Luxembourg may be one of the smallest countries in Europe, but it’s one of the richest countries in the world in terms of GDP (Gross Domestic Product). Luxembourg has managed to establish a business environment that offers important tax advantages for foreign investors, therefore many foreign entrepreneurs have opted for the Luxembourg incorporation, because companies established in this country can benefit from unique tax advantages, no matter their size.
Being a founding member of the European Union and having a strategic location right in the heart of Europe, Luxembourg is still often regarded as a tax haven. However, Luxembourg establishes the perfect balance between providing a business-friendly environment with low taxes and the flexibility of the tax system constantly adapted to the EU legislation in order to prevent harmful conflicts. This balance was more than necessary as many foreign investors opt for the Luxembourg incorporation when establishing a company that deals with cross-border transactions. Due to its geographical location and its status as a core EU member state, Luxembourg is the perfect destination to set up the head offices of a company operating in various jurisdictions or a logistics center for commercial activities in some of Europe’s strongest economies.
Having an adaptable and progressive approach regarding taxes and tax regulations, Luxembourg is recognized as a stable and well established location for start-ups, multinationals, financial structures and tax planning. In addition, there are other important reasons to consider the Luxembourg incorporation process to open a new company.
All companies incorporated in Luxembourg are subject of the Belgian company law established in 1913 and a large number of its subsequent amendments are based on EU directives. Many foreign companies and investors choose the Luxembourg incorporation process to open holding companies in the country. Holding companies are formed under the Luxembourg law of 1929, which is why this type of business structures is also known as holding companies 1929. The respective law created a privileged tax regime for companies that have the sole purpose of holding shares in other companies from Luxembourg.
The tax system
Speaking of Luxembourg’s favorable taxation, there’s another important advantage for holding companies. Holdings are exempt from taxation and are only subject to capital tax and to a tax for subscription of shares levied at a rate of 0.2%. Unlisted companies are taxed on capital subscription but the tax rate varies.
Another common business structure used for Luxembourg incorporation is the SOPARFI. This type of company is fully taxable but it benefits from the participation exemption in Luxembourg, as well as from provisions included in double taxation avoidance treaties concluded by Luxembourg and from the provisions included in the EU directive regarding parent companies and their subsidiaries. As a result, most capital gains and dividends are exempt from tax in Luxembourg. In addition, tax rates of the withholding tax on dividends paid by foreign companies to a SOPARFI are usually low. Given its important tax advantages, the SOPARFI is a business structure often used for holdings and financing activities.
Double taxation avoidance treaties
Luxembourg has concluded several double taxation avoidance treaties with countries from all over the world. This means that withholding taxes on dividends, interest and intellectual property are often reduced to 0%, depending on the taxpayer’s country of residence.
The incorporation process is relatively simple and it can become even simpler if foreign investors choose to acquire the services of a firm specialized in the Luxembourg incorporation procedure and in all the other legal aspects related to it.