Communal business tax (impôt commercial communal - ICC) is used to finance the expenses that communes have to bear (road infrastructure, gas pipes, electricity supply, etc.).
Of the different economic agents present in a commune, businesses are generally considered to generate additional costs for the commune (provision of industrial zones, parking spaces, special measures to protect the natural environment, etc.).
In accordance with the principle that whoever generates expenses for the commune must contribute thereto, communal business tax is designed to obtain compensation from commercial businesses for the additional costs they cause for the commune.
Communal business tax was traditionally aimed at the business and not the operator, which explains why it did not take the personal situation of operators, including their ability to contribute, into account. This is why communal business tax was originally an impersonal tax that took into account the size of the business through a combination of production factors, such as the human and technical capital.
This traditional approach penalised labour-intensive businesses. It also risked imposing tax on a business despite the fact that it was making a loss. This explains why a number of changes were made to gradually bring the communal business tax calculation rules into alignment with those applicable to income tax. The most recent changes in 2001 made communal business tax a personal tax. The profit to be taxed is now determined on the basis of the criteria used to determine corporate income tax, apart from certain additions and deductions resulting from the traditional ‘impersonal’ nature of communal business tax.
Because the tax is specific to a given commune, the communal business tax amount is determined by applying the communal rate to the statutory base rate of 3 %. The constitutional principle of the financial autonomy of the communes grants them the freedom to set the communal rate. The communal rates must, however, be submitted to the Grand Duke for approval. This explains why the rates remain within a range of 200 % to 400 % in practice.
Weight of communal business tax depending on the legal form
All businesses conducting a fixed commercial activity are subject to communal business tax, provided that they operate within the country:
- sole proprietorships and partnerships generating commercial profits (note that partnerships are directly subject to communal business tax rather than the partners, despite their transparent nature);
- capital companies, regardless of the nature of their business (since capital companies are commercial businesses by definition);
- Luxembourg permanent establishments of foreign businesses for their Luxembourg activities (foreign permanent establishments of Luxembourg businesses are not subject to communal business tax as they do not carry out any activities in Luxembourg).
Note that partnerships that do not make commercial profits but which have one or more majority partners that are capital companies (commercial by definition), or partnerships carrying out commercial activities, are subject to communal business tax.
- a partnership (SENC) runs a commercial activity
=> it is subject to communal business tax;
- a partnership that limits its activities to running an agricultural business is not subject to communal business tax because it does not make any commercial profits.
- a limited partnership (SECS) limits its activities to running an agricultural business but has partners that are traders
=> the business of the SECS will be considered to be a commercial activity subject to communal business tax.
With regard to communal business tax, transparent taxpayers (sole proprietorships and partnerships) receive preferential treatment.
The reason for this preferential treatment is that certain salaries and remuneration (board of directors, managers, directors, etc.) reduce the tax base of opaque companies, while the salaries and remuneration paid to sole proprietors or partners of partnerships do not reduce the operating profit of these transparent taxpayers. It is also intended to favour sole proprietorships and transparent companies as they make up the majority of small and medium-sized businesses.
This preferential treatment takes 2 main forms:
- the operating profit on which communal business tax is payable is reduced by an allowance that varies according to the tax status of the taxpayer. The allowance is EUR 40,000 for taxpayers not subject to corporate income tax, and EUR 17,500 for others;
- Communal business tax is not a deductible expense for opaque companies, but it remains deductible from the results of sole proprietorships and transparent companies.
Tax base of communal business tax
The tax base for communal business tax is identical to that calculated for income tax, apart from certain additions and deductions.
The starting point for calculating the communal business tax is therefore the commercial profit as determined for income tax, to which we must:
- the share in the profit of the general partner of a partnership limited by shares (société en commandite par actions - SECA or SCA). This addition is justified by the fact that this share in the profit was deducted from the commercial profit of the SECA;
- the share in the loss of a transparent company in which the business has a holding. This share already reduces the communal business tax payable by the transparent company;
- the losses made by foreign permanent establishments. This addition only takes place where the loss effectively reduced the taxable amount subject to income tax. This means that losses made by permanent establishments located in countries with which Luxembourg has signed an international tax agreement must not be added because in this case the positive or negative income from the permanent establishment is not taken into account in Luxembourg.
- the dividends from holdings of at least 10 % in fully taxable capital companies, whether they are resident or non-resident. In practice the scope of this provision is limited to holdings held by businesses other than capital companies because parent companies and subsidiaries receive preferential treatment with respect to corporate income tax for holdings held by capital companies. As the taxable amount used to calculate communal business tax is based on the corporate income tax base, the exemption granted to capital companies with respect to corporate income tax automatically benefits the business when calculating communal business tax;
- the share in the profits of a transparent company. This share has already been subject to communal business tax at the level of the transparent company;
- the profits made by foreign permanent establishments. The reasons are the same as for the addition for losses made by foreign permanent establishments.
Example: the commercial profit obtained when calculating the income tax of SA was set at 1,000.
This profit includes a profit of 50 made by a foreign branch.
SA has also deducted its share in the losses of a SECS (200) from its taxable result.
The taxable result for communal business tax will therefore be 1,000 – 50 + 200 = 1,150
The law on communal business tax has had a tax consolidation regime in place for many years. This regime is now based on the regime concerning corporate income tax. Where companies are consolidated with respect to corporate income tax, they will automatically be consolidated for communal business tax. It is not possible for companies to benefit from tax consolidation for communal business tax without being consolidated for corporate income tax purposes.
The start and end dates of tax liability with respect to communal business tax vary depending on whether the taxpayer is a sole proprietorship, partnership or opaque company.
Sole proprietorships and transparent companies
- the tax liability starts when the activities of the business meet the conditions to be considered a commercial activity;
the tax liability ends with the cessation of the commercial activity:
in the event of the liquidation of the business, the commercial activity is deemed to have ended before the liquidation procedure starts. Capital gains and losses from sales carried out as part of the liquidation of the business are therefore not to be taken into consideration with regard to communal business tax;
Example: during the liquidation of his business, a sole proprietor sells the premises in which he carried out his commercial activity.
This sale generates a capital gain.
This capital gain will not be taken into account in the calculation of communal business tax.
when the business is sold in its entirety to a third party, the tax liability of the former owner ceases. The new owner is deemed to create a new business. However, this rule does not apply if the buyer is already an entrepreneur, in which case the buyer is deemed to carry on the commercial business.
Example: an entrepreneur sells his business on 30 June 2005 to a person that wishes to start a similar commercial activity.
The income to be taken into account with respect to the communal business tax payable by the former owner will be the income from 1 January to 30 June 2005.
- in the event of the liquidation of the business, the commercial activity is deemed to have ended before the liquidation procedure starts. Capital gains and losses from sales carried out as part of the liquidation of the business are therefore not to be taken into consideration with regard to communal business tax;
- the tax liability starts on the date the company is incorporated (opaque companies are commercial companies by definition, independently of the type of business activity they carry out);
- the tax liability ends with the definitive cessation of the company, including the company liquidation operations. Communal business tax is therefore no longer payable as of the definitive liquidation of the company.
Exceptionally short first financial year: whether set up in the form of a company or not, businesses are very often created during the calendar year. The variable allowance, which depends on the tax status of the taxpayer (EUR 40,000 for taxpayers not subject to corporate income tax, EUR 17,500 for others), is fully deductible even if the business has not existed for the whole year.
Tax return and payment
Accounting and tax return obligations of the company
The communal business tax rate is obtained by multiplying the statutory rate of 3 % (called the base rate) by the communal rate freely chosen by each commune within a range of 200 % - 400 % (see 'Calculation of business tax)
On 1 January 2011, the communal business tax rate for Luxembourg city was set at 6.75 % (225 % x 3 %).
- Since communal business tax is not deductible from its own base for opaque companies, the effective taxation rate for capital companies established in Luxembourg city is 6.75 %.
- For other businesses, however, communal business tax remains deductible as an operating expense from the commercial profit of the business, i.e. it can be deducted from the base used to calculate the communal business tax. The effective communal business tax rate for said taxpayers in the commune of Luxembourg is therefore 6.32 % (= 6.75 / (100+6.75)).
Communal business tax calculation formula
+ Commercial profit according to LIR (Law on Income Tax)
+ Share in the losses of a transparent company
+ Loss made in a foreign permanent establishment
- Dividends from holdings of >10% in opaque companies
- Share in the profits of a transparent company
- Profit made in a foreign permanent establishment
- Losses carried forward
= Operating profit (rounded down to the nearest EUR 50 multiple)
- Allowance (EUR 40,000 or EUR 17,500)
= Intermediate balance x 3 %
= Tax base x t (communal rate of 200 % to 400 %)
= Communal business tax amount
Although it is a communal tax, communal business tax is established and collected by the Luxembourg Inland Revenue. The tax authorities establish the tax amount and collect the Treasury's receivable on behalf of the commune.
Communal business tax gives rise to an annual tax return. Payment is made in quarterly advance instalments in February, May, August and November. The balance is payable on receipt of the tax bulletin.