DIRECT HOLDING OF REAL ESTATE

This section covers the main tax aspects of the direct holding of real estate. In the first part, we describe the impact for resident individuals and non-resident individuals. Thereafter we describe the impact for resident companies and non-resident companies.

Resident individuals

Personal income tax

Income derived from Luxembourg real estate properties such as rental income is subject to personal income tax, which varies between 0% and 42% (to which the surcharge for the unemployment fund contribution of 7% or 9% is added) depending on the taxpayer's overall level of income. An additional contribution so called 'assurance dépendance' of 1.4% is due by individual resident taxpayers.

Deductibility of costs, interest and depreciation

The net amount of the rental income derived from the property investment is subject to the personal income tax. Expenses in direct relation with the property are tax deductible. Deductible expenses consist of depreciation of the property, interest in relation to the financing of the property, maintenance casts of the property, insurance, and property taxes (impôt foncier).

Losses - carry back/forward

If the expenses are higher than the rental income, it may generate a loss, which can be offset against other taxable income of the same tax year only. No carry-forward or carry-back is allowed.

Non-resident individuals

The same rules as for the resident individuals apply. A minimum income tax rate of 15% applies to the income received by non-resident individuals.

Double tax treaties may potentially apply.

Resident companies

Corporate income tax

Rental income received by resident companies is subject to corporate income tax and municipal business income. Income up to EUR 175,000 is subject to corporate income tax and municipal business tax at a rate of 22.8% including municipal business tax of 6.75% (for Luxembourg City) and the surcharge for unemployment fund of 1.05%. Income between EUR 175,000 and EUR 200,000 gives rise to a flat amount of EUR 26,250 plus 31% of the income exceeding EUR 175,000 (up to 200,000). The municipal business tax of 6.75 % (for Luxembourg City) and the surcharge for unemployment fund should be added. Income exceeding EUR 200,001 is subject to a rate of 24.94% including municipal business tax of 6.75% (for Luxembourg City) and the surcharge for unemployment fund of 1.19%. All income gains and expenses of companies are taken into account on accrual basis.

Deductibility of costs, interest and depreciation

Expenses in direct relation with the property are tax deductible. Deductible expenses consist mainly of depreciation of the property, interest in relation with the financing of the property, maintenance costs of the property, insurance, and property taxes. Depreciation rates generally lie around 2% (for residential properties completed after 1 January 2021, a rate of 4% can apply under the condition that the buildings were completed no later than 5 years). Since 1 January 2021, a depreciation rate of 6% may also apply to sustainable energy renovation costs of old property for a period of 10 years. The land is not depreciable.

In addition, from fiscal year 2021 under certain conditions, taxpayers benefiting from the above-mentioned 4% depreciation rate may claim an additional 1% tax deduction up to EUR 10,000.

Anti-tax avoidance directive

The anti-tax avoidance directive (ATAD 1) entered into force from fiscal years starting on or after 1 January 2019 (except for the exit tax provisions that apply as from 2020). The ATAD 1 contains certain interest restrictions that may affect investors in real estate. The deduction of interest expenses on all forms of debts exceeding interest revenue, defined as 'exceeding borrowing costs', is restricted to 30% of the taxpayer's tax- EBITDA. A de minimis exception for exceeding borrowing costs not exceeding EUR 3 million also applies. Various detailed rules apply.

Interest paid to associated companies established in a country blacklisted

On 28 January 2021, the Luxembourg Parliament approved a law aiming to deny the tax deductibility of interest payments made to an associated company established in a country blacklisted by the EU as non-cooperative for tax purposes (subject to a main purpose test). This law will apply on interest payments due from 1^st March 2021.

Losses - carry back/forward

Losses incurred from real estate revenue may be set off against all taxable income of the current year. The unused losses may be carried forward and may offset the future income of the company. Losses may be carried forward for 17 years when incurred in financial years ending after 31 December 2016.

Losses realised before that date continue to benefit from the previous rules and may be carried forward indefinitely. A carry back of losses is not allowed.

Where there is a change in the ownership and business activity of the company, the carrying forward of the losses may be refused by the tax authorities under the application of anti-abuse provisions if the transaction is driven exclusively by tax reasons.

Where fiscal unity applies, losses of the company can be set off against profits realised by other companies within the fiscal unity. lf the fiscal unity has an overall loss, the losses may be carried forward.

Non-resident companies

Depending on whether the non-resident company has a permanent establishment in Luxembourg or not, the taxation will be different.

Investment through a permanent establishment

Where the foreign company has a permanent establishment in Luxembourg, the same rules as for the resident companies will apply.

Investment by a non-resident company

Where the non-resident company does not hold its investment through a permanent establishment, it will be subject to the same rules as for the rental income earned by non-resident individuals.

As a consequence, the tax losses incurred from real estate revenue may only be offset against other Luxembourg taxable profits arising during the same tax year. No carry-forward or carry back is allowed.

INDIRECT HOLDING OF REAL ESTATE

This section covers the main tax aspects of the indirect (shares) holding of real estate. In the first part, we describe the impact for resident individuals and non-resident individuals. Thereafter we describe the impact for resident companies and non-resident companies.

Resident individuals

Personal income tax

Individuals who hold 10% or more of the shares in a Luxembourg company are holders of the so-called substantial interest.

Dividend income received by a resident individual is subject to the progressive income tax rate. A 50% tax exemption applies to dividends received from a fully liable Luxembourg company.

Dividend withholding tax

Dividends distributed by a Luxembourg company to resident individuals are subject to a 15% withholding tax. However, the individual may benefit from a tax credit.

Non-resident individuals

Personal income tax

Taxation regime of the country of residence of the individual will apply.

Dividend withholding tax

Dividends distributed by a Luxembourg company to non-resident individuals are subject to a 15% withholding tax. The non-resident individual may potentially benefit from a tax credit in his country of residence under a Double Tax Treaty.

Resident companies

Corporate income tax

In principle, dividend income is subject to corporate income tax and municipal business tax.

Dividends received from another Luxembourg company are however exempt from taxation (participation exemption) if the parent company holds or commits itself to hold the participation in the subsidiary for an uninterrupted period of 12 months and, for the duration of this period, the level of the participation does not fall below the level of 10% or the acquisition price below EUR 1,200,000 (subject to anti-abuse provisions).

The expenses in direct relation with exempt income (e.g. dividends) are only tax deductible if they exceed the exempt income of a given year. The expenses in direct relation with the exempt income are for example the interest due on the financing which has been used to acquire the participation or business expenses with a direct economic relationship with the exempt income.

Anti-tax avoidance directive

The anti-tax avoidance directive (ATAD 1) entered into force for fiscal years starting on or after 1 January 2019 (except for the exit tax provisions that apply as from 2020). The ATAD 1 contains certain interest restrictions that may affect investors in real estate. The deduction of interest expenses on all forms of debts exceeding interest revenue defined as 'exceeding borrowing costs' is restricted to 30% of the taxpayer's tax- EBITDA. A de minimis exception for exceeding borrowing costs not exceeding EUR 3 million also applies.

Interest paid to associated companies established in a country blacklisted

On 28 January 2021, the Luxembourg Parliament approved a law aiming to deny the tax deductibility of interest payments made to an associated company established in a country blacklisted by the EU as non-cooperative for tax purposes (subject to a main purpose test). This law will apply on interest payments due from 1^st March 2021.

Non-resident companies

Corporate income tax

In principle, dividends distributed by a Luxembourg company to a non-resident company are subject to a withholding tax of 15%.

Dividends distributed are however exempt from withholding tax (participation exemption) if the parent company (i.e. non- resident company) holds or commits itself to hold the participation in the subsidiary for an uninterrupted period of 12 months and, for the duration of this period, the level of the participation does not fall below the level of 10% or the acquisition price below EUR 1,200,000. This exemption applies only if the parent company is (i) an EU company mentioned by article 2 of the parent-subsidiary directive or (ii) a non-resident capital company which is liable to an income tax corresponding to the Luxembourg corporate income tax and resident in a country with which Luxembourg has concluded a double tax treaty (subject to anti-abuse provisions).