Legal form - Fiscal implications
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The legal structure of a business does not only have an influence on the liability of the entrepreneur, the daily business management and the distribution of the powers within the business; it also impacts the taxation of investments made, the income generated and distributed or the losses incurred by the business, if any.
The level of taxation differs depending on the legal business form:
- sole proprietorship;
- partnership (called transparent company); or
- capital company (called opaque company).
Who is concerned?
Every person planning to set up a company must therefore take into account the tax characteristics which will depend on the legal form of business chosen and which will determine the company form best suited for the entrepreneur's needs:
Sole proprietorship
The sole trader carries out the business activity in his own name.
He has to take decisions on his own and only he is responsible for the financing of his business.
He must take full responsibility with regard to third parties (debts of the company) and pledge his personal assets.
The income and profits of the business belong to one person only: the sole trader himself.
Partnership (transparent company)
A transparent company is not taxable as such. The income of the business is directly taxable at the level of its partners.
No withholding tax is applicable.
These conditions apply to:
- partnerships (société en nom collectif - SENC);
- limited partnerships (société en commandite simple - SCS);
- civil companies (société civile);
- de facto companies (société de fait).
Capital company (opaque company)
The income of the capital company is taxable at the level of the company: the shareholders are only taxable when the profit is distributed.
We speak of a distribution of dividends with a withholding tax rate of 15 %, unless a more favourable rate applies (convention, parent/subsidiary directive, etc.).
These conditions apply to:
- public limited companies (société anonyme - SA);
- limited liability companies (société à responsabilité limitée - SARL);
- European companies (societas europea - SE);
- partnerships limited by shares (SECA or SCA).
How to proceed
Tax status
Sole proprietorship
A sole proprietorship has no tax status.
It is not considered to be a taxable person under tax law. The operator of the business is the taxable person: he has to submit his personal tax return and pays income tax based on his commercial activity.
Partnership (transparent company)
A partnership has no tax status.
It is however subject to income tax on business profits and is also subject to communal business tax.
Capital company (opaque company)
Capital companies have different tax obligations and a tax status which is separate from the one of its shareholders.
A capital company is a taxable person in its own right which must file a tax return for corporate income tax and communal business tax.
Income tax / Corporate income tax
Sole proprietorship / Partnership (transparent)
Business profits in a transparent company are taxed at the level of the operator/partners.
The profit is added to the other taxable income of the operator/partners (in proportion to their contribution) and each of them is liable for income tax (impôt sur le revenu - IR) on their cumulated income.
Business operators may not deduct the following from their income tax:
- their remuneration;
- the remuneration of the assisting spouse;
- the interest yielded by capital invested.
Capital company (opaque company)
Profits generated by opaque companies are theoretically taxed twice:
- at first at the level of the company subject to corporate income tax (impôt sur le revenu des collectivités - IRC);
- then at the level of its partners/shareholders at the time of the distribution of dividends.
However, certain tax exemptions allow for the elimination of this double economic taxation:
- where the shareholder is a natural person, the gross dividend distributed benefits from a tax exemption of 50 %;
- where the shareholder is a company, and where the conditions allow to benefit from the parent/subsidiary company scheme, the gross dividend is fully exempt from tax.
The company may namely deduct the following from corporate income tax:
- the managing partner’s remuneration;
- the remuneration of the managing partner's spouse;
- the interest on capital invested by the partners.
Communal business tax
Sole proprietorship
Communal business tax (impôt commercial communal - ICC) is paid by the operator.
Partnerships and capital companies
Communal business tax is borne by the company.
Net wealth tax
Sole proprietorship
Net wealth tax does not apply to sole traders as they are natural persons.
Transparent company / partnership
Net wealth tax does not apply to partners who are natural persons.
However, if the partner/shareholder is an opaque company, they are liable for net wealth tax in proportion to their contribution.
Capital company (opaque company)
Net wealth tax is borne by the company.
Contributions
Sole proprietorship
A sole proprietorship and its owner are deemed to be one and the same legal entity, and their investment in the business is not to be seen as the level of their contribution.
It is in fact considered a change in allocation of the owner's assets, or more precisely, a transfer from the entrepreneur's private assets to his working capital.
Partnerships and capital companies
The legal personality of the company is separate from that of any person who decides to contribute or withdraw an asset.
Therefore, the contribution may be defined as the allocation of an asset to the business in exchange for shares in the company (or where applicable a hidden contribution).
Withdrawals / Distribution
Sole proprietorship / Partnership (transparent)
Whenever an entrepreneur withdraws assets from his business, for personal or any other use (not linked to the business), we speak of private withdrawal.
Capital company (opaque company)
The withdrawal will be treated as a distribution and will follow the tax logic applied to the distribution of dividends (or where applicable a hidden distribution of profits).
Losses
Sole proprietorship / Partnership (transparent)
Losses are borne by the business operator/partners and can be offset against their other income. Possible losses during business start up will reduce the operator's global taxable income.
In the event of lack of funds to compensate for the losses, the losses can be carried forward indefinitely and charged against the global future income.
Capital company (opaque company)
Losses do not impact the partners and may not be charged against their other income. The losses incurred during start up will have no impact on the taxable income of the partners (natural persons).
However, the company will not pay tax and the losses can be carried forward indefinitely to be charged against future financial years.
Example:
A business operator has an annual income of EUR 100,000 from rental operations.
He also intends to set up a sports shop. Because of the existing competition, he is expecting start-up losses amounting to EUR 70,000 in year 1 and EUR 40.000 in year 2.
- If he sets up his business in the form of a sole proprietorship or a partnership, his taxable income will be EUR 30,000 (= 100,000 – 70,000) in year 1 and 60,000 (= 100,000 – 40,000) in year 2.
- If he chooses to set up his business in the form of a capital company, his personal taxable income will be EUR 100,000. Since the capital company has sustained losses, it will not pay taxes but the losses cannot be offset against the business operator's/partner's personal income and level of taxation.
Tax losses can be carried forward indefinitely but only at the level of the capital company.
Reinvestment of profits
Sole proprietorship / Partnership (transparent)
Taxation of reinvested profits is higher for sole proprietorships and partnerships than for opaque companies.
As a matter of fact, sole traders (in sole proprietorships) / partners (in partnerships) are subject to personal income tax based on the business profits and personal income tax has a higher tax rate than corporate income tax.
Capital company (opaque company)
Taxation of reinvested profits is lower for opaque companies than for sole proprietorships and partnerships.
The opaque company is only liable for corporate income tax (lower than personal income tax) on business profits.
Profits are reinvested and distributed later and are therefore not subject to personal income tax which normally only applies in the case of a distribution of dividends.
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
-
Loi du 21 décembre 2012
portant modification: - de la loi modifiée du 4 décembre 1967 concernant l'impôt sur le revenu; - de la loi modifiée du 16 octobre 1934 concernant l'impôt sur la fortune; - de la loi générale des impôts modifiée du 22 mai 1931 («Abgabenordnung»); - de la loi modifiée du 30 juin 1976 portant 1. création d'un fonds pour l'emploi; 2. réglementation de l'octroi des indemnités de chômage complet; - de la loi modifiée du 22 décembre 2006 promouvant le maintien dans l'emploi et définissant des mesures spéciales en matière de sécurité sociale et de politique de l'environnement; - de la loi modifiée du 12 février 1979 concernant la taxe sur la valeur ajoutée; - de la loi modifiée du 30 juillet 2002 déterminant différentes mesures fiscales destinées à encourager la mise sur le marché et l'acquisition de terrains à bâtir et d'immeubles d'habitation
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