Distribution of dividends
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A company that generates profits remains the owner of said profits for as long as they are not distributed. Profits are subject to corporate income tax (impôt sur le revenu des collectivités - IRC) at the level of the company.
The company can distribute the profits in the form of dividends to their partners / shareholders in proportion to their shares in the company. At the time of distribution of profits, the dividends become taxable at the level of the beneficiaries.
In order to avoid hampering the ability of companies to finance their activities, there are several steps that can be taken to limit or eliminate economic double taxation.
The steps that can be taken namely depend on:
- the country in which the registered office of the distributing company is located;
- the beneficiary's personal capacity and country of residence;
- the size of the shareholding if the dividends are paid by a subsidiary of the parent company.
Who is concerned
After having declared their profits for corporate income tax purposes, capital companies may distribute all or part of the profits to their partners.
Depending on the capacity of the partner or the size of his shareholding, the company will have to deduct withholding tax on investment income (retenue à la source sur revenus de capitaux - RRC) from these dividend payments.
Where applicable, the partner/shareholder must then pay the remaining tax due on their tax return.
Partnerships do not pay dividends. Tax on income from partnerships is payable by its partners, whether they have received this income or not. The partners must therefore declare their share of the business profit on their income tax return.
How to proceed
Taxable dividends
Broadly speaking, all income distributed by a company to its partners is a dividend. This includes both regular dividends and any hidden distributions.
Regular dividends
Income distribution payments (dividends, shares of profit and other income allocated in respect of shares, capital shares, profit shares or other equity held in the companies concerned) officially approved by all partners and recorded in the accounts as such are considered regular dividends.
Hidden distribution of profits
If a partner receives benefits that he would normally not have received if he had not been a partner, said benefits are deemed to represent a hidden distribution of profits by the tax administration.
Examples: no interest loans or at a rate below the market rate, lease of buildings without payment of rent, sale of a product below its real value, and other advantages granted to partners/shareholders.
The hidden distribution of profits is included in the taxable income of the paying company and of the beneficiairy.
Example:
The company sells a property worth EUR 1,000 to the shareholder for EUR 800, with the purchase cost of the property being EUR 400.
The company would not have agreed to sell the property to a third party for less than its value (EUR 1,000):
- the sale is therefore considered to have been made for EUR 1,000 and not EUR 800;
- The company's tax gain therefore is EUR 600 (1,000 - 400) and not 400 (800 - 400);
- the advantage is reclassified as a hidden distribution of profits and is EUR 200 in this instance (600 - 400).
Luxembourg company distributing profits to a partner in Luxembourg
Luxembourg distributing company
Capital companies must declare their commercial profits in order to submit them for corporate income tax purposes before distributing any income to their partners/shareholders.
When distributing income in the form of dividends to their Luxembourg resident partners/shareholders, they must:
- deduct a 15 % withholding tax;
- submit a withholding tax return on capital income (model 900F) and pay the withholding tax to the competent revenue office (Luxembourg, Ettelbruck, Esch-sur-Alzette) at the Luxembourg Inland Revenue (ACD), within 8 days from the day the income is made available.
This 15 % withholding tax constitutes an advance payment of the income tax payable by the beneficiary.
Resident partner beneficiaries: half dividend system
Beneficiaries receiving dividends must declare them as investment income on their income tax return in Luxembourg.
As the distributing company has already paid tax on the dividends paid out, they may benefit from an exemption of up to 50 % if the distributing company is:
- either a fully taxable resident company;
- or a capital company resident in a country that has signed a tax treaty with Luxembourg and that is subject to a tax similar to corporate income tax (with a rate of at least 10.5 %);
- a company resident in the European Union covered by the parent/subsidiary directive but that does not meet the shareholding requirements (holding period, 10% threshold or purchase cost) to make it eligible for the parent/subsidiary regime.
The income tax calculation will therefore be based on 50% of the gross dividends received (before deducting withholding tax). Beneficiaries will then pay the difference between the withholding tax already deducted and the total amount of tax payable.
Example: if a company pays a dividend of EUR 100 and the taxpayer's marginal tax rate is 39 %, the amount of tax payable is calculated as follows:
|
Gross dividend paid out |
100 |
|
Withholding tax (15 %) |
- 15 |
|
Net dividend collected |
85 |
|
Taxable dividend (50 % of gross dividend) |
50 |
|
Total tax payable (39 %) |
(19.5) |
|
Withholding tax already deducted |
- 15 |
|
Outstanding tax payable (19.5 - 15) |
- 4.5 |
|
Net dividend after tax (100 – 19.5) |
80.5 |
Luxembourg company distributing profits to a partner residing outside of Luxembourg
Luxembourg distributing company
Capital companies must declare their commercial profits in order to submit them for corporate income tax purposes before distributing any income to their partners/shareholders.
When distributing income in the form of dividends to their non-resident partners/shareholders, they must:
- deduct withholding tax:
- at the normal rate of 15 %;
- or, where applicable, at the reduced rate as provided for in the double taxation treaty between the 2 countries;
- submit a withholding tax return on capital income (model 900F) and pay the withholding tax to the competent revenue office (Luxembourg, Ettelbruck, Esch-sur-Alzette) at the Luxembourg Inland Revenue (ACD), within 8 days from the day the income is made available.
Non-resident associated beneficiaries
Beneficiaries receiving dividends must, in principle, declare them to the tax authorities in their country of residence.
If the distributing company has applied a withholding tax rate higher than that stipulated in the relevant tax treaty, beneficiaries may submit a request for the refund of the excess payment to the Luxembourg Inland Revenue.
Luxembourg subsidiaries distributing income to their parent companies: parent/subsidiary regime
Income paid by a subsidiary to its parent company is exempt from withholding tax if the parent/subsidiary regime eligibility conditions are met on the date that the funds are made available.
Example 1: SA1, a Luxembourg société anonyme (public limited company), pays a dividend to SA2, an Italian company which has held 13 % of SA1 for two years.
SA1 does not need to deduct a withholding tax as the shareholding is greater than 10%.
Example 2: take the same data except that the stake held is 7 %.
In this case, the withholding tax rate stipulated in the Italian tax agreement, i.e. 15 %, applies as the stake held is less than 10 %.
Example 3: however, if SA2 has paid at least EUR 1,200,000 for its shareholding in SA1, the dividends paid may be exempt from withholding tax, in accordance with the parent/subsidiary regime.
Foreign company distributing profits to a partner in Luxembourg
Foreign distributing company
Dividends distributed by foreign companies to partners/shareholders residing outside of Luxembourg are subject to withholding tax applicable in the country where they are established, in accordance with the tax treaties in force.
Beneficiary partner resident in Luxembourg
Beneficiaries who have their place of residence in Luxembourg and who receive dividends must declare them as investment income on their income tax return in Luxembourg.
As the distributing company has already paid tax on the dividends paid out, they may benefit from an exemption of up to 50 % if the distributing company is:
- either a fully taxable resident company;
- a capital company resident in a country that has signed a tax treaty with Luxembourg and that is subject to a tax similar to corporate income tax (with a rate of at least 10.5 %);
- a company resident in the European Union covered by the parent/subsidiary directive but that does not meet the shareholding requirements (holding period, 10 % threshold or purchase cost) to make it eligible for the parent/subsidiary regime.
The income tax calculation will therefore be based on 50% of the gross dividends received (before deducting withholding tax). Beneficiaries will then pay the difference between the withholding tax already deducted and the total amount of tax payable.
If the distributing company has applied a withholding tax rate higher than that stipulated in the relevant tax treaty, beneficiaries may submit a request for the refund of the excess payment to the tax administration in the country where the distributing company is established.
Online services and forms
Who to contact
Luxembourg Inland Revenue (ACD)
-
Luxembourg Inland Revenue (ACD)
- Address:
- 33, rue de Gasperich L-5826 Hesperange Luxembourg
Please consult the above website to find the competent department.
Related procedures and links
Procedures
Links
Legal references
-
Loi modifiée du 4 décembre 1967
concernant l'impôt sur le revenu
-
Règlement grand-ducal modifié du 21 décembre 2001
portant exécution de l'article 166, alinéa 9, numéro 1 de la loi modifiée du 4 décembre 1967 concernant l'impôt sur le revenu
