Luxembourg has a particularly structured tax regime for financial flows between companies. Dividends, interest, and royalties are not treated in the same way: each is subject to its own taxation and exemption rules.
Dividends
- Dividends received by a SOPARFI: fully exempt if the company holds at least 10% of the subsidiary’s share capital (or a participation with an acquisition value of at least €1.2 million) for more than 12 months.
- Dividends distributed to a foreign parent company: subject in principle to a 15% withholding tax. This rate may be reduced or eliminated under tax treaties or the European Parent-Subsidiary Directive.
- Dividends distributed to resident individual shareholders: taxed at 50% of the ordinary personal income tax rate (half-rate system).
Interest
- Interest received by a Luxembourg company: taxed at the ordinary corporate income tax rate. There is no automatic exemption regime comparable to the participation exemption.
- Interest paid abroad: generally not subject to withholding tax in Luxembourg, which constitutes a structural advantage for intra-group financing arrangements.
- Interest limitation rule (ATAD): deductible net interest expenses are capped at 30% of tax EBITDA, or €3 million (minimum threshold).
Royalties
- IP Box regime: income derived from eligible intellectual property rights (patents, software, etc.) benefits from an 80% exemption on the net income amount. The effective tax rate is therefore reduced to approximately 4.99%.
- Royalties paid abroad: generally not subject to withholding tax, provided anti-abuse rules and applicable tax treaties are respected.
- Eligibility conditions for the IP Box regime: the intangible assets must have been developed or acquired as part of genuine R&D activities. A nexus ratio is calculated to determine the eligible portion.
These regimes are legal and regulated, but they are subject to increased scrutiny from the European Commission and the OECD. Their use must form part of a structure supported by real substance and a solid economic justification.
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