DIRECT SALE OF REAL EST ATE

Resident individual

Capital gains

Capital gains realised by individuals on disposal of property are taxable as miscellaneous income or '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.

Where the property has been held for more than 2 years, a re-evaluation of the acquisition cost may apply. This re-evaluation is determined by using coefficients provided by the Luxembourg tax law in order to take into account the effect of inflation.

Exemptions

Capital gains realised by individuals 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 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 a capital gain 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.

VAT

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 its input VAT further to the activities carried out in the property sold or rent. The applicable VAT rate is 17%.

The off-plan sales are subject to VAT.

Registration duties

The market value or the sale price of the immovable property will be taxed against a tax rate of 6% increased by 1% of transcription tax. A municipal surcharge may eventually apply.

Losses

Losses realised on the sale of an immovable property may not be offset against other categories of income. No carry-forward or carry-back is allowed.

Non-resident individual

The same rules as for the resident individuals apply.

Resident company

Capital gains

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

The corporate income tax on capital gains is computed on the difference between the sale price and the net book value (i.e. value after deduction of value adjustments) of the property.

VAT

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 sale of a property which has not yet been built is subject to VAT (off plan sales).

Registration duties

The market value or the sale price of the immovable property will be taxed against a tax rate of 6% increased by 1% of transcription tax. A municipal surcharge may eventually apply.

Deferral of tax I Reinvestment reserve

Companies can defer taxation on realised capital gains under reserve that the following conditions are respected:

• 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
• lf 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.

The gains realised on the disposal of property may be offset against the tax losses available.

lf a loss is realised on the disposal of the property, this loss may offset the future income of the company. The carry forward of tax losses incurred in financial years ending after 31 December 2016 is limited to 17 years. 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.

Non-resident company

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 capital gain realised on the disposal of property by non­resident individuals and will thus be taxed as 'miscellaneous income'.

Capital gains realised by a non-resident company on the disposal of property is thus determined by the difference between the acquisition price and the disposal proceeds without taking into account any deductions. Where the property has been held for more than 2 years, a re-evaluation of the acquisition cost may apply. This re-evaluation is determined by using coefficients provided by the Luxembourg tax law in order to take into account the effect of inflation.

INDIRECT SALE

Resident individuals

Capital gains

Capital gains on the disposal of shares which have been held less than 6 months are subject to the progressive income tax rate.

Capital gains on the disposal of shares, which have been held for more than 6 months are exempt from taxation. However, capital gains realised on the disposal of substantial interest (i.e. more than 10% of the shareholding’s capital at any point in time during the 5 years preceding the sale) held more than 6 months are subject to 50% of the marginal tax rate. In such case, an allowance of EUR 50,000 or EUR 100,000 (for taxpayers taxable jointly) is granted every 10 years.

VAT / Registration duties

The transfer of shares is usually not subject to VAT and registration duties.

Non-resident individual

Capital gains

Capital gains realised on the disposal of shares in a Luxembourg company may only be taxable in Luxembourg in the following situations:

• Disposal of a substantial interest (more than 10% of the shares held directly or indirectly at any time during the 5 years prior to the day of disposal) realised within 6 months of the acquisition of such shareholding. The capital gain will be subject to the progressive income tax rate.
• Disposal of a substantial interest by a non-resident individual who has been resident in Luxembourg for more than 15 years and has subsequently become a non-resident less than 5 years before the realisation of the capital gain on the shareholding. The capital gain will be subject to 50% of the marginal tax rate.

The taxation of the capital gain may potentially be reduced by the Double Tax Treaties.

VAT / Registration duties

The transfer of shares is usually not subject to VAT and registration duties.

Resident company

Capital gains

In principle, capital gains realised on the disposal of a subsidiary by resident companies subject to corporate income tax and municipal business tax.

However, capital gains derived from the sale of subsidiaries may be exempt from taxation in Luxembourg if the following conditions are met:

• The parent company and the subsidiary are fully tax liable Luxembourg resident capital-company;
• The parent holds the participation in the subsidiary for an uninterrupted period of 12 months and, for the duration of this period, the level of the participations does not fall below the level of 10% or the acquisition price below EUR 6,000,000.

Capital gains realised upon disposal of a subsidiary benefiting from the participation exemption remain taxable up to the amount of the expenses (e.g. interest due on the financing of the subsidiary and direct business expenses in relation with the subsidiary) in relation with the subsidiary, which have been tax deductible during the year of disposal and during previous years.

VAT / Registration duties

The transfer of shares is usually not subject to VAT and registration duties.

Losses

The gains realised on the disposal of shares may be offset against the tax losses available.

If a loss is realised on the disposal of the shares, this loss may offset the future income of the company. The carry forward of tax losses incurred in financial years ending after 31 December 2016 is limited to 17 years. 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.

Non-resident company

Capital gains

Capital gains realised on the disposal of shares in a Luxembourg company may only be taxable in Luxembourg in the following situations:

• Disposal of a substantial interest (more than 10%) realised within 6 months of the acquisition of such shareholding.
• Disposal of a substantial interest by a non-resident company who has been established in Luxembourg for more than 15 years and has subsequently become a non-resident less than 5 years before the realisation of the capital gain on the shareholding.

The taxation of the capital gain may potentially be reduced by the Double Tax Treaties. 

DIRECT TRANSFER INTRA CONCERN (LUXEMBOURG REAL ESTATE TO LUXEMBOURG COMPANY)

Resident Company

Capital gains

From a Luxembourg tax perspective, the transfer of a property by a resident company to another resident company in exchange of shares is considered a disposal of the property.

VAT

In principle, the transfer of a property from a resident company to another resident company in exchange of shares is exempt from VAT.

Registration duties

In principle, the market value of the immovable property will be taxed against a tax rate of 6% increased by 1% of transcription tax. A municipal surcharge may eventually apply.

The registration duties may be reduced to 0.6% and the transcription tax to 0.5% in case the property is contributed to a company in exchange for shares. A municipal surcharge may eventually apply.

Fiscal unity

Under Luxembourg law, a group of companies may benefit from the tax consolidation regime 'fiscal unity'. This regime can be applied to fully resident capital companies with at least 95% of their capital directly or indirectly held by another fully taxable resident capital company or a permanent establishment in Luxembourg of a non-resident capital company which is fully liable to tax corresponding to the corporate income tax.

Non-resident company

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 realise its investment through a permanent establishment, it will be subject to the same rules as for the capital gain realised on the contribution of the property by non-resident individuals and will thus be taxed as 'miscellaneous income'.

Capital gains realised by a non-resident company on the contribution of the property is thus determined by the difference between the acquisition price and the disposal proceeds without taking into account any deductions. Where the property has been held for more than 2 years, a re-evaluation of the acquisition cost may apply. This re-evaluation is determined by using coefficients provided by the Luxembourg tax law in order to take into account the effect of inflation.

INDIRECT TRANSFER INTRA CONCERN (LUXEMBOURG REAL ESTATE COMPANY TO LUXEMBOURG COMPANY)

Resident company

Capital gains

From a Luxembourg tax perspective, the contribution of shares in a property company by a resident company to another resident company in exchange of shares is assimilated to a disposal of shares and thus triggers the realisation of capital gains on the shares.

VAT / Registration duties

The transfer of shares is usually not subject to VAT and registration duties.

Deferral of tax

Under specific conditions, the exchange of shares may be tax neutral when the acquiring company obtains the majority of the voting rights in the acquired company or increases the majority of voting rights already held (share for share exchange).

Fiscal unity

Under Luxembourg law, a group of companies may benefit from the tax consolidation regime ‘fiscal unity’. This regime can be applied to fully resident capital companies with at least 95% of their capital directly or indirectly held by another fully taxable resident capital company or a permanent establishment in Luxembourg of a non-resident capital company which is fully liable for a tax corresponding to the corporate income tax.

It may be interesting for a foreign investor to establish a new entity in Luxembourg which would acquire the shares in a Luxembourg real estate company. Where the holding company would finance the acquisition of the real estate company through an interest-bearing debt, the interest expenses derived from the debt could offset the real estate income by application of the fiscal unity regime.

Non-resident company

Capital gains

Capital gains realised on the contribution of shares may only be taxable in Luxembourg in the following situations:

• Contribution/disposal of a substantial interest (more than 10%) realised within 6 months of the acquisition of such shareholding.
• Contribution/disposal of a substantial interest by a non-resident company who has been established in Luxembourg for more than 15 years and has subsequently become a non-resident less than 5 years before the realisation of the capital gain on the shareholding.

The taxation of the capital gain may potentially be reduced by the Double Tax Treaties.

DIRECT TRANSFER INTRA CONCERN (LUXEMBOURG REAL ESTATE TO FOREIGN COMPANY)

Resident company

Capital gains

From a Luxembourg tax perspective, the contribution of a property by a resident company to a foreign company is considered as the disposal of the property.

VAT

In principle, the contribution of a property from a resident company to a foreign company is in principle exempt from VAT.

Registration duties

In principle, the market value of the immovable property will be taxed against a tax rate of 6% increased by 1% of transcription tax. A municipal surcharge may eventually apply.

The registration duties may be reduced to 0.6% and the transcription tax to 0.5% in case the property is contributed to a company in exchange for shares. A municipal surcharge may eventually apply.

Fiscal unity

A foreign company cannot be part of a fiscal unity for Luxembourg tax purposes.

Non-resident company

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 capital gain realised on the contribution of the property by non-resident individuals and will thus be taxed as 'miscellaneous income'.

Capital gains realised by a non-resident company on the contribution of the property is thus determined by the difference between the acquisition price and the disposal proceeds without taking into account any deductions. Where the property has been held for more than 2 years, a re-evaluation of the acquisition cost may apply. This re-evaluation is determined by using coefficients provided by the Luxembourg tax law in order to take into account the effect of inflation.

INDIRECT TRANSFER INTRA CONCERN (LUXEMBOURG REAL ESTATE COMPANY TO FOREIGN COMPANY)

Resident company

Capital gains

From a Luxembourg tax perspective, the contribution of shares in a property company by a resident company to a foreign company in exchange of shares is assimilated to a disposal of shares and thus triggers the realisation of capital gains on the shares.

VAT I Registration duties

The transfer of shares is usually not subject to VAT and registration duties.

Deferral of tax

Under specific conditions, the exchange of shares may be tax neutral when the acquiring company obtains the majority of the voting rights in the acquired company or increases the majority of voting rights already held (share for share exchange). The acquired company is an EU company or a capital company fully taxable subject to a comparable effective tax rate applicable in Luxembourg.

Fiscal unity

A foreign company cannot be part of a fiscal unity for Luxembourg tax purposes.

Non-resident company

Capital gains

Capital gains realised on the contribution of shares may only be taxable in Luxembourg in the following situations:

• Contribution/disposal of a substantial interest (more than 10%) realised within 6 months of the acquisition of such shareholding.
• Contribution/disposal of a substantial interest by a non-resident company who has been established in Luxembourg for more than 15 years and has subsequently become a non­resident less than 5 years before the realisation of the capital gain on the shareholding.

The taxation of the capital gain may potentially be reduced by the Double Tax Treaties.