Article 166 LIR in Luxembourg exempts qualifying dividends and capital gains from corporate taxation, making it one of the most important tools for international investors. This participation exemption allows Luxembourg holding companies to act as tax-neutral platforms, eliminating double taxation and enabling efficient profit repatriation. Foreign investors, private equity funds, and family offices frequently rely on this rule to optimize international investment structures.
What does Article 166 LIR in Luxembourg cover?
Article 166 of the Luxembourg Income Tax Law (LIR) grants an exemption from corporate income tax (CIT) and municipal business tax (MBT) on qualifying participations.
Eligibility conditions (summary):
- Dividends / liquidation proceeds: hold ≥10% of the subsidiary or an acquisition price ≥ EUR 1.2 million, for ≥12 months.
- Capital gains: hold ≥10% or an acquisition price ≥ EUR 6 million, for ≥12 months.
- The subsidiary is fully taxable in Luxembourg, another EU Member State, or a treaty country on a comparable basis.
When these conditions are met, dividends and capital gains are fully exempt from Luxembourg CIT and MBT.
2025 update: For tax year 2025, Luxembourg reduced the top CIT rate from 17% to 16%, lowering the combined (CIT + 7% employment fund surcharge + MBT Luxembourg-City) rate to 23.87%. Companies must still file returns; exempt items are disclosed and deducted under Article 166 LIR.
Why do foreign investors use Luxembourg Article 166 LIR?
- Eliminates double taxation – profits aren’t taxed at both subsidiary and holding levels.
- Efficient profit repatriation – cash can be redistributed or reinvested without Luxembourg tax leakage.
- Exit flexibility – capital gains on qualifying sales are exempt, supporting PE exits and corporate reorganizations.
- Compliance and transparency – annual Luxembourg tax returns with clear exemption disclosures.
- Flexible legal wrappers – SOPARFI (SA/Sàrl), SCSp, RAIF and other vehicles can leverage Article 166 LIR.
How are Luxembourg tax returns handled under Article 166 LIR?
Luxembourg companies must file annual returns even if income is exempt:
- Exempt dividends/gains are reported and deducted under Article 166 LIR.
- This ensures audit-ready documentation and bank/investor comfort.
- Net wealth tax and other filings may still apply depending on profile and balance sheet.
What capital gains are exempt in Luxembourg through Article 166 LIR?
Capital gains on qualifying participations are exempt if the 10% or EUR 6 million acquisition price test and 12-month holding period are met.
Example:
A Luxembourg SOPARFI owns 15% of an Italian energy company. After 5 years, it sells its stake, realizing EUR 50 million. Under Article 166 LIR, the gain is tax-free in Luxembourg, preserving proceeds for investors.
How do private equity funds use Luxembourg Article 166 LIR?
Private equity (PE) sponsors typically hold portfolio companies via a Luxembourg SOPARFI (or an SCSp at fund level):
- During ownership: dividends upstream exempt in Luxembourg (subject to conditions).
- On exit: qualifying share sale proceeds exempt; reinvest or distribute with minimal leakage.
Example:
A UK PE fund acquires Polish logistics companies through a Luxembourg SOPARFI. Dividends during the hold period and the exit sale to a German buyer flow into Luxembourg exempt, then on to LPs.
How do family offices benefit from Luxembourg Article 166 LIR?
Family offices consolidate cross-border holdings in Luxembourg to simplify governance and optimize taxes:
- Dividends from French real estate SPVs and Belgian private companies can be pooled exempt.
- Capital gains on qualifying disposals remain exempt, supporting strategic reallocations.
Example:
A Swiss family office uses a Luxembourg SOPARFI to manage operating and real-estate stakes across the EU. Article 166 LIR enables tax-neutral reinvestment and structured distributions to family vehicles.
Why do institutional investors prefer Luxembourg Article 166 LIR?
Pension funds and sovereign investors value Luxembourg for its predictability and treaty network:
- Dividend streams from German, Portuguese, and Italian subsidiaries can be centralized in Luxembourg exempt, then redeployed into new projects.
Example:
A Canadian pension fund invests EUR 200 million in EU renewables via Luxembourg. Upstreamed cash is exempt under Article 166 LIR and promptly reinvested in Nordic assets.
How do multinational groups use Luxembourg Article 166 LIR?
Multinationals use Luxembourg to pool European cash flows:
- Dividends from subsidiaries in Ireland, Spain, and Germany route to a Luxembourg holding.
- Under Article 166 LIR, distributions are exempt, enabling efficient upstreaming or intra-EU reinvestment.
Comparison: with vs. without Article 166 LIR in Luxembourg
| Scenario | Tax treatment (Luxembourg City, TY 2025) | Effective burden |
|---|---|---|
| Without Article 166 LIR | Dividends and gains taxed at 23.87% | Higher |
| With Article 166 LIR | Dividends and gains exempt | 0% |
Rates vary by commune; table uses Luxembourg-City combined rate for tax year 2025. Always model treaty/WHT interactions in source and investor jurisdictions.
Why is Luxembourg still a prime investment hub under Article 166 LIR?
Luxembourg combines:
- Participation exemption (Article 166 LIR) covering dividends and capital gains.
- Broad tax treaty network (80+ countries) for WHT optimization.
- Flexible corporate forms (SA, Sàrl, SOPARFI, SCSp, RAIF).
- Stable, transparent legal environment favored by banks and regulators.
Internal resources:
Luxembourg company formation services
Damalion blog: Luxembourg structures and Double Tax Treaty Network
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This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
FAQ: Article 166 LIR Luxembourg
Does Article 166 LIR apply to all dividends?
No. The participation must meet the 10% or EUR 1.2 million acquisition price test and 12-month holding period, and the subsidiary must be properly taxed.
Do Luxembourg companies still need to file tax returns if income is exempt?
Yes. Exempt income is declared and deducted under Article 166 LIR to evidence compliance.
Are capital gains exempt under Article 166 LIR?
Yes, if the 10% or EUR 6 million acquisition price test and 12-month holding are satisfied.
Which vehicles can use Article 166 LIR?
Commonly SOPARFI (SA/Sàrl) holdings, and fund platforms like SCSp and RAIF (subject to structure and activity).
Article 166 LIR in Luxembourg is a cornerstone of cross-border planning. By exempting qualifying dividends and capital gains, it preserves value for private equity sponsors, family offices, pension funds, and multinationals. Combined with Luxembourg’s treaty network and flexible legal wrappers, Article 166 LIR delivers a transparent, efficient, and internationally recognized hub for foreign investments.
