The tax is payable by:
- the entrepreneur in the case of a sole proprietorship;
- the partners in the case of a partnership.
The tax applicable (personal income tax or corporate income tax) depends on the status of the partner concerned.
Who is concerned
Taxable persons can be grouped into two categories:
- the entrepreneur in a sole proprietorship, i.e. the natural person exercising a commercial activity in his/her own name. Only the entrepreneur has a legal personality and a personality for tax purposes. The owner who is taxed on any income, with the income from the sole proprietorship being only one component of this income.
- the partners in transparent partnerships (SENC, SECS, de facto companies, or civil companies) which are subject to a regime comparable to that of sole traders, namely:
Foreign service providers
Generally speaking, profit from the occasional provision of services is not subject to income tax in Luxembourg.
Example: profit from a Belgian business carrying out construction work in Luxembourg is taxable in Luxembourg if the duration of the work exceeds 6 months.
In order to be taxable, profit from a sole proprietorship or partnership must be derived:
- from commercial or craft activities;
- from agricultural or forestry activities;
- or from exercising a liberal profession.
Commercial or craft activities
An activity is considered as commercial from a tax standpoint if it meets the following four criteria:
- it is independent (which excludes salaried activity);
- it is for profit (which excludes amateur or unpaid activities);
- it is permanent (which excludes isolated acts);
- and it constitutes a participation in general economic life (it must target a large market).
Where the profit from a partnership does not meet these 4 criteria, it is nonetheless considered commercial profit if one or more of the majority partners are:
Partners of this type of partnership must therefore also declare the profits derived from this company as commercial profit.
- a civil company (partnership) exercises a commercial activity (within the meaning of the above definition): its partners are liable for tax on the profit they receive from the company as it is derived from a commercial activity;
- natural persons are partners in a limited partnership (société en commandite simple - SECS) exercising a non-commercial activity. As the activity is not commercial, the partners are not taxed on its profit;
- a public limited company (société anonyme - SA) holding 70% of a civil real estate company which does not perform any commercial activity. As the majority shareholder is a capital company (SA), the profit is considered as commercial. All the partners in a civil company are therefore liable for tax on the profit that they receive from it.
Agricultural or forestry activities
Activities considered as agricultural or forestry from a tax standpoint specifically include:
- agriculture, forestry, viticulture, horticulture, fruit and vegetable growing, in nurseries or greenhouses;
- livestock farming;
- hunting and fishing conducted in conjunction with farming or forestry.
Profit derived from these activities must therefore be declared as profit from agricultural and forestry activities.
Exercising a liberal profession
Activities considered to be liberal professions from a tax standpoint specifically include the following, if they are exercised as independent activities:
- scientific, artistic, literary, teaching or educational activities;
- doctors, dentists, veterinary surgeons, midwives, physiotherapists, masseurs;
- lawyers, notaries, bailiffs, executors of wills, property managers, accountants and tax advisers;
- engineers, architects, chemists, inventors, consultants, journalists, photo-journalists, interpreters and translators, etc;
- directors, auditors of SA, SARL, SECA, cooperative companies (sociétés coopératives, SC), etc.
Profit derived from these activities must therefore be declared as profit derived from exercising a liberal profession.
How to proceed
Sole trader/Partner natural person
Natural persons must declare profit derived from a sole proprietorship or partnership on their personal income tax return (form 100F):
- in the commercial profit category if it results from a commercial or craft activity within the meaning of tax law;
In such cases, the tax return must be accompanied by the declaration for the calculation of commercial profit and business tax (110F)
- under agricultural or forestry profit;
- or under profit derived from the exercise of a liberal profession.
Any business losses may be deducted:
- from the owner's total income in the case of a sole proprietorship;
- from each partner's income pro rata according to his/her share of the partnership.
In the event of insufficient income, the residual loss can be carried forward by the taxpayer indefinitely against future income.
Carrying losses forward is subject to the following two conditions:
- carrying out proper bookkeeping for the financial year during which the loss occurred;
- the carrying forward of losses is limited to losses which have not been offset by other net income or a restatement of net profits.
Partners in capital companies
Capital companies must declare profit derived from a partnership on their corporate income tax return.