The parent-subsidiary regime

Large businesses

SMEs

The parent-subsidiary regime for businesses has as a main objective to avoid double taxation (first at the level of the subsidiary, and then at the level of the parent company):

of income from large shareholdings - which, in principle, is subject to tax on income from capital (retenue sur revenus de capitaux - RRC) at the time of the distribution of dividends and to corporate income tax (impôt sur revenu des collectivités - IRC) and business tax (impôt commercial - IC) at the time of the receipt of dividends;
on the capital gain from the transfer of large shareholdings - which in principle are subject to corporate income tax and net worth tax;
of shareholdings - which in principle are subject to net worth tax (impôt sur la fortune - IF).

Some operations between a subsidiary and the parent company can benefit from a tax exemption.

Who is concerned

In principle, the application of the parent-subsidiary regime requires the parent company and the subsidiary to:

be capital companies (established in the EEA, in a signatory State or another State) subject to corporate income tax or to a similar corporation tax;
and to meet certain requirements in terms of shareholdings.

Income from exempted shareholdings

Income from shareholdings can only be exempted (article 166 L.I.R.) if the parent company holds or has committed to hold for at least 12 months:

at least 10 % of the subsidiary's share capital;
or where the purchase price is at least EUR 1.2 million.

Exemption for capital gain from transfers

Capital gain from the transfer of shares can only be exempted (Grand Ducal regulation implementing article 166 (9) L.I.R.) if the parent company holds or has committed to hold:

at least 10 % of the subsidiary's share capital;
or where the purchase price is at least EUR 6 million.

How to proceed

Taxation of income from holdings

Exemption for the distribution of dividends

Within the framework of the parent-subsidiary regime, subisidiaries do not apply withholding tax on income from capital (retenue à la source sur revenus de capitaux - RRC) for the distribution of dividends to the parent company (article 147 L.I.R.).

The distributing company is nevertheless required to indicate the amount of tax-exempted income from capital in their withholding tax return on income from capital (form 900) which they need to submit to the Luxembourg Inland Revenue (Administration des contributions directes - ACD) within 8 days as from the date the income from capital is made available.

Receipt of dividends

Within the framework of the parent-subsidiary regime, income from important shareholdings paid to the parent company by the subsidiary (article 166 L.I.R.) is exempted:

from corporate income tax (IRC);
and from business tax (impôt commercial - IC).

Expenses related to exempted income (interest, management expenses, deductions for depreciation, etc.) will, in principle, not be deductible any longer.

The beneficiary has to indicate the dividends received (which are already recorded in their profit and loss accounts) as well as the expenses in relation to the holding:

in the annexe - Details of the shareholdings referred to in article 166 L.I.R. (form 506A);
and in its corporate income tax return (form 500) under the following items:
- Exempt income from substantial participations (under "Taxable income / deductions");
- share of profits in collective commercial undertakings and dividends or profit shares from a holding of at least 10 % in a fully taxable stock corporation (under "Municipal business tax / deductions").

Examples:

The fully taxable Luxembourg company SA1 has been holding 15 % of its fully taxable French subsidiary SA2 for 2 years.
=> The dividends received from SA2 are exempted from corporate income tax and business tax in Luxembourg as SA1 has been holding more than 10 % of SA2's share capital for more than 12 months.
SA1 bought a holding of 5 % in a non-EU company SA2 at a price of EUR 2 million. SA1 has held the participation for more than one year. SA2 is subject to a tax in its country of establishment which is similar to corporate income tax in Luxembourg.
=> The dividends received from SA2 are exempted from corporate income tax and business tax in Luxembourg as the purchase price of the shareholding in SA2 exceeded EUR 1.2 million.

Taxation of capital gain from transfers

Exempted capital gain from transfers

Within the framework of the parent-subsidiary regime, capital gains from the transfer of shares held by the parent company in the capital of its subsidiary are exempted from corporate income tax (Implementing Grand Ducal regulation of article 166 (9) L.I.R.).

Expenses related to exempted income (interest, management expenses, deductions for depreciation, etc.) will, in principle, not be deductible any longer.

The beneficiary must indicate exempted capital gains from transfers and expenses in relation with the holding:

in the annexe - Details of the shareholdings referred to in article 166 L.I.R. (form 506A) ;
and in its corporate income tax return (form 500) under the following items:
- Exempt income from substantial participations (under "Taxable income / deductions");
- Share of profits in collective commercial undertakings and dividends or profit shares from a holding of at least 10 % in a fully taxable stock corporation (under "Municipal business tax / deductions").

Exceptionally taxable capital gain from transfers

Capital gain from transfers will be taxable at the time of transfer of the holding:

if the holding company is deducting or has deducted an expense (interest, management costs, depreciation costs, etc.) in relation with their holding.
In this case, the capital gain is taxable on the total amount of the aforementioned deductions;
if the holding transferred had been acquired by reinvestment of a capital gain (capital gain transfer).
In this case, the reinvested capital gain is discovered and taxable up to the amount previously transferred and tax-exempt.

The beneficiary needs to complete the annexe - Details of the shareholdings referred in article 166 L.I.R. (form 506A) together with the tax return and indicate:

the expenses in relation with the holding at the end of each financial year (expenses which were deducted from the financial result as operating expenses);
after the transfer, taxable capital gain from transfers.

Examples:

SA pays interest of 100 on its holding during the financial years 1 and 2.
In year 3, SA sells its holding with a gain of 270.
The profit of 270 is tax-exempt and only 100 is taxable as 100 have already been deducted from previous tax bases.
SA1 has a taxable profit of 100 by selling the holding in SA2. SA1 reinvests a major holding of 300 in SA3 and transfers the capital gain on SA3.
18 months later, SA1 is selling its holding in SA3 for 340 As the investment is more than 12 months old, the capital gain of 40 is tax-exempt.
However, the unrealised gain of 100, which has not yet been taxed because of the transfer, becomes taxable at the time SA1 sells its holding in SA3.

Forms / Online services

Withholding tax return on income from capital

Download the form

Retenue d'impôt sur les revenus de capitaux

Télécharger le formulaire

Steuerabzugserklärung auf Einkünften aus Kapitalvermögen

Das Formular herunterladen

Impôt des collectivités (impôt sur le revenu, impôt commercial 2019, impôt sur la fortune 2020)

Télécharger le formulaire

Who to contact

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Luxembourg Inland Revenue (ACD)

45, boulevard Roosevelt
L-2982 Luxembourg
Luxembourg

Please click on the link below to find the competent department.

Luxembourg Inland Revenue (ACD) Path to Luxembourg Inland Revenue (ACD)

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