OVERVIEW OF LUXEMBOURG REAL ESTATE

Tax treatment of income and gains of Luxembourg real estate

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  1. To which a surcharge for the unemployment fund contribution of 7% or 9% is added. The maximum tax brackets range between 0% and 45.78%. lf the unemployment fund contribution is 9%, the calculation is as follows: UFC: 42% x 9% = 3.78%. Tax: 3.78% + 42% = 45.78%.
  2. Municipal business tax rate applicable in Luxembourg City.

Rental income

Individuals

Introduction

Rental income derived from a property investment is subject to Luxembourg income tax.

Liability to tax

Rental income received by individuals 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 contribution for dependence insurance (‘assurance dépendance’) of 1.4% is due by individual resident taxpayers.

Basis to tax

Resident individuals are taxed on their worldwide income. The following categories of income are aggregated in computing the total taxable income:

  • Trade and business income;
  • Agriculture and forestry income;
  • Income from independent professional services;
  • Income from employment;
  • Income from pensions and annuities;
  • Income from movable capital;
  • Income from rentals and leases;
  • Miscellaneous income.

The net amount of the rental income derived from the property investment is taxable as category 7 ‘Income from rentals and leases’ and subject to the personal income tax.

Companies

Introduction

Rental income is subject to Luxembourg income tax.

Liability to tax

Rental income received by resident companies is subject to corporate income tax (CIT) and municipal business income (MBT).

Rental income received by non-resident companies is only subject to corporate income tax provided that the non-resident companies have no permanent establishment in Luxembourg.

Basis to tax

Resident companies:

  • 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%.

Non-resident companies:

  • Income up to EUR 175,000 is subject to corporate income tax at a rate of 16.05% including the surcharge for unemployment fund of 1.05%.
  • Income between EUR 175,000 and EUR 200,000 gives rise to a flat tax amount of EUR 26,250 plus 31% of the income exceeding EUR 175,000 (up to 200,000).
  • Income exceeding EUR 200,001 is subject to a rate of 18.19% including the surcharge for unemployment fund of 1.19%.

Capital gains

Individuals

Introduction

In general, capital gains realised by individuals on the disposal of property are subject to the personal income tax.

Liability to tax

Capital gains realised by individuals on disposal of property are taxable as miscellaneous income ('bénéfice de spéculation') and subject to personal income tax from 0% to 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 contribution for dependence insurance ('assurance dépendance') of 1.4% is due by individual resident taxpayers.

Exemptions

Capital gains realised by an individual on the disposal of the principal residence may be exempt from taxation in Luxembourg under certain conditions.

Capital gains realised by individuals on the disposal of a property, other than the principal residence, and which has been held for more than 2 years prior the sale, may benefit from an allowance of EUR 50.000 or EUR 100,000 (for taxpayers taxable jointly) every 10 years. The personal income tax rate is 50% of the marginal tax rate. An additional allowance of EUR 75.000 is granted for capital gains on the sale of a property inherited in the direct line and which consisted of the parent's main residence. These deductions may not create a loss.

Basis to tax

For capital gains realised by individuals on the disposal of a property other than the principal residence, and which has been held less than 2 years prior the sale, the capital gain corresponds to the difference between the acquisition price and the disposal proceeds without taking into account any deductions.

For capital gains realised by individuals on the disposal of property other than the principal residence, and which has been held more than 2 years prior the sale, the capital gain corresponds to the difference between the revalued acquisition price (taking into account the inflation) and the disposal proceeds without taking into account any deductions.

Companies

Introduction

Capital gains realised on the disposal of property by resident companies are subject to corporate income tax and municipal business tax.

Capital gains realised by non-resident companies are only subject to corporate income tax provided that the non-resident companies do not have a permanent establishment in Luxembourg. If a company qualify as permanent establishment must be analysed in a case-by-case basis.

Liability to tax

Resident companies:

  • 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 tax 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%.

Non-resident companies:

  • Income up to EUR 175,000 is subject to corporate income tax at a rate of 16.05% including the surcharge for unemployment fund of 1.05%.
  • Income between EUR 175,000 and EUR 200,000 gives rise to a flat tax amount of EUR 26,250 plus 31% of the income exceeding EUR 175,000 (up to 200,000).
  • Income exceeding EUR 200.001 is subject to a rate of 18.19% including the surcharge for unemployment fund of 1.19%.

Exemptions

Companies can defer taxation on realised capital gains subject to the following conditions:

  • The property which has been sold was in the balance sheet of the company for at least 5 years preceding the disposal
  • The company is subject to regular bookkeeping
  • The company reinvests the gain in assets which can be allocated to a permanent establishment located in Luxembourg
  • The reinvestment takes place before the end of the second fiscal year following the year of the sale

If the reinvestment does not take place during the fiscal year of the sale, the part of the gain which has not yet been reinvested must be booked into a special reserve.

Luxembourg VAT & transfer taxes

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Value Added Tax

Individuals

Introduction

Value added tax is a tax based on the increase in value of a product or service at each stage of the supply the chain.

Liability to tax

In principle, if a company performs commercial or professional activities in Luxembourg, it will be subject to the VAT.

Basis to tax

As a general rule, the supply and lease of existing immovable property located in Luxembourg are exempt from VAT. lt is however possible to opt for VAT on real estate transactions.

The right to opt for VAT may be exercised if the seller and the buyer or the tenant are VAT taxable persons who are entitled to recover VAT. Moreover, the buyer or the tenant must recover at least 50% of his input VAT further to the activities carried out in the property sold or rent. The applicable VAT rate is 17%.

The off-plan sales (commonly known as VEFA in Luxembourg) are subject to VAT.

Companies

The same rules as for individuals apply.

Registrations duties

Individuals

Introduction

Registrations duties are due on the transfer of real estate located in Luxembourg from one person or company to another.

Liability to tax

Registration duties are levied on the acquisition of the legal or economic ownership of Luxembourg real estate and are payable by the purchaser.

Basis of tax

The market value or the sale price of the immovable property is taxed at a tax rate of 6% (registration duties) increased by 1% of transcription tax. A municipal surcharge may eventually apply.

The registration duties may be reduced to 2.4% in case the property is contributed to a company in exchange for shares. A municipal surcharge may eventually apply.

Companies

The same rules as for individuals apply.

Luxembourg Net Wealth/worth taxes

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Companies

Introduction

The net wealth tax is a tax levied on the net wealth of the company to be determined at the beginning of each year.

Liability to tax

Net wealth tax is due on the net wealth of the companies. The net wealth of a company corresponds to its net assets determined by the unitary value of the company.

Basis to tax

The net wealth is subject to an annual 0.5% net wealth tax. In the event that the taxable wealth exceeds EUR 500,000,000, the rate drops to 0.05%.

For the purpose of computing the net wealth of the company, the value of the Luxembourg real estate properties is replaced by their unitary value (which are determined by the Luxembourg authorities and which generally range between 0.7% to 1% of the property's market value).

Minimum net wealth tax

In 2016 Luxembourg introduced a minimum net wealth tax ('MNWT'). The MNWT amounts to EUR 4,815 for companies whose financial fixed assets, loans to affiliated undertakings, transferable securities and cash deposits exceed 90% of the total assets of the company and whose gross assets exceed EUR 350,000. The MNWT due by the other corporations depends on the total balance sheet of the company and ranges between EUR 535 and EUR 32,100.

Vehicles for Luxembourg real estate

Commonly used vehicles for Luxembourg real estate

Limited

Known as 'Sà rl' and 'SA', the Luxembourg private limited liability company (société à responsabilité limitée) and the Luxembourg public limited liability company (société anonyme) are the most frequently used vehicles for the ownership of Luxembourg real estate. The equity is divided into shares and the shareholders of these vehicles are not personally liable for the business debts. They are only liable up to the amount of their participation in the company.

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

Dividends distributed by a Luxembourg company are subject to a 15% withholding tax.

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

Profits made by the Sà rl or SA are subject to the corporate income tax and the municipal business tax at a combined rate of 24.94% (Luxembourg City).

Limited partnerships

The special limited partnership (in French: société en commandite spéciale – SCSp) and the common limited partnership (in French: société en commandite simple – SCS) are typically limited partnerships. These limited partnerships (LP) must have at least a general partner and a limited partner. The LPs are treated as transparent and tax neutral regarding Luxembourg income tax and net wealth tax. lf the LPs exercise a business activity, they will be subject to Luxembourg municipal business tax. The LPs are deemed to perform a business activity if the general partner is a capital company that owns more than 5% of the LPs.

The partners of the LPs are considered to carry out individually the activity of the LPs. The LPs have to report the profit/loss which is attributable to each partner.

Trusts

The concept of trusts does not exist in Luxembourg.

Specific real estate vehicles for Luxembourg real estate

Real estate UCIs

Real estate UCls are regulated vehicles, which may be set up either in a contractual common fund form (F.C.P. - Fonds Commun de Placement) or in a corporate form (S.I.C.A.V. - Société à Capital Variable and S.I.C.A.F - Société d'lnvestissement à Capital Fixe). The real estate U.C.l.s benefit from the general tax rules applicable to UCls and are exempt from corporate income tax, municipal business tax and net wealth tax. They are however subject to a fixed one-time registration duty (EUR 75) and an annual subscription tax. The subscription tax amounts to 0.05% and is computed on the total net assets of the UCI. Exemptions and rate of 0.01% may apply under certain conditions.

Since 1 January 2021, graduated subscription tax rates from 0.04% to 0.01% may apply on the sustainable net assets of UCIs depending on the percentage of net assets of the fund invested in sustainable assets.

Since 1 January 2021, a 20% real estate levy applies to real estate UCI, structured in any form other than FCP, SCSp and SCS. It is levied on the gross amount of rental income and net gains deriving from real estate located in Luxembourg.

There is no withholding tax for distributions made by real estate U.C.l.s.

SIF

The S.I.F. Law allows 'eligible investors' to invest in regulated, operationally flexible and fiscally efficient real estate investment funds. S.I.F.s may qualify as Alternative lnvestment Fund (A.I.F) for the purpose of the Alternative lnvestment Fund Managers Directive (A.I.F.M.).

S.I.F.s are regulated vehicles which may be structured as a contractual common fund form (F.C.P.), a corporate form (S.A., S.à r.l., S.C.A., S.C.S., S.C.S.p, SCoSA) or a S.I.C.A.V. The S.I.F. is exempt from corporate income tax, municipal business tax and net wealth tax. lt is however subject to a fixed one-time registration duty (EUR 75) and an annual subscription tax of 0.01% assessed on the total net assets of the S.I.F.. Exemptions may apply under certain conditions.

Since 1 January 2021, a 20% real estate levy applies to the gross amount of rental income and net gains deriving by S.I.F.s, structured in any form other than FCP, SCSp and SCS, from Luxembourg real estate assets.

There is no withholding tax for distributions made by the S.I.F.s.

SICAR

The purpose of the S.I.C.A.R. is to invest in securities representing risk capital in order to enable the investors to the benefit of the result of the management of such assets in consideration for the risk incurred. S.I.C.A.R.s may qualify as A.I.F. for the purpose of the A.I.F.M. directive.

The SICAR is not authorised to invest directly in real estate properties but may, under certain conditions, invest indirectly via entities whose main activity is the investment in real estate. Real estate investments made by a SICAR have to bear risk capital characteristics in order to qualify as eligible investments.

S.I.C.A.R.s may be incorporated in the legal form of an S.A., an S.à r.l., an S.C.A., an S.C.S., an S.C.S.p, or an S.C.o.S.A.

S.I.C.A.R.s incorporated as an opaque entity are subject to corporate income tax, municipal business tax, minimum net wealth tax but are exempt from net wealth tax. Income and capital gains derived from securities as well as income from cash held less than 12 months before being invested in risky assets are tax exempt. No withholding tax is levied on dividends and liquidation proceeds distributed by S.I.C.A.

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