Many companies incorporated in Luxembourg in reality have no effective presence in the country. This so-called “letterbox companies” phenomenon has been under increased scrutiny by the authorities for several years and is now subject to growing enforcement.
The risks of non-compliance are significant:
- Tax reclassification: the Luxembourg Inland Revenue (ACD) may consider that the company is tax resident in another country, thereby challenging all Luxembourg tax advantages.
- Tax reassessments and penalties: profits may be reassigned to another jurisdiction, resulting in additional tax assessments, surcharges, and late payment interest.
- Loss of access to tax treaties: without real substance, the company can no longer benefit from Luxembourg’s network of 103 double tax treaties.
The ACD and European authorities have tightened their requirements. A company is considered to have real substance if it meets the following criteria:
- Effective management in Luxembourg: strategic decisions must be taken locally by directors physically present in the country.
- Real and documented activity: regular board meetings, minutes, contracts, and active bank accounts.
- Qualified staff or local service providers: at least one resident director or an approved management service provider.
- Adequate infrastructure: dedicated office space, equipment, and resources proportionate to the activity.
In practice, many companies believe they are compliant when they are not. A substance audit helps identify gaps before a tax inspection and implement appropriate corrective measures.
https://droit.cairn.info/revue-de-droit-fiscal-2019-3-page-13?lang=fr
https://www.luxlexlaw.com/services/exigences-substance/
https://www.lexgo.be/fr/actualites-et-articles/12560-l-utilisation-de-la-soparfi-par-des-
residents-belges-et-la-montee-en-puissance-de-la-substance-economique