Taxation of interest payments to lenders - Withholding tax
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Natural persons may lend money to companies in the form of a loan, bonds, short-term notes and receivables, deposits, sureties or shareholder current accounts.
These loans are generally remunerated by the payment of interest.
The taxation of this interest varies depending on:
- the status and tax residence of the beneficiary of the interest paid;
- the status and country of establishment of the entity paying the interest.
The payment of interest may be subject to a withholding tax, in full discharge of tax liability or not.
Who is concerned
Beneficiary
Interest received by companies with a legal personality (capital companies and partnerships), resident or not, fully taxable or not, is exempt from withholding tax.
The company must declare the interest income received to the tax authorities in the country where their registered office is established.
Individuals residing in an EU Member State or a country treated as such will receive the interest due:
- either after application of withholding tax provided that the payer thereof is a professional paying agent established in Luxembourg;
- or without the application of withholding tax, provided the payer thereof is a natural person, a business or a paying agent established in another EU Member State.
In the event that the interest received has not been subject to withholding tax in full discharge of tax liability, the beneficiaries must declare the interest received to the tax authorities in their country of residence.
The following are treated as EU Member States: the French overseas departments (currently excluding Saint-Barthélemy), the Azores, Madeira, the Canary Islands, the Åland Islands, Gibraltar, Bonaire, Sint Eustatius and Saba, Curaçao, Saint Martin (Dutch part), Aruba, Jersey, Guernsey, Isle of Man, Montserrat and the British Virgin Islands.
The following countries are excluded: Switzerland, Liechtenstein, San Marino, Monaco, Andorra, the Cayman Islands, Anguilla, Turks and Caicos Islands.
Natural persons living outside the EU are not subject to withholding tax.
Payer or paying agent
Economic operators who pay interest to individuals (actual beneficiaries) within the framework of their professional activity in the financial sector (bank, credit institution, fiduciary, etc.) are deemed to be "paying agents".
The paying agent established in Luxembourg must in principle declare and apply a withholding tax:
- on interest paid or credited to an account and related to receivables of any kind;
- on interest accrued or capitalised in relation to a transfer, purchase or repayment of said receivables.
Individuals or businesses who makes punctual interest payments to their creditors are not deemed to be paying agents (financial sector professional - professionnel du secteur financier - PSF). Payments are therefore made without withholding tax.
Examples:
- a Luxembourg bank pays interest to its bondholders. As a paying agent, the bank must apply withholding tax on the interest payments.
- the company Luxembourg SARL pays interest to its managing partner in return for a loan. The company is not deemed to be a paying agent and therefore makes interest payments without withholding tax. In the latter case, the bank that simply transfers the funds is not deemed to be a paying agent.
How to proceed
Beneficiary - natural person residing in Luxembourg
Interest payments made by a natural person or a business
If the natural person or the business does not apply withholding tax on the interest payments to their creditors, the resident beneficiary must declare the interest received as net income from movable assets ("income not subject to Luxembourg withholding tax") when submitting the tax return (form 100) to the Luxembourg Inland Revenue (Administration des contributions directes - ACD).
The first tranche of EUR 1,500/year is tax exempt (EUR 3,000 in the event of collective taxation).
Interest paid by Luxembourg paying agents (financial sector professionals - PSF)
Paying agents established in Luxembourg paying interest to a resident natural person must:
- apply 20 % withholding tax in full discharge of tax liability;
- declare and pay to the Luxembourg Inland Revenue's Department for withholding tax on interest the total amount of withholding tax in full discharge of tax liability on certain interest on savings income (form 930) applied;
- and provide the beneficiary with a certificate (or account statement) showing:
- the amount of income subject to the withholding tax;
- the amount of tax deducted;
- the date when the income becomes available.
If the interest is generated by the beneficiary's private assets, the withholding tax is in full discharge of tax liability. This means that the income is thus definitively taxed with the deduction of 20 %. Therefore, the beneficiary need not declare it in their tax return.
If the interest is generated by a taxable economic activity, the full discharge of tax liability does not apply. The beneficiary must therefore declare it in their tax return:
- either as commercial profit;
- or as profit from agricultural and forestry activities;
- or as profit arising from the exercise of a liberal profession.
When the interest received is generated by income exempted from withholding tax, the beneficiary must declare it in their tax return as net income on movable assets ("income not subject to Luxembourg withholding tax").
The first tranche of EUR 1,500/year is tax exempt (EUR 3,000 in the event of collective taxation).
Interest paid by a paying agent from another EU State (financial sector professional - PSF)
Interest attributed to a natural person resident in Luxembourg by a paying agent located in another EU State (or in a State which is a signatory to the European Economic Area Agreement) or in a State which has signed an international agreement directly related to the "savings directive" is, in principle, taxable by assessment.
The beneficiary should therefore declare it as net income from movable assets ("income not subject to Luxembourg withholding tax") in their tax return.
He/she may, however, opt for a 20 % deduction in full discharge of tax liability. In order to do so, the beneficiary must:
- send a withholding tax declaration in full discharge of tax liability (option) (form 931) to the Luxembourg Inland Revenue's Department for withholding tax on interest by 31 March at the latest of the year following the year in which the income was attributed;
- and immediately pay the withholding tax declared to the Ettelbruck revenue office, indicating his/her national identification number (social security number), and the category of tax "15000".
If this interest was generated by a taxable economic activity, the beneficiary cannot opt for withholding tax in full discharge of tax liability.
The beneficiary must therefore declare interest received in their tax return:
Beneficiary - natural person resident in another EU Member State (or treated as such)
Following the introduction of the automatic exchange of information concerning interest payments between the tax authorities in the different EU Member States or countries treated as such, the withholding tax applied on the payment of loan interest will no longer be carried out by the paying agents (whether an individual, a company or a paying agent) established in Luxembourg.
Non-resident beneficiaries must therefore declare interest received to the tax authorities in their country of residence.
Beneficiary - natural person resident outside the EU
When paying loan interest to its creditors, the payer (whether a private individual, a business or a paying agent) shall not apply withholding tax.
Non-resident beneficiaries must therefore declare interest received to the tax authorities in their country of residence.
Beneficiary - commercial company
When paying loan interest to a commercial company, the payer (whether a private individual, a business or a paying agent) shall not apply withholding tax.
Non-resident beneficiaries must therefore declare interest received to the tax authorities in their country of establishment.
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
Links
Further information
Legal references
transposant en droit luxembourgeois la directive 2003/48/CE du 3 juin 2003 du Conseil de l'Union européenne en matière de fiscalité des revenus de l'épargne sous forme de paiement d'intérêts
