Luxembourg - Taxation



Luxembourg has come under pressure to share information on the interest paid on the hither-to-secret savings accounts maintained by non-residents. In June 2003, the EU Commissioners issued a directive that would allow Luxembourg (as well as Belgium and Austria) to apply increased withholding taxes in lieu of directly sharing information on the interest tax paid on these accounts. Withholding rates of 15% to 20% would be applied 2004 to 2007, rising to 25% 2007 to 2009, and to 35% after 2009. The US Bush administration stood opposed to these EU initiatives to deal with tax evasion on the grounds that they would eliminate useful "tax competition."

Luxembourg's corporate income tax (IRC) rate in 2003 was 22.88%, which includes a 4% employment fund contribution. Companies are also subject to municipal taxes of 7.5%, bringing the effective tax rate to 30.88%. Business enterprises not subject to the IRC are subject to municipal taxes of about 6.98%, though the regional rates vary. Prior to 2002 the municipal tax was deductible for corporate tax purposes. Capital gains are taxed as ordinary income, although some capital gains are tax-exempt. Dividends paid to non-residents are subject to 25% withholding unless the payments are to a parent company resident in the EU that owns at least 25% of the subsidiary paying dividends. Subsidiaries of foreign companies are considered resident companies ("capital societies") and are taxed at the same rate.

Personal income in Luxembourg is taxed according to a progressive schedule with rates from 0% (below €9,667 in 2002) to 38.95% (as of 1 January 2002) on increments above €33,614. Social security taxes total 21,86%, 11.65% paid by the employer and 10.65% by the employee. There is also a wealth tax of 0.5%. There is no inheritance tax for direct descendants; for others, the tax is 15%. Gift taxes range from 1.5% to 27.11%, and rights of recordings are taxed from 0% to 14.4%.

The main indirect tax is Luxembourg's value-added tax (VAT), introduced 1 January 1970 with a standard rate of 8% and a reduced rate of 4%. Revisions as of 10 January 1992 instituted a standard rate of 15% with reduced rates of 3 and 6%, and a "parking" (intermediate) rate of 12% (applied mainly to petroleum products and electricity). The 3% rate is applied to foodstuffs, newspapers, books, and periodicals, medicines and medical equipment, medical and dental care, and other basic goods and services. The 6% rate is applied mainly to repair and domestic services.

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