section 2.8) and the interest-limitation rule (Section 2.6) form the core of Luxembourg's outbound and inbound framework, attributing substance-light low-taxed foreign income, requiring arm's-length pricing (notably for intra-group financing companies) and capping financing deductions. Anti-hybrid and reverse-hybrid rules neutralise mismatches involving hybrid entities and instruments, in line with the EU directives.

5.2 Anti-abuse and disclosure

A general anti-abuse rule allows the authorities to disregard arrangements that are non-genuine and put in place essentially to obtain a tax advantage contrary to the law's object, supplemented by a denial of deductions for payments to EU-blacklisted jurisdictions and by the mandatory-disclosure (DAC6) rules for cross-border arrangements. Luxembourg applies the OECD treaty-abuse and exchange-of-information standards.

5.3 Foreign tax relief

Double taxation is relieved by the participation exemption for qualifying dividends and gains and, otherwise, by a credit for foreign tax limited to the Luxembourg tax on the foreign income (with treaty exemption for foreign permanent-establishment and real-estate income). Treaties allocate taxing rights and provide a mutual-agreement procedure.

6.1 Value-added tax

Luxembourg levies the lowest standard VAT rate in the European Union, at 17%, with reduced rates of 14%, 8% and a super-reduced 3% for specified goods and services, and exemptions for financial, insurance, medical and education services. Businesses register, charge and recover VAT, and the EU cross-border, reverse-charge and one-stop-shop rules apply; the management of regulated investment funds is VAT-exempt, supporting the fund sector.

6.2 Net wealth, registration and subscription taxes

The corporate net wealth tax (Section 2.4) is a distinctive annual charge on company net assets. Registration duties apply to notarised deeds and certain real-estate and contribution transactions, real-estate transfer tax applies on property acquisitions, and the subscription tax (taxe d'abonnement) is the principal levy on regulated investment funds (0.05%, or 0.01% for certain funds). There is no general capital duty on share issuances.

6.3 Social security and other

Employer and employee social-security contributions fund pensions, health and dependency insurance and are moderate by European standards. Excise duties, a vehicle tax and various minor levies apply. Combined with the low VAT rate and the absence of an individual wealth tax, Luxembourg's overall burden is competitive for a high-income EU economy.

7.1 Filing, rulings and payment

Direct taxes are administered by the ACD on the basis of an annual return (companies and individuals file electronically, generally by 31 December of the following year under current practice), with quarterly advance payments and a balance on assessment. Luxembourg's advance-decision (ruling) procedure provides binding confirmation of the tax treatment of transactions and structures, subject to a fee and substance requirements — a long-standing pillar of its structuring industry.

7.2 Audit and limitation

The ordinary statute of limitation is five years from the end of the tax year (extended to ten years in cases of incomplete or fraudulent declaration). The authorities conduct desk reviews and audits, and exchange information under the EU and OECD standards (including automatic exchange of financial-account information and rulings). Late-payment interest and penalties apply, scaled to culpability.

7.3 Disputes

A taxpayer first lodges a hierarchical claim (réclamation) with the head of the ACD, then appeals to the administrative tribunal and the administrative court. The mutual-agreement procedure and EU dispute-resolution mechanisms address cross-border double taxation, and Luxembourg's treaty network supports relief for its many cross-border structures.

Indicative deadlines. As-of June 2026.

9.1 Vehicle choice

Holding and financing is typically structured through a fully taxable SOPARFI (an S.A. or S.à r.l.), while investment is pooled through regulated or lightly taxed fund vehicles — the specialised investment fund (SIF), the reserved alternative investment fund (RAIF), the risk-capital company (SICAR) and the Variable Capital Company. The SOPARFI accesses the participation exemption and the treaty network; the fund vehicles are generally exempt from corporate and net wealth tax and pay only the annual subscription tax.

9.2 Holding and financing structures

A Luxembourg holding combines the 100% participation exemption on dividends and gains, the absence of withholding tax on interest, royalties and liquidation proceeds, and the IP box, but must satisfy substance expectations and the interest-limitation, anti-hybrid and reverse-hybrid rules. Intra-group financing companies are a particular transfer-pricing focus, and adequate people and premises in Luxembourg are increasingly important to defend treaty and directive benefits.

9.3 A worked illustration

A Luxembourg City trading company with EUR 2 million of profit pays corporate income tax at 16% plus the 7% solidarity surtax (an aggregate 17.12%) and the 6.75% municipal business tax, for a combined effective rate of about 23.87%. A pure holding company's qualifying dividends and gains are effectively untaxed under the participation exemption, subject only to the minimum net wealth tax (EUR 4,815 where the balance-sheet total exceeds EUR 2 million, on the three-band scale applicable from 2025).

9.4 Compliance and the minimum tax

Luxembourg's advance-decision (ruling) practice underpins its structuring industry, subject to substance and the general anti-abuse rule. In-scope groups now face the Pillar Two qualified domestic minimum top-up tax, income inclusion rule and undertaxed-profits rule, with registration and GloBE filings due by 30 June 2026 for early in-scope years, while the minimum net wealth tax continues to set a floor for asset-holding companies.