The EU Parent-Subsidiary Directive of 1990 as amended aimed at the elimination of existing disadvantages between parent companies and subsidiaries established in different Member States, in comparison to those based in the same Member State, through the introduction of a common system to facilitate the grouping of companies. However, Luxembourg went beyond that and extended this regime (Articles 147 and 166 of the Income Tax Law):
Dividends distributed by a Luxembourg company – They are in principle subject to withholding tax at a rate of 15% – unless a reduced rate under the provisions of a double tax treaty applies. However, the domestic dividend withholding tax regime based on the EU Parent-Subsidiary Directive can apply and lead to an exemption from withholding tax insofar as the following requirements are fulfilled:
- Shareholding hold by the recipient company: at least 10% of the share capital or acquisition price of over EUR 1.2 million.
- Holding period: holding or commitment to hold the minimum shareholding for at least 12 months.
- Recipient of the dividends: fully taxable resident company, EU company covered by the Parent-Subsidiary Directive or a non-EU company having a tax treaty with Luxembourg and subject to CIT of at least 10.5% on a basis comparable to the Luxembourg taxable basis.
Dividends received by a Luxembourg company – They are in principle subject to CIT at the overall rate of 29.22% for companies established in Luxembourg City. Nevertheless, dividends – as well as liquidation proceeds – are exempt from CIT in Luxembourg where the following conditions are met:
- Shareholding hold by the recipient company: at least 10% of the share capital or acquisition price of over EUR 1.2 million.
- Holding period: holding or commitment to hold the minimum shareholding for at least 12 months.
- Distributing company: fully taxable resident company, EU company covered by the Parent-Subsidiary Directive or a non-EU company subject to CIT of at least 10.5% on a basis comparable to the Luxembourg taxable basis.
Capital gains realized – They are generally regarded as ordinary business income and are subject to CIT but they are exempted under the same conditions of the dividends received except that the alternative to the 10% shareholding is not EUR 1.2 million but EUR 6 million.
These conditions make Luxembourg one of the most attractive participation exemption regimes for European investments.