The main sources of international tax law in Luxembourg are as follows:

• constitutional principles (eg, the principle of legality);
• EU law transposed into Luxembourg law, such as the Parent-Subsidiary Directive, the Interest and Royalties Directive and the Anti-Tax Avoidance Directives;
• tax treaties;
• domestic tax legislation (eg, the Income Tax Law);
• case law; and
• administrative guidance (eg, circular letters).

As of February 2026, Luxembourg has a comprehensive network of 88 tax treaties in force.

Luxembourg adheres to the principle of treaty supremacy, whereby duly ratified and officially published international tax agreements take precedence over conflicting domestic tax legislation.

As a founding member state of the OECD, Luxembourg predominantly aligns its treaty policy with the OECD Model Tax Convention, with few deviations. The OECD Model and its Commentaries serve both as a reference point in treaty negotiations and as a tool for interpreting tax treaties.

Luxembourg has incorporated some aspects of the UN Model in certain tax treaties with developing countries.

Luxembourg signed the Multilateral Convention to Implement Tax Treaty-Related Measures to Prevent Base Erosion and Profit Shifting (MLI) on 7 June 2017 and deposited the instrument of ratification with the OECD on 9 April 2019. The MLI entered into force for Luxembourg on 1 August 2019, taking effect from 2020 depending on the type of tax and whether it has also entered into force in the other contracting state.

In Luxembourg, the territorial scope of taxation is governed by the principles of residence and source. Residents of Luxembourg, individuals and corporate entities, are subject to tax on their worldwide income, whereas non-residents are only subject to tax on income derived from Luxembourg.

Relief from double taxation is available for foreign-source income derived by Luxembourg residents through exemption or credit, as set out in applicable tax treaties or domestic law.

Under Luxembourg law, individuals are considered tax residents if they have their tax domicile or habitual abode in Luxembourg. A tax domicile is established when an individual has a dwelling at their disposal under circumstances that suggest their intention to keep and use it permanently. This standard requires the satisfaction of the following three main conditions.

• Having a dwelling available – this does not mean that the individual must own the accommodation, but merely that they have the right to use it.
• The dwelling is intended for residential use – it must be equipped in such a manner that the individual may reasonably reside therein and have at their disposal the amenities required for residential occupation, considering the specific circumstances of each taxpayer.
• With the intent to keep and use it – this implies effective, regular and continuous use, as evidenced by the actual occupation of the dwelling.

The notion of habitual abode refers to two possible distinct situations.

• A continuous stay – this criterion is usually met when an individual resides in Luxembourg on a habitual basis, irrespective of the specific duration.
• A stay exceeding six months – this applies from the date of arrival in Luxembourg. Once this threshold of 183 days is exceeded, the individual is deemed a tax resident with retroactive effect, starting from the first day of their presence in Luxembourg.

Individuals who are considered tax residents of Luxembourg are generally subject to personal income tax on their worldwide taxable income. The system is based on a progressive tax schedule, with current effective rates reaching up to 45.78% (including the solidarity surcharge for the employment fund), and the top rate being applicable when income reaches EUR234,870 (for a single taxpayer in tax class 1).

Taxable income is determined by aggregating net income from eight distinct categories:

• trade and business income;
• income from agriculture and forestry;
• income from self-employment;
• employment income;
• pensions and annuities;
• income from movable capital;
• rental income; and
• miscellaneous income.

Taxpayers are categorised into three tax classes (1, 1a, and 2), based primarily on their marital and family status. A reform is currently under discussion to modernise the system through the introduction of a unified tax class, which would particularly benefit single taxpayers and single-parent households.

Luxembourg offers targeted relief through various mechanisms that reduce either the taxable base or the final tax due, as follows.

• Residents may significantly reduce their taxable income by claiming ”special expenses”. These include mandatory social security contributions, insurance premiums, interest on personal loans, and charitable donations.
• Specific credits exist to increase purchasing power, notably for employees, pensioners and single parents.

Residents benefit from Luxembourg’s vast network of double taxation treaties. Foreign income that is exempt under a treaty (eg, foreign rental income) is excluded from the tax base but is considered when determining the applicable tax rate on remaining Luxembourg income (exemption with progression).

For passive income such as foreign dividends and interest that are subject to withholding tax at source, Luxembourg usually uses the credit method. This means that the foreign tax paid can be credited against the Luxembourg tax due on that income.

In Luxembourg, tax on employment and pension income sourced domestically is generally withheld at source each month via wage tax.

Even when it is not mandatory to file an income tax return, residents may choose to regularise their tax position by submitting a voluntary tax return or requesting an annual tax adjustment. This enables them to claim eligible deductions and allowances, determine their final tax liability and potentially receive a tax refund.

Individuals who are not tax residents of Luxembourg are subject to limited tax liability, and are only subject to tax on specific categories of Luxembourg-sourced income.

Certain income streams, such as dividends, directors’ fees and salaries, are subject to initial tax withholding at source. For non-residents, this withholding tax is usually final. However, they may still be required to file an annual tax return if their salary or directors’ fee exceeds a certain statutory threshold (such as EUR100,000), or they may choose to file in order to claim specific tax deductions.

Non-residents must file an income tax return for other types of income (eg, business profits or rental income). This income is subject to tax at the same progressive rates as for residents, but often with a minimum tax rate of 15%. Non-residents may opt to be treated as residents for tax purposes, allowing them to access the same deductions (eg, interest and insurance) and tax classes (eg, Class 2 splitting) as residents. This option is available if:

• at least 90% of the taxpayer’s worldwide income is taxable in Luxembourg; or
• the taxpayer’s net income not subject to Luxembourg tax is less than EUR13,000.

A specific threshold applies to Belgian tax residents, who may qualify if more than 50% of their household’s professional income is taxable in Luxembourg.

If assimilation is chosen, the non-resident will be subject to tax on their Luxembourg-sourced income at the average rate applicable to their worldwide income (exemption with progression). This regime is particularly beneficial for non-residents with high-deductible personal expenses, and for married couples with disparate incomes who wish to be jointly taxed.

In Luxembourg, the tax residence of collective entities, such as capital companies, is determined based on either their registered office (as stated in their formation documents) or their place of effective management (where shareholders’ meetings and board meetings are held, decisions are made, the company’s relevant information is stored, etc). If both are situated in Luxembourg, the tax residence is clearly established.

Companies incorporated under foreign laws but effectively managed in Luxembourg are considered Luxembourg tax residents.

Tax-transparent entities formed under Luxembourg law, such as limited partnerships (SCS) or special partnerships (SCSp), are not considered tax residents of Luxembourg.

Under Luxembourg law, a permanent establishment (PE) is defined as any fixed local facility or installation used for the purpose of conducting ongoing business activities. Examples of PEs include branch offices, manufacturing facilities, warehouses, mines, construction sites, etc.

The domestic definition is generally broader than those in tax treaties. However, under domestic law, the criteria used to determine the existence of a foreign PE of a Luxembourg taxpayer are those set out in the applicable tax treaties, thus avoiding any conflicting interpretations.

While Luxembourg’s tax treaties generally align with the OECD Model Tax Convention, including the PE provisions, some specific treaties differ.

Luxembourg Resident Individuals

Individuals who are tax residents of Luxembourg are subject to tax on their worldwide taxable income, including income derived from immovable property located in Luxembourg or abroad. Net rental income is aggregated with other taxable income and is subject to the progressive income tax schedule.

Luxembourg immovable property

Income from the rental of private property is subject to tax as net rental income. The taxable base is calculated as gross receipts minus deductible expenses (eg, interest, maintenance, depreciation and management fees).

A key feature is that buildings (excluding land) can be depreciated for tax purposes. This amortisation is generally tax-deductible and does not reduce the acquisition price for future capital gains calculations.

Foreign immovable property

If a double tax treaty applies, foreign rental income is generally exempt in Luxembourg but is subject to the exemption with progression rule. This means that, while the income itself is not subject to tax, it is included in the worldwide income base to determine the applicable tax rate on other Luxembourg-source income.

In the absence of a tax treaty, foreign rental income is fully taxable in Luxembourg. However, a foreign tax credit is usually available for taxes paid abroad to mitigate double taxation, subject to domestic limitations.

Non-Resident Individuals

Non-resident individuals are only subject to tax on income sourced in Luxembourg, including rental income from property located in Luxembourg. If a non‑resident owns Luxembourg immovable property through a permanent establishment, the rental income is treated as business profits of that PE and subject to tax under standard corporate tax rules.

Luxembourg Resident Entities

Resident companies

For Luxembourg tax resident companies, income from immovable property is usually categorised as business profits and is subject to tax in accordance with standard corporate tax regulations. As such, the income is subject to corporate income tax (CIT) and municipal business tax (MBT), and the company remains subject to net wealth tax (NWT) on its net assets.

Real estate levy on Luxembourg investment funds

Luxembourg imposes a specific 20% real estate levy on certain corporate collective investment vehicles that own real estate located in Luxembourg. This levy applies to:

• specialised investment funds (SIF);
• Part II undertakings for collective investment (UCI); and
• reserved alternative investment funds (RAIF).

To fall within the scope of the levy, these vehicles must be organised in corporate form (eg, SA, SCA or Sàrl). Funds structured as SCSs, SCSp or FCPs are notably excluded from this tax.

The 20% levy applies to income derived from Luxembourg real estate, whether held directly or indirectly through tax-transparent entities, such as partnerships or FCPs. Taxable income includes:

• rental income from Luxembourg real estate properties;
• capital gains from the disposal of such properties; and
• income from the disposal of interests in tax transparent entities, provided that the value of these interests reflects the underlying Luxembourg real estate.

Non-Resident Entities

Non-resident companies without Luxembourg PEs

Non-resident companies are subject to CIT on income derived from real estate located in Luxembourg. As this income is not considered to be business profits, and in the absence of commercial activities in Luxembourg, the MBT is not usually due.

Non-resident companies with Luxembourg PEs

Where immovable properties are allocated to PEs, the income is generally classified as business income and is subject to CIT and MBT at the level of the PE.

Luxembourg Resident Individuals

Individuals who are Luxembourg tax residents are taxable on their worldwide business income, subject to double tax treaty provisions. Business profits are aggregated with income from other sources and are subject to tax at progressive personal income tax rates.

Individuals carrying out a commercial activity in Luxembourg are also subject to MBT. The rate varies by municipality (currently 6.75% in Luxembourg City). However, individuals benefit from an annual allowance of EUR40,000, meaning MBT is only levied on business profits exceeding this amount.

Non-Resident Individuals

Non-residents are subject to tax on business income only if it is attributable to a PE or a permanent representative located in Luxembourg. If a non-resident has a PE or permanent representative established or present in Luxembourg, the net income attributable to it is subject to tax in the same way as that of residents: it is subject to progressive income tax rates and MBT (after the EUR40,000 allowance).

In the absence of a PE or permanent representative, business profits are not subject to tax in Luxembourg.

Luxembourg Resident Entities

In accordance with the principle of commerciality by legal form, any income realised by Luxembourg capital companies (eg, SA, Sàrl) is considered as business income, regardless of its actual source or nature, unless an entity is specifically exempt from income tax. Consequently, income is treated as business income, whether it stems from real estate, passive income, capital gains, etc.

Resident companies are subject to CIT, the solidarity surcharge and MBT on their worldwide taxable income at an aggregate rate of 23.87% (2026 rate for entities established in Luxembourg City) for taxable profits exceeding EUR200,000. Certain exemptions apply to dividend income and capital gains under the participation exemption. Luxembourg companies are also subject to NWT at a rate of 0.5% on their net wealth (subject to applicable exemptions and a lower rate for high net wealth).

Non-Resident Entities

Non-resident companies with Luxembourg PEs

If a non-resident company operates through a PE or a permanent representative creating taxable presence in Luxembourg, the PE is treated similarly to a resident commercial company regarding the income attributable to that PE. The net profits generated by the PE are considered business income and are subject to CIT and MBT; NWT is assessed on the net assets allocated to the PE.

Non-resident companies without Luxembourg PEs

In the absence of a PE or a permanent representative creating taxable presence in Luxembourg, the income does not automatically become commercial. Consequently, MBT does not apply. The non-resident is therefore subject only to CIT (the rate for 2026 is 17.12%, including surcharge).

Luxembourg Resident Individuals

Passive income is generally subject to progressive income tax rates, although significant tax reliefs apply.

• Dividends from qualifying companies are exempt from tax on 50% of their gross amount. If the dividend is paid by a Luxembourg company, the standard 15% domestic withholding tax is fully creditable against the final tax liability. For qualifying foreign dividends, the foreign withholding tax credit is limited to the Luxembourg tax due on that specific income, and any uncredited excess foreign tax is only partially deductible.
• Interest income paid by a Luxembourg paying agent (and certain foreign agents) to a resident individual is typically subject to a final withholding tax of 20% (RELIBI regime). Interest not covered by this regime (eg, from non-EU sources) is subject to tax at progressive rates.
• Royalties are aggregated with other taxable income and are subject to tax at progressive rates. A deduction for expenses is often permitted.

Non-Resident Individuals

Non-resident individuals are only subject to tax in Luxembourg on specific Luxembourg-source income.

• Dividends paid by Luxembourg companies are generally subject to a 15% withholding tax, which is considered the final tax liability for non-residents. While this rate may be reduced under applicable tax treaties, it is rarely reduced below 15% for individual shareholders, with a few notable exceptions, such as Singapore, where the withholding rate is reduced to 0%.
• Interest and royalties are generally exempt from withholding tax and are not subject to Luxembourg income tax, provided they are not attributable to a PE (or similar taxable presence maintained) in Luxembourg.
• Some exceptions exist for certain profit-sharing interest payments (which are treated as dividends) and royalties paid to artists and sportspeople for services performed in Luxembourg, which may trigger specific withholding taxes.

Luxembourg Resident Entities

For Luxembourg tax resident companies, passive income is subject to corporate taxation. However, under the Luxembourg participation exemption, dividends (including liquidation distributions) may be fully exempt, provided that certain cumulative conditions are met on the date of the payments, which can be summarised as follows:

• the subsidiary is covered by the EU Parent-Subsidiary Directive or is a capital company subject to an income tax comparable to the Luxembourg CIT (at least 8% if the foreign tax is compulsorily levied based on a system similar to that in Luxembourg);
• a minimum direct participation threshold of 10% in the capital or shares representing an historical acquisition price of at least EUR1.2 million is required; and
• a minimum uninterrupted holding period of one year is required.

The participation exemption also applies to Luxembourg PEs of companies covered by the EU Parent-Subsidiary Directive that are resident in the EEA or in a country with which Luxembourg has concluded a tax treaty. Certain tax treaties concluded by Luxembourg provide for more favourable conditions for the participation exemption on dividends, notably regarding the holding period requirement.

If the full domestic exemption is not available, in some cases dividend income may be 50% exempt if the subsidiary is covered by the EU Parent-Subsidiary Directive or if the subsidiary is a company that is resident in a country with which Luxembourg has concluded a tax treaty and the comparable tax test is met.

Withholding Tax

No withholding tax applies on arm’s length interest and royalties paid by Luxembourg companies.

In principle, dividends (including deemed dividends) and profit-sharing interest paid by Luxembourg companies to their shareholders are subject to withholding tax at a rate of 15%. However, the withholding tax does not apply to these payments made to qualifying corporate shareholders if the following conditions are met at the date of the payments:

• the recipient is an entity covered by the EU Parent-Subsidiary Directive (or a PE thereof), an entity resident in a tax treaty country and the comparable tax test is met (or a Luxembourg PE thereof), an entity resident and subject to tax in Switzerland without benefiting from an exemption, or an entity resident and subject to tax in an EEA country and the comparable tax test is met (or a PE thereof);
• a minimum direct participation threshold of 10% in the capital or shares having an historical acquisition price of at least EUR1.2 million is required; and
• a minimum uninterrupted holding period of one year is required (or a commitment to meet this condition subsequently).

In cases where the direct shareholders are tax transparent entities from a Luxembourg perspective, a look-through approach applies to determine if the above conditions are met by corporate or individual shareholders.

If the above exemptions are not available, exemptions or reduced withholding tax rates may be available under tax treaties.

Liquidation distributions made by Luxembourg companies, including partial liquidation distributions in the context of share class buyouts, are not considered dividends and are therefore not subject to withholding tax. In addition, under the regimes applicable to securitisation vehicles, SIFs, RAIFs, Venture Capital Investment Companies (SICAR) and Family Wealth Management Companies (SPF), dividend distributions are not subject to withholding tax.

Luxembourg Resident Individuals

Residents are taxable on worldwide capital gains, with treatment depending on the nature of the asset and holding period.

• Gains realised on movable assets (eg, shares) held for less than six months or real estate held for less than five years (so-called speculative gains) are subject to tax as ordinary income at progressive rates.
• Gains on real estate held for more than five years and on “substantial participations” in companies (shareholding of more than 10% held for more than six months) are subject to tax at a preferential rate equal to half the global average tax rate (maximum effective rate of approximately 22.89%).
• Residents benefit from a EUR50,000 allowance (doubled for jointly taxed couples) applicable to long-term gains every ten years.
• Capital gains on the disposal of the taxpayer’s principal private residence are fully exempt from taxation.

Non-Resident Individuals

Provided there is no permanent establishment or any other taxable presence in Luxembourg, non-residents are subject to capital gains tax only on specific Luxembourg-source assets.

• For real estate situated in Luxembourg, non-residents follow the same rules as residents: speculative gains (less than five years) are subject to tax at ordinary rates, while long-term gains (more than five years) are subject to tax at half the global rate.
• Non-residents are generally exempt from capital gains tax on shares in Luxembourg companies, unless:
1. they hold a “substantial participation” (more than 10%) and sell the shares within six months of acquisition; or
2. they were resident in Luxembourg for more than 15 years and became non-resident less than five years before the gain was realised.

However, these rules do not apply to gains from shares in specific vehicles such as SPFs, SICARs or corporate UCIs, which remain exempt for non-residents regardless of the participation size.

Where a double tax treaty applies, these domestic provisions do not usually apply to gains on movable assets (shares), as the right to tax is typically allocated exclusively to the country of residence. However, specific exceptions exist; for example, under the tax treaty between Luxembourg and the Netherlands, the source country retains the right to tax these gains if the taxpayer is a former resident holding a “substantial interest” in the company.

Luxembourg Resident Entities

For Luxembourg companies, capital gains are subject to corporate taxation. However, gains realised on shares (including foreign exchange gains) may be fully exempt under the Luxembourg participation exemption, provided certain conditions are met. Such conditions are practically the same as the participation exemption for dividends, except that the acquisition price must be at least EUR6 million.

In principle, a capital gain becomes taxable up to the amount of aggregate expenses and write-downs relating to the participation, which were deducted during the year in which the exempt capital gain was realised and in previous years. However, such a capital gain can be offset against tax losses carried forward.

Some share-for-share exchanges, mergers and demergers may benefit from rollover relief if certain conditions are met.

Capital Gains Taxation of Non-Resident Entities

Provided that there is no permanent establishment or any other taxable presence in Luxembourg to which the relevant assets are allocated, non-resident entities are subject to tax on specific Luxembourg assets.

• Capital gains realised on the full or partial disposal of shares in a Luxembourg resident company are subject to corporate income tax in the hands of the shareholder if the participation represents a substantial shareholding (in broad terms, a direct participation in the capital of the company exceeding 10%) and the disposal occurs within six months after acquisition. Specific rules apply if the non-resident shareholder was a Luxembourg tax resident for more than 15 years in the past and became a non-resident less than five years prior to the disposal of such participation. However, Luxembourg’s taxation rights are usually restricted under applicable tax treaties.
• For real estate located in Luxembourg, capital gains are generally classified as miscellaneous income rather than business income and are subject to Luxembourg corporate income tax.

Employment income is subject to progressive tax rates and includes salaries, bonuses and benefits in kind. Residents are subject to tax on their worldwide income, whereas non-residents are generally only subject to tax on income derived from professional activities performed in Luxembourg.

Employers with a presence in Luxembourg must withhold wage tax. This generally satisfies the employee’s tax liability, unless they have multiple income sources or choose to file a tax return to claim specific deductions.

For short-term assignments, Luxembourg generally follows the standard 183-day rule found in most tax treaties – ie, a non-resident working in Luxembourg for less than 183 days is generally not taxable there, provided their salary is paid by a non-resident employer and not borne by a Luxembourg PE.

For cross-border workers, specific bilateral treaties apply to commuters from neighbouring countries, establishing “tolerance thresholds” for remote work. Following recent amendments to all treaties with neighbouring countries (Belgium, France and Germany), these thresholds have been harmonised and increased to a uniform 34 days. This ensures a consistent tax framework for all cross-border employees working for a Luxembourg employer.

If a cross-border worker works outside Luxembourg (eg, from home) for longer than these limits, the income corresponding to all days worked outside Luxembourg becomes taxable in their country of residence, rather than in Luxembourg.

Consequences of Remote Working

For individuals, working remotely for more than 34 days triggers a split taxation status. Salary must be allocated between Luxembourg (for days physically worked there) and the country of residence (for remote working days), necessitating payroll adjustments and potentially incurring a tax liability in the country of residence.

A non-resident company faces a PE risk if its employees work remotely from Luxembourg. While occasional remote work is generally tolerated, if home working becomes habitual or involves concluding contracts or managerial roles, it may trigger corporate tax liability for the foreign employer in Luxembourg.

Incentives

Luxembourg offers several attractive frameworks to optimise remuneration for individuals.

• Inpatriate regime: qualifying new resident employees can benefit from tax exemptions on 50% of their gross annual remuneration (applicable up to a maximum eligible remuneration base of EUR400,000), provided they meet certain conditions.
• Profit-sharing bonus: employees may receive a portion of company profits with a 50% tax exemption, up to certain thresholds (increased to 30% of the employee’s gross annual salary as of 2025).
• Young professional bonus: a new support measure providing a 75% tax exemption on a specific employer-granted bonus. It is available for young employees under the age of 30 (on 1 January of the tax year) who are signing their first permanent employment contract (CDI) in Luxembourg.

Carried Interest

Luxembourg has recently modernised its tax regime for carried interest for investment fund managers. Qualifying carried interest derived by resident individual taxpayers is either subject to tax at a highly preferential rate of one quarter of the standard rate (up to approximately 11.45%) or exempt, depending on the type of carried interest and whether specific conditions are met.

Directors’ Fees

Luxembourg applies a flat withholding tax of 20% on the gross amount paid to non-resident directors. This tax is final only if the director’s gross fees do not exceed EUR100,000 per year and the director derives no other professional income in Luxembourg. Although the OECD Model (Article 16) allocates taxing rights to the company’s residence state, Luxembourg’s use of a flat withholding tax makes compliance easier than the standard assessment process.

Intellectual Property

Luxembourg offers a specific tax regime for qualifying intellectual property assets (such as patents and copyrighted software). Under this regime, up to 80% of the net income, including capital gains, derived from eligible IP assets is exempt from income tax, resulting in an effective tax rate of approximately 4.8%.

This benefit is strictly linked to the “nexus approach” (Action 5 of the OECD BEPS Project), meaning the exemption only applies to income proportionate to the qualifying R&D expenditure actually incurred by the taxpayer. Qualifying IP assets are also fully exempt from NWT.

Luxembourg has not taken any steps to implement Pillar One (Amounts A and B).

Luxembourg has not taken any steps to implement Pillar One (Amounts A and B).

Luxembourg implemented the global minimum tax under Pillar Two by enacting EU Directive 2022/2523, which included a Luxembourg Qualifying Domestic Minimum Top-Up Tax (QDMTT), through the Law of 22 December 2023.

This law came into force on 31 December 2023 and was subsequently amended in 2024 and 2025.

Luxembourg’s legislation closely aligns with the OECD framework and remains fully compliant with the EU directive. Amendments to the law in 2024 and 2025 considered the latest OECD updates and guidance.

Luxembourg has not introduced a specific tax on digital products. Any future initiative to implement such a tax would probably come about through EU-wide legislation or international negotiations.

Tax Evasion and Fraud

Administrative infractions

Simple tax fraud involves obtaining an undue tax advantage for oneself or somebody else, or intentionally reducing tax revenues. Involuntary tax fraud is caused by the taxpayer’s negligence.

Criminal offences

Aggravated tax fraud is wilful tax evasion where the evaded tax (or undue refund) exceeds either 25% of the tax due (with a minimum value of EUR10,000) or EUR200,000.

Tax fraud (escroquerie fiscale) involves a significant amount of tax evaded, in terms of either the yearly taxes due or the absolute amount, and is committed through the systematic use of fraudulent manoeuvres to hide relevant facts from the authorities or mislead them.

Tax Avoidance

This is considered the use of tax rules and laws in a technically legal manner to obtain tax advantages or reduce tax liabilities, but potentially in a way that goes against legislative intent, which can result in it being deemed illegal by tax authorities and courts. Under the Luxembourg General Anti-Abuse Rule (GAAR), abuse occurs when a specific legal route is chosen with the main purpose or one of the main purposes of obtaining a tax advantage contrary to the intention of the tax law. The GAAR applies to all Luxembourg taxpayers.

Luxembourg has the GAAR and specific anti-abuse rules (SAARs) in place to identify and combat abusive arrangements and schemes.

Under the GAAR, arrangements that are not genuine, or a series of such arrangements, which are put in place with the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purpose of the applicable tax law, shall be disregarded. Arrangements are considered non-genuine if they are not implemented for valid commercial reasons that reflect economic reality. Thus, the GAAR enables the Luxembourg tax authorities to disregard legal acts that are primarily tax-driven and contrary to the purpose of the law, unless the taxpayer can demonstrate valid non-tax reasons.

In addition to the GAAR, SAARs are relevant in a cross-border context – for example, controlled foreign company rules, interest limitation rules, anti-hybrid mismatch rules relating to certain income and withholding tax, and transfer pricing rules based on the arm’s length principle. Another example is the principal purpose test provisions under Luxembourg’s tax treaties.

Luxembourg also combats tax evasion and aggressive avoidance by exchanging information with other jurisdictions.

Luxembourg applies the EU list of non-cooperative jurisdictions for tax purposes.

Interest and royalties due by Luxembourg taxpayers to related entities based in a jurisdiction included on this list are not tax-deductible unless the taxpayers can prove that there are valid economic reasons relating to the transactions that originated such payments.

In this context, the recipients of the payments must be corporate entities (a look-through approach applies in cases where the recipients are transparent for tax purposes from a Luxembourg perspective) and the beneficial owners.

To combat tax evasion, fraud and aggressive tax avoidance, Luxembourg has implemented an extensive set of reporting obligations. Key measures include:

• DAC6 mandatory disclosure rules, which require intermediaries and taxpayers to report certain cross-border arrangements;
• Country-by-Country Reporting and transfer pricing documentation for multinational groups;
• Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standard (CRS) reporting for financial institutions regarding foreign account information, enabling the automatic exchange of data with other jurisdictions; and
• suspicious transaction reporting obligations under AML legislation.

The Luxembourg tax authorities have extensive investigative powers, including conducting tax audits, accessing accounting and banking information, requesting third-party data, carrying out on-site inspections and, in some cases, making unannounced visits to businesses. The tax administration cannot autonomously conduct tax searches or raids (fiscal perquisitions); these become available only once a matter has been escalated to the criminal sphere, at which point the prosecutor and investigating judge may authorise searches, seizures and asset freezes.

These tools are complemented by extended assessment periods, powerful civil enforcement and asset seizure powers that can be exercised without court authorisation, and criminal prosecution mechanisms in cases of tax fraud.

The Luxembourg General Tax Law, and in particular the law that implements EU DAC6 in Luxembourg, establishes the main legal framework for penalties in the event of a failure to comply with cross-border transaction reporting obligations. Penalties of up to EUR250,000 may be imposed on intermediaries and taxpayers if they fail to report or notify other intermediaries or relevant taxpayers (in the case of exempt intermediaries), if they report late, or if they provide incomplete or inaccurate information. This penalty may be applied to each reportable cross-border arrangement.

The authority responsible for enforcement is the Administration des contributions directes.

The criminal tax offences and penalties are as follows.

• Aggravated tax fraud is punishable by imprisonment ranging from one month to three years and a fine ranging from EUR25,000 to up to six times the amount of evaded taxes (or unduly obtained refund).

• Tax fraud (escroquerie fiscale) is punishable by imprisonment ranging from one month to five years and a fine ranging from EUR25,000 to up to ten times the amount of evaded taxes (or unduly obtained refund).

The Luxembourg tax authorities qualify tax evasion involving amounts greater than EUR200,000, implying the use of fraudulent manoeuvres, as tax fraud. Criminal tax offences identified by the tax authorities are referred to the judicial authorities for prosecution.

The tax and judicial authorities co-operate with each other through an inter-administrative and judicial co-operation mechanism. This co-operation notably involves the tax authorities being obliged to:

• provide information to the judicial authorities and to the Financial Intelligence Unit (CRF) upon their request; and
• notify the State Prosecutor whenever criminal tax offences (eg, aggravated tax evasion or tax fraud) and other crimes or offences are identified during the taxation procedure (including anti-money laundering crimes or offences).

This co-operation is mutual, in that the judicial authorities and the CRF must also communicate any information that could help to accurately impose taxes.

In Luxembourg, administrative co-operation in tax matters is based on specific legislation, which often implements EU directives and multilateral/bilateral treaties.

Luxembourg Laws

• Luxembourg laws implementing the EU Directives on administrative co-operation (DAC): DAC1 to DAC7 (DAC2 for CRS) and DAC9 have been implemented either through the general law on administrative co-operation or through dedicated legislation. This includes the exchange of rulings (DAC3), the CbCR (DAC4) and the Mandatory Disclosure Rules (DAC6).
• DAC8 has not yet been implemented. A draft law is pending in Parliament.
• Luxembourg has implemented EU Directive 2010/24/EU on the mutual assistance in the recovery of tax claims.

Main Conventions

• Multilateral Convention on Mutual Administrative Assistance in Tax Matters.
• Bilateral tax treaties concluded by Luxembourg generally include an exchange of information provision based on the OECD Model Convention (Article 26).
• Benelux Agreement on Cooperation between Administrative and Judicial Authorities.
• Agreement with the US regarding FATCA.

The tax treaties concluded by Luxembourg provide for the exchange of any information that is foreseeably relevant for applying the treaty or domestic laws between the competent authorities. In line with the OECD Commentary, this encompasses exchange on request, spontaneous exchange and automatic exchange, depending on the relevant tax treaty.

Luxembourg participates in:

• the OECD’s International Compliance Assurance Programme (ICAP), which facilitates collaboration between multinational enterprises (MNEs) and tax administrations in a co-operative risk assessment process; and
• the European Trust and Cooperation Approach (ETACA) – Pilot 2, a European Commission initiative that fosters multilateral co-operation and preventative risk assessment among EU member states.

A legal framework for joint tax audits, as introduced under DAC7, has also been implemented in Luxembourg’s domestic law. This creates a legal basis for co-ordinated tax audits involving revenue authorities from two or more EU member states.

The Luxembourg framework for the mutual agreement procedure (MAP) mainly comprises the Luxembourg law that implements EU Directive 2017/1852 among EU member states, as well as the MAP procedure set out in Luxembourg’s relevant double taxation treaties.

For MAPs based on domestic law, the deadline is three years from the date of the initial notification of the measure that caused or will cause the dispute.

For MAPs based on a tax treaty, the deadline varies depending on the treaty. It is often two or three years from the first notification of the measure that led to the taxation being in breach of the tax treaty.

Luxembourg has also opted in to the arbitration clause under the MLI, and mandatory binding arbitration is included in some of its tax treaties. Where included, this clause obliges the relevant authorities to reach a binding decision through an independent arbiter when MAP negotiations fail.

The EU Arbitration Convention provides for an arbitration resolution mechanism. If the relevant competent authorities fail to reach an agreement to eliminate double taxation, they must establish an independent advisory commission to deliver an opinion on how to eliminate the double taxation in question. This opinion is binding on the competent authorities.

Luxembourg has an advance pricing agreement (APA) programme, which is set out in the general tax law. The programme offers taxpayers advance certainty on transfer pricing matters, helping them to avoid potential disputes with the tax authorities.

Taxpayers can apply for an APA through the advance tax clearance procedure.

The general tax law provides for a procedure that allows taxpayers to request a binding advance tax clearance from the tax authorities on the application of Luxembourg tax law to transactions that they are considering but have not yet implemented. The request is subject to an administrative fee of between EUR3,000 and EUR10,000 depending on the complexity of the case.

This clearance is valid for a maximum period of five years, but it may be withdrawn under certain circumstances (eg, a change in applicable laws or in the taxpayer’s facts and circumstances).

Clearances issued by the Luxembourg tax authorities are subject to exchange if the conditions of the law implementing DAC3 are met.