4 Accounting and Tax Obligations to Know Before Staritng a Business in Luxembourg

Deciding on which countries to expand your business to can be a complex and difficult decision.  As an aspiring entrepreneur, you might have heard of the lucrative business environment of Luxembourg and might be wondering about any accounting and tax obligations to be aware of before  starting a business in Luxembourg.  In this article, Tetra Consultants will offer insights into the 4 key accounting and tax obligations to consider before starting a business in Luxembourg so that you may better understand this business phenomenon and make a more informed decision about whether you should register company in Luxembourg.

1. Taxable period

The taxable period for fully taxable resident entities within Luxembourg follows the financial year of the company (varies based on internal accounting standards and policies).  With regards to how companies keep track of such tax obligations, Companies generally use the calendar year for accounting purposes but may apply a different accounting year in certain instances. 

Hence, in these instances, the taxable period would match this distinct accounting year. 

2. Tax returns

Companies are required to submit their respective tax returns by 31 May of each year following the calendar year during which the profits were earned. As of financial year 2017, tax returns for companies liable to CIT are mandated to be submitted via online platforms.

Assessments are issued after the end of the tax year and normally can be finalised within five years, although the delay may extend to ten years if the declaration is found to be incomplete or inexact, with or without the intention of fraud. Once issued, the tax assessment notice is, in principle, final (unless new facts come to light).

Tax assessments are given out by the tax authorities at the point of receipts of the tax return being given out, and are based on the taxable profit reported by the company. The tax authorities may subsequently re evaluate or ask for more details on the return within a time period of 5 years after the receipt of the tax return.

Luxembourg companies are permitted to choose the currency in which they wish to prepare their financial accounts as long as it is a freely tradable currency. Luxembourg companies that expect to conduct most of their business in a currency apart from euros will most likely opt to use that ‘foreign’ functional currency to record and organise their financial statements. In particular, this will ensure that such companies need not clearly record, for accounting purposes, foreign exchange gains and losses which do not reflect the true economic profitability of their business.

Despite this, as a general rule, Luxembourg taxpayers faced with such a circumstance have until now been required to file their tax returns in euros, basing these returns on euro-denominated tax balance sheets. Luxembourg taxpayers are also given the permission to, upon request, to decide on their taxable basis only in a ‘foreign’ functional currency, and then only having to convert the final basis figure into euros. This has avoided the need to establish a euro-denominated tax balance sheet simply for tax filing purposes.

3. Payment of taxation

Tax payments must be made every quarter. These payments are often set  by the tax administration with respect to the tax assessed for the preceding year or with respect to the estimate for the first year. This estimate is provided by the company pursuant to the request of the Luxembourg tax authorities.

Once the final payment of CIT has been made at the end of the month after the month of reception by the company of its tax assessment, such tax obligations are successfully fulfilled.  

4. Issues of concern for Tax Authorities

Beyond initiating a comprehensive legal framework with regards to the management of tax policy, Luxembourg tax authorities have increasingly placed emphasis on transfer pricing matters, as well as the various methods used to decide on the remuneration for  Luxembourg based companies which are currently being carefully examined by the Luxembourg tax authorities.

Another example of such concerns include the introduction and enforcement of the General anti abuse rule (GAAR).  The Law implementing ATAD 1 into Luxembourg domestic tax law and applicable as of tax years beginning from or after the 1st of January 2019 includes a provision adapting GAAR. Based on this new Law, Luxembourg must change and modify its existing GAAR. 

Under the Law text, there is an abuse of law if the legal route, after being utilized with the main aim or purposes of circumventing and reducing tax contrary to the object or purpose of law, is not legitimate in considering all relevant facts and circumstances.  This legal path, which might consist of more than one step or part, will be viewed as  legitimate so long as it was not applied with a legitimate corporate basis that accurately reflects economic reality.

Conclusion

Navigating a new country’s different and unique business climate might be a challenging process – a hassle to say the least.  However, with a relatively tax friendly environment and credits/treaties, it is easy to see why many entrepreneurs will consider starting a business in Luxembourg.  As such, Tetra Consultants hopes that this article has provided you a much better understanding about 4 key accounting and tax obligations to consider before  starting a business in Luxembourg  so that you can truly decide on whether you should register company in Luxembourg yourself.

So, what are you waiting for? Contact us to find out more about the process of starting a business in Luxembourg, and our dedicated and experienced team will respond within the next 24 hours.  Tetra Consultants will not only empower you by helping to navigate the different regulations of Luxembourg, but also aid in facilitating the registration of your company there while providing invaluable, nuanced insights into any potential challenges.