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Luxembourg: Offshore Legal and Tax Regimes

Taxation of Foreign Employees of Offshore Operations

In Luxembourg the taxation of individuals is based entirely on the concept of residence, regardless of nationality. See Domestic Personal Taxation for the general principles of individual taxation in Luxembourg, which also apply to the resident employees of non-resident entities. Generally, individuals are considered to be resident when they maintain a residence in Luxembourg with the intention of remaining other than temporarily. A stay of six months is deemed to be residence. Most types of compensation and benefit paid to employees are taxable. Traditionally, there have been no special privileges or exemptions for expatriate workers, althoughan expatriate tax regime for highly skilled employees came into force on January 1, 2011. See Residence and Liability for Taxation for details of the newly-introduced expatriate tax regime.

Non-residents are liable to pay Luxembourg taxes only on certain types of income arising in Luxembourg or from Luxembourg sources. These types of income are very precisely defined in Luxembourg legislation. Nationals of countries with which Luxembourg has Double Taxation Treaties also need to be aware that the relevant treaty may well affect their tax treatment.

The main types of taxable income for non-residents are:

  1. income from trade or business carried on in Luxembourg or arising there;
  2. income from dependent services (ie employment income) performed or arising in Luxembourg;
  3. pension income resulting from former activity in Luxembourg;
  4. investment income arising or paid from Luxembourg;
  5. income from leasing of goods etc situated in Luxembourg or exploited by a Luxembourg entity;
  6. capital gains on the sale of property or substantial participations in Luxembourg companies.

Each of these categories is further defined in considerable detail in the legislation.

Luxembourg eventually signed up to the compromise on the European Savings Tax Directive reached in January, 2003, and has been imposing a withholding tax on non-residents' investment returns, like Switzerland, as from July, 2005 (initially at a rate of 15%, rising to 20% in 2008, and 35% in 2011). The withholding tax option will be replaced with an automatic information exchange from 1 January 2015.



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