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In certain circumstances, a group of companies may benefit from the tax consolidation regime. This allows them to combine or offset the respective taxable result of each company in the group and to be taxed on the overall sum, as if they were a single taxpayer. This means that losses incurred by some consolidated companies are offset by the profits made by others.
To benefit from the tax consolidation regime, the companies concerned must submit a request to the Luxembourg Inland Revenue (ACD).
While the regime is in place, only the "consolidating" or "umbrella" company pays corporate income tax on the overall taxable profit of the consolidated companies.
Who is concerned
The tax consolidation regime can be applied to fully taxable resident capital companies with at least 95% of their capital directly or indirectly held by:
- another fully taxable resident capital company;
- or a permanent establishment in Luxembourg of a non-resident capital company that is fully liable for a tax corresponding to corporate income tax.
As transparent companies do not exist for tax purposes, the indirect holding of a participating interest in an opaque company through a transparent company is deemed equivalent to the partner of the transparent company directly holding the opaque company.
- SA 1 owns 99% of SA 2 via a general partnership (société en nom collectif - SENC).
→ SA 2 may be subject to direct tax consolidation in SA 1.
- SA 1 holds 100% of SA 2 and 50% of the share capital of SA 3. SA 2 holds the remaining 50% of SA 3.
SA 1 therefore holds 50 % of SA 3 directly and 50 % indirectly.
→SA 1 and SA 3 can therefore opt for the tax consolidation regime.
Companies eligible under certain conditions
The tax consolidation regime may be applied to resident capital companies with at least 75% of their capital directly or indirectly held by the consolidating company provided that:
- at least 75% of the minority shareholders agree to this regime;
- the Minister of Finance has confirmed that the participating interest is particularly likely to promote the growth and structural improvement of the national economy.
Companies formally excluded from the regime
To prevent the use of tax evasion schemes, the tax consolidation regime cannot be applied:
- to securitisation entities;
- or to venture capital companies (sociétés d’investissement en capital à risque – SICAR).
In order to benefit from the tax consolidation regime:
- the 95% (or 75%) minimum shareholding must be held without interruption from the beginning of the financial year to which the regime is applied;
- the subsidiaries and the consolidating company must begin and end their financial years on the same date;
- the companies concerned must be linked for at least five financial years.
The regime is extended by tacit renewal until the companies concerned end its application or one of the application conditions is no longer met.
How to proceed
Requesting the application of the tax consolidation regime
The companies concerned must submit a joint written request to the relevant tax office for the consolidating company before the end of the first financial year of the period for which the regime is being requested.
The tax office checks the request and informs the companies concerned, as well as the relevant tax office(s) of the subsidiaries concerned, of the decision.
Tax consolidation – corporate income tax
Taxable profit of all group companies
All group companies must:
- determine their own taxable profit;
- file a tax return allowing the tax that would have been due if they were not consolidated to be calculated.
Taxable profit corresponds to the income appearing on:
- the commercial balance sheet, adjusted for tax additions and deductions (tax corrections);
- or the tax balance sheet, adjusted for tax additions and deductions (tax corrections).
Corrected group taxable profit
The consolidating company must correct overall profit to take account of transactions likely to result in the group being subject to double taxation or double deduction.
The companies' taxable profit is added even if part of this income is derived from intra-group transactions: these transactions between the parent company and its subsidiaries are treated as transactions between third parties, excluding any value adjustments that the parent company may have performed on the shares of its subsidiaries. This is the case if the consolidating company sets aside depreciation provisions for the shares of its consolidated subsidiaries or sub-subsidiaries: as the loss of value suffered by the subsidiary is already included in the overall group profit, the consolidating company must adjust the group consolidated profit to take account of these value adjustments in order to avoid double deduction.
Example: SA 1 is the parent company of SA 2 with which it is consolidated.
SA 2 generated an accounting result of –1,000, including profit of 200 on sales to SA 1.
SA 1 makes a book profit of 1,400, once 500 has been deducted for purchases made from SA 2 and a value adjustment of 500 recorded on equity shares in SA 2 has been made.
→ SA 2's income is to be taken as-is, even if it includes intra-group profit.
→ SA 1's income must be corrected by the value adjustment amount, while the loss by SA 2 does not require rectification.
→ The consolidated taxable profit is: 1,400 (SA 1 profit) + 500 (reintegrated value adjustment) – 1,000 (SA 2 loss) = 900.
Group taxable income
The taxable income of the consolidated group is the overall group taxable profit (after any corrections) less the special expenses of the separate consolidated companies, i.e.:
- gifts (e.g. donations), up to the tax deductible thresholds applicable to the consolidating company;
- losses that can be carried forward incurred by the group companies from the date the tax consolidation came into effect.
Sums that can be deducted from or offset against the group tax rate
The consolidating company can deduct or offset the following from/against corporate income tax:
- tax relief received by group companies from the date the tax consolidation came into effect, subject to the following:
- tax relief for investment in audio-visual equipment and venture capital is only tax deductible for the assessment year in which the investment was made;
- tax relief for investments involving providing jobs to unemployed people and for continuous vocational training costs is tax deductible for the ten assessment years thereafter (should the level of tax be too low in the year in which the investment was made).
Tax relief granted before the regime was applied can only be carried forward up to the amount of the tax rate that the individual members would hypothetically be subject to if they were not subject to the regime.
- taxes paid by group companies from the date the tax consolidation came into effect, including:
- Luxembourg withholding tax levied on return on capital and allocated portions of profit (any excess payment will be refunded);
- the portion of foreign tax that may be offset against the Luxembourg tax rate (any excess amount is tax deductible as an operating expense).
Tax return and payment of tax on group income
In addition to the separate tax returns filed by each group company, the consolidating company must file a corporate income tax return that combines or offsets its own taxable profit with or against that of all the consolidated subsidiaries or sub-subsidiaries.
The consolidating company is also liable for payment of:
- corporate income tax on the taxable income of the entire group;
- any advances determined by the Luxembourg Inland Revenue (ACD).
Tax consolidation – communal business tax
Companies consolidated for corporate income tax purposes are also automatically consolidated for communal business tax.
Tax base for communal business tax
The operating profit declared for communal business tax purposes is the total of the taxable profit of all the companies concerned as defined for corporate income tax purposes (see "Group taxable income"), and adjusted as follows:
- increased or decreased by the amounts that must be applied when calculating communal business tax (paragraphs 8 and 9 of the law on communal business tax);
- reduced, where applicable, for losses that can be carried forward incurred by group companies from the date the tax consolidation came into effect (paragraph 9a of the law on communal business tax).
Losses incurred prior to the application of the regime can only be carried forward if the company that incurred the losses makes a profit, and only up to the amount of profit made by the parent company.
- rounded down, where applicable, to the nearest multiple of EUR 50 and reduced up to an allowance of EUR 17,500.
This adjusted operating profit is multiplied by the 3% rate to form the tax base for communal business tax.
Communal business tax payable
The overall tax base for the consolidated group must then be divided between the communes in which each of the consolidated companies is established (with each subsidiary considered to be a permanent establishment of the parent company).
Each share of the overall tax base allocated to a commune is then multiplied by the relevant communal business tax rate to determine the amount due in each commune concerned.
Tax consolidation – net wealth tax
No tax consolidation for net wealth tax
There is no tax consolidation for net wealth tax for groups of companies.
Each group company therefore remains liable for the net wealth tax applicable to its own taxable wealth.
Reduction of net wealth tax payable by consolidated companies
However, capital companies within a consolidated group can receive a net wealth tax reduction if they allocate their profits to a special reserve:
- amounting to five times the net wealth tax reduction requested;
- and kept for the following 5 assessment years.
They will then receive a yearly net wealth tax reduction of 20 % of the reserve built up. The reduction shall not exceed the sum of corporate income tax and employment fund contributions payable by the group before any tax credits.
Every consolidated group company can benefit from this reduction according to its profits or available reserves, regardless of which group company or companies built up the reserve.
The companies concerned must therefore allocate the reserves according to:
- the assessment years for which a net wealth tax reduction has been requested;
- and the companies for which this reduction has been requested, in the event that one of the companies builds up a reserve on behalf of another.