Damalion Luxembourg desk
Doing business in Luxembourg
Despite its important location in the center of Europe and tiny size, Grand-duchy of Luxembourg is a founding member of the UN, NATO, and the European Union. It serves as the region’s financial and political capital. The success of Luxembourg is built on its wide range of endeavors, which have helped it become competitive, powerful, and stable.
The foundation of the Luxembourg’s economy consists of the industrial, steel, and banking sectors. According to the Globe Bank’s Doing Business 2020 report, Luxembourg is the only region in the world where international trade is the accessible.
The World Bank estimates Luxembourg’s Gross Domestic Product at 73,26 billion USD, making it one of the world’s least populous countries but with high GDP ratio. With a per capita income of over USD 115,500, Luxembourg is also one of the richest nations, making it the best place for high-yield foreign investments.
With a score of 80.6, Luxembourg has the fifth-freest economy in the 2022 Index. With a total score that is higher than both the global and regional norms, Luxembourg is rated third out of 45 nations in the Europe Union. According to the Global Competitive Category, it is regarded as the 12th most competitive economy and 72d in the “ease of doing business” index. In essence, it gives Luxembourg a particularly advantageous location for establishing firms and receiving international investments.
However, before starting any business and making foreign investments, it is imperative to sensitize the entrepreneurs and investors of states legal system, economic outlook, social systems and banking systems. It helps them to formalize their plans and divisive strategies accordingly to grow their profits exponentially.
The following considerations of Luxembourg make it favorable.
- Large reserves of Iron Ore
- Unlimited Natural Resources
- Aesthetic Sceneries
- Arable Lands growing variety of crops particularly grapes
- Services and Financial Industry
- Industrial and Banking Hub
- Diary and Wine Industry
- Technological Advancements
Being blessed with aforementioned economic resources, following are the advantages for starting a business in Luxembourg.
- Political and Social Stability as there is Parliamentary Monarchy
- Exemplary Taxation Regime and Social Viability
- Strategic Location: the European countries have easy access to Luxembourg and the engagements under the hood of the European Union make Luxembourg a favorable jurisdiction for investors to take advantage of existing trade agreements
- Highly Skilled Force
- Business Friendly Policies
- An option to Expand footprints in the European Countries.
The country has managed to attain a reputable status in terms of maintaining a pro-business climate as well as stability of the jurisdiction, attracting major businesses to register companies in the Luxembourg.
A parliamentary representative democracy, headed by a constitutional monarch, Luxembourg is governed by Constitution of 1868. The constitution provides for three branches of government; the powers of three branches are delicately separated in performance of their functions.
Parliament is directly elected and is responsible for enacting laws. Executive emanates from the Parliament and is headed by Prime Minister and ministers. And the Judicial System overseas the functioning of the government. The Judicial System consists of the two-tier system of courts.
Luxembourg’s has adopted civil legal system on the models functioning in the neighboring countries of France and Belgium. There are different administrative tribunals as well for administering different functions of the legal system.
Luxembourg’s following sectors attract foreign investment and offer vast opportunities for making investments coupled with favorable legal regime.
- Industrial Sector involving Mining Sector etc.
- Financial Services involving Banks, Funds etc.
- Technological Opportunities
Legal forms of commercial companies
From Corporate perspective, there are six types of most common companies available to entrepreneurs to kick-start their business.
- Private Limited Liability Company
The formation of Private Limited Liability Company is one of popular choice for foreign investors in the Luxembourg. One director and one member/shareholder can form the company with investment of 12,500 Euros. The members have limited liability.
- Public Limited Liability Company
The other popular choice is Public Limited Company, which allows issuance of shares, that can be publically traded. Shareholders are subject to limited liability. The requirement to set up a Public Limited Company is 1 director and 1 shareholder. The minimum share capital required to set up is EUR 30,000.
- General Partnership
The third type of company is General Partnership. It is a commercial company that is to be setup by two or more partners, where partners are held liable for company’s liabilities. There is no startup capital requirement. However, the partnership is required to file annual reports if the annual turnover exceeds EUR 100,000.
- Limited Partnership
The fourth type of company in Luxembourg that can be formed is limited Partnership, formed by two or more partners. One partner acts as General Partner whereas, the other one acts as Limited Partner. The General Partner has unlimited liability while Limited Partners hold Limited Liability. And for setting up, there is minimum capital requirement.
- Sole Proprietorship
The fifth type of company that can be formed is Sole Proprietorship and is ideal for sole entrepreneurs such as tradesman, craftsman, artisans or any skilled workers. The owners of Sole Proprietorship have unlimited liabilities and treated by law equally. There is no minimum capital required to set-up the sole proprietorship. Sole Proprietorships are required to file annual reports if their turnover exceed EUR 100,000.
- Societal Impact Company
Luxembourg offers the formation of a societal company to entrepreneurs and investors for engaging in economic activity that is to bore societal impacts into the society as well. In first place, it would be any Public or Private Company, later would apply for accrediting as Societal Impact Company. The sole requirement is to contribute to the social causes in the state.
Luxembourg differs from other financial centers due to its distinctive and extensive financial eco system, which includes market infrastructures, legal services, consultants, education and training, IT partners, and FinTech businesses. Luxembourg is international financial hub involving various banking models, private and public wealth management systems, retail banking, corporate finance and depositary banks.
Due to its comprehensive eco system, Luxembourg is recognised as a global financial powerhouse. It has the greatest banking internationalization rate in all of Europe, with 94 percent of banks being foreign and more than a third of banks coming from outside the European Union. Using the EU passport, these banks do cross-border business and offer financial services all throughout Europe, particularly in the fields of private banking, corporate banking, and asset servicing.
The Luxembourg financial services sector is well-known abroad for its talented, varied, and effective workforce. The financial industry is the country’s economic engine, contributing almost a third of GDP, 10% of jobs, and 13.7% of total government income in 2020.
Due to its AAA rating, broad financial environment, and highly skilled international workforce, Luxembourg has traditionally welcomed foreign financial organizations. With strong collaboration between financial institutions and FinTech startups, made possible by the ABBL and other public-private partnerships, it is also utilizing these distinctive characteristics to position itself as a pioneer in cutting-edge financial innovations.
Luxembourg’s Fund Industry is the largest funding industry in Europe and second largest industry in the world with over Euro 4,500 Billion net assets. The funds have grown at the consistent pace of 8-9% over the years. With such huge funds deposits, Luxembourg is the largest global investment funds distribution center.
The funds are offered to more than 70 countries across the world for investment purposes.
The strength can be gauged from the fact that Luxembourg funds sector has proved to be resilient during the COVID Wave. One of its important characteristics is the long-term stability of the nation and ecosystem, which is complemented by a strong regulatory framework, a trustworthy and recognized regulator, and a flexible business law regime.
With a wide variety of investment vehicles that combine various legal forms, fund regimes, tax requirements, and regulatory frameworks, Luxembourg has a long history of innovation in the fund business.
There are different Regulated Investment funds such as:
- UCI funds are short term investment asset. They have distinct and cumulative objectives which offer returns as per money market rate. And are governed by Part II of the Law of 17 December 2010.
- The other funds are SICAR specifically designed for investors seeking investment in risk capital. The concept of SICAR was emerged from the limited partnership structure. It offers flexible investment policy rules, wide variety of corporate structures and tax flexibility. It is best suited for professional investors. The minimum investment required is 125,000,00.
- Specialized Investment Fund (SIF) is an investment type of fund that can be used to invest in all the types of assets. Primarily, it is regarded as an alternative investment opportunity and can also be sold to all types of investors. The funds invested through SIF can be marketed through market shares, units or partnership interests with European passport. The investors are defined as institutional investors or professional investors. The investments are regulated by law of 13th February 2007.
Apart from it, there are various Unregulated Investment funds as well:
- Among the unregulated funds and vehicles, SOPARFI is most common vehicle dedicated for holding and financing activities. Such company formed for investment purposes can be used to perform other activities as well. SOPARFI is a fully commercial company that offers tax advantages on dividends, interests, royalties.
- Introduced in July 2016, the RAIF (Reserved Alternative Investment Fund) is an alternative investment fund (AIF) that is exempt from CSSF product clearance. An authorized external AIFM must be chosen by RAIFs.
- Securitization vehicles are also interesting investment vehicles. Due to its flexibility, investor protection, and tax neutrality, Luxembourg is the preferred location for securitization vehicles. A wide variety of illiquid assets are transformed into securities through Luxembourg securitization vehicles, making them marketable and available to all kinds of investors.
The prime purpose of Luxembourg is the introduction and implementation of innovations. It is continuously improving its legal framework and expanding the tools of products. It is always keeping the products and service sectors to keep it an attractive option for investors and asset managers.
Luxembourg’s fiscal year runs from January 1 to December 31, and tax returns must be submitted by March 31 of the following year. There are various taxes like Federal and Local taxes applicable. Residents and Non-residents are taxed differently. Residents are required to declare their worldwide income whereas the Non-Residents are required to only declare their Luxembourg income.
PERSONAL INCOME TAX
About its income tax systems, Luxembourg has three tax classes and 23 brackets with varying percentages of income tax that range from 0% to 42%. The additional payment that employees must make to the employment fund ranges from 7 to 9 percent.
Tax-free offers start at €11,265 and drop to the lowest rate of 8% after that. Earnings over €200,004 are subject to the highest rate of 42 percent.
Luxembourg’s offers various personal tax exemptions and deductions. For the professional expenditures, each employee is entitled to a yearly lump sum deduction of €540. Additional exclusions include the following:
- Each employee is allowed a yearly lump sum deduction of €540 for their professional expenses.
- Depending on how far you live from your place of employment, the maximum amount you may deduct for travel expenses is €2,574.
- The cost per kilometer of the vehicle is multiplied by the mileage to determine the tax benefits for corporate cars. The data are calculated using a distance logbook, while a lump-sum method is also available.
- Seniority-related gifts are free from taxes up to a total of €4,500.
- Overtime pay and allowances
- Occupational Pensions are subject to 20% exempted.
VAT ON GOODS AND SERVICES
Businesses and self-employed businessman with over 35,000 Euros in Luxembourg are required to be registered for VAT (TVA) by law. There are different categories for following categories of goods.
- Super-decreased rate: 3% (e.g., foodstuffs, pharmaceuticals, restaurants)
- 8 percent for a reduced rate (e.g., cleaning, repairs, heating)
- 14 percent (e.g., adult clothing, wine)
- Standard percentage: 17% (e.g., alcohol, beer, adult shoes)
There is comprehensive corporate taxation regime. The corporate taxation laws provide that If a company’s yearly turnover surpasses €200,000, it must pay corporation tax at a rate of 17% that is very favorable for entrepreneurs and foreign investors.
Additionally, there are several other taxes as well like solidarity tax. Businesses in Luxembourg City must also pay a municipal business tax of 0.7%. (charged at 6.75 percent).
Therefore, for businesses with higher incomes, the effective corporation tax rate is 24.94 percent.
The total rate is 22.8 percent, with a lower corporation tax rate of 15 percent applied to businesses with annual revenues of less than €175,000.
CAPITAL GAINS TAX
In case of disposal of any asset like primary house, no capital gains tax is charged. However, the extra residences are taxed.
If the property is sold within two years of purchasing it, there would be Capital Gain Tax as part of the income at the appropriate income tax level. However, one can also be eligible for a discounted rate if the sale occurs more than two years after the original purchase.
Every ten years, capital gains can be taxed at a lower rate of up to €50,000. It also offers eligibility criteria for a tax break of €75,000 for properties that were inherited.
REAL ESTATE EARNINGS
A Luxembourg-based residential property’s rental revenue is subject to progressive income taxes.
In addition to paying €26,250, those who earn between €175,001 and €200,000 annually must also pay 31% of their revenues over €175,000.
Businesses normally pay their corporate taxes quarterly in advance, with payments due in March, June, September, and December.
The Schengen Area includes Luxembourg. Holders of Schengen visas are permitted to travel freely throughout the member nations for up to 90 days for either business or vacation.
With a valid identity card or passport, anybody with free movement rights, including EU nationals, may visit Luxembourg and stay there for up to three months. They must either work for a firm, be self-employed, enrolled in a public or private school, have enough money to not be a financial burden on the social security system, or have health insurance in order to live longer.
Most non-EU nationals need a visa in order to remain for up to three months. An application, a valid passport, documentation of the purpose of the trip, information on where you’ll be staying, and a return ticket are often required to apply for a short-stay visa at a local Luxembourg embassy or consulate.
To become a Luxembourgish citizen, you must be at least 18 years old, have lived in Luxembourg for at least 10 years, and be fluent in all three of the official languages (French, German, and Luxembourgish). Alternatively, you can apply for citizenship after five years of residence there if you have ties to Luxembourg through your birth, adoption, or marriage.
Luxembourg provides a comprehensive procedure for Intellectual Property. Intellectual Property Office deals with the issues pertaining to the Intellectual Property. The Luxembourg Ministry of Economy’s Intellectual Property Office is where Luxembourg patent applications must be submitted. The laws and procedures provide for Patent, Trademark, Design, Copyright, Submitting and Advice and support Protections.
Patents are issued in Luxembourg for innovations that are novel, innovative, likely to have industrial applications, and not disqualified from patentability.
Luxembourg patents are not the subject of any litigation. The following reasons can be used in court to contest a patent’s validity in the courts such as Invention Not Patentable, Patent does not disclose the invention and is beyond the scope of the application being entertain-able.
The time required for IP registration takes around 18 months. When the applicant submits a request for a search report or a request for validation of a search report already prepared by the European Patent Office within 18 months of the application filing date, the protection of a Luxembourg patent lasts for 20 years after the time allotted to the applicant to amend the application following receipt of the search report (or the priority date, if priority is claimed).
In addition, Luxembourg offers an attractive tax regime offering up to 80 % tax exemption on income derived from exploitation of intellectual property provided that some terms are fulfilled.
There are several varieties of employment contracts, open-ended and fixed-term agreements are the most important. Employment contracts are finalized at the latest when the employee begins working for the company.
Both the employer and the employee sign the CDI, or Contract for a Definite Term. It is created without a deadline to satisfy a long-term business necessity. The worker then does tasks for the business in return for pay.
FIXED TERM CONTRACT
A written contract that outlines the duration and temporary nature of the work to be done between an employer and employee is known as a fixed-term contract. A fixed-term agreement has a two-year maximum duration and is renewable twice. The CDD meets a particular need for the company. If required, the worker and the employer will sign a long-term contract.
There are various other including seasonal as well as temporary work contracts.
BENEFITS TO THE EMPLOYEES
Employees are allowed to utilize the telework days. Under a stringent agreement with their employer, they are allowed to work from home occasionally. In 2019, just 20% of residents telecommuted, a practice that had not previously been prevalent.
LEGAL WORKING HOURS
8 hours per day and 40 hours per week are the maximum permissible working hours for a full-time position. Up to 2 hours of overtime per day and 8 hours per week are permitted by law.
A maximum of 10 hours per day and 48 hours per week may be worked.
A total of 26 days working leave is mandated for the employees, in addition to the Legal holidays including Easter, Ascension Day, Christmas and others.
- Chamber of employees CSL
The Ministry of Labor and Employment is given control of CSL. It comprises all Luxembourg-based workers, whether they are white-collar or blue-collar, apprentices, or pensioners. Training new hires and ensuring continued training for current staff is another one of the CSL’s key goals.
- Chamber of Trades and Crafts
The Chamber is the knowledgeable professional body in the subject of crafts in Luxembourg. It brings together all of Luxembourg’s craft sector businesses.
- Chamber of Commerce
All Luxembourg enterprises, with the exception of those involved in the craft industry and agriculture, are supported and accompanied in their growth at the national, European, and global levels by the Luxembourg Chamber of Commerce, a public organization. It accounts for 75% of all paid employment in Luxembourg and makes for 80% of the country’s GDP.
To its more than 90,000 member firms and anybody else interested in doing business, Luxembourg Chamber of commerce offers economic analysis and services. It is the nation’s most significant professional chamber.
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