The Minister of Finance presented the long awaited draft law regarding the 2017 tax reform (draft law N° 7020 hereafter referred to as the “Draft Law”) on July 26th 2016 to the Luxembourg Parliament. The Draft Law, if approved in its current form, would implement most of the measures announced in February and April 2016 (please refer to our April 2016 Newsletter in this regard) as of the tax year 2017 (with certain exceptions).
The main measures relevant for international investors are detailed below:
A two-step reduction of the corporate income tax rate with reduced rates for start-ups and Small and Medium Enterprises.
The previously announced intention to reduce the corporate income tax rate from its current 21% (i.e. an aggregate tax rate for Luxembourg City resident corporate taxpayer of 29.22% when taking into account the 7% solidarity surcharge and the 6.75% municipal business tax rate) to 19% in 2017 and to 18% in 2018 has been maintained, thus leading to an aggregate tax rate for Luxembourg City resident corporate taxpayers of 27.08% as of 2017 and 26.01% starting 2018.
Additionally, for corporate taxpayers generating a taxable income below EUR 25,000 per year, the corporate income tax rate will be decreased to 15% (leading to an aggregate corporate income tax rate for Luxembourg City resident corporations of 22.8%). This tax rate will then gradually increase when generating a taxable income between EUR 25,000 and EUR 30,000, before reaching the above mentioned standard tax rates.
Lastly, in the comments to the Draft Law, the Government once again confirms its firm commitment to carefully monitor the developments resulting from the OECD’s work on Base Erosion and Profit Shifting and to continuously assess whether further downward adjustments of the tax rate will be required in the near future in order to remain competitive.
Limitation of tax losses carried forward.
The carrying forward of tax losses incurred as from the tax year 2017 will be limited to 17 years. For the tax losses incurred between the tax years 1991 and 2016, the carry forward will remain unlimited in time, with the sole restriction that the oldest tax losses are used first to offset any taxable income generated by the taxpayer.