Equity investment from China into Luxembourg
Discover more about the tax implications for a Chinese resident purchasing a Luxembourg resident company, either directly or through a Luxembourg resident holding company. This guide assumes that the Luxembourg resident company (LuxCo) is a fully taxable non-transparent company which is tax resident in Luxembourg only.
Purchase of shares in Luxembourg resident company
The purchase / acquisition of shares in LuxCo should not trigger Luxembourg taxation and should not be subject to stamp tax or similar duty in Luxembourg to the extent that the corporate documents pertaining to the transaction are not:
- physically attached as an annex to a public deed or any other document subject to mandatory registration in Luxembourg;
- deposited in the minutes of a notary in Luxembourg; or
- registered with the Luxembourg indirect tax authorities (Administration de l'Enregistrement, des Domaines, et de la TVA).
Luxembourg tax residence
A company is treated as tax resident in Luxembourg if it has its statutory seat or its central administration in Luxembourg.
Under the Luxembourg-China double tax treaty (DTT), if a company is a resident of both Luxembourg and China, then it is deemed to be a resident only of the state in which its place of effective management is situated.
Corporate income tax rate
The current combined Luxembourg corporation income tax (LCIT) rate is 23.87% (for Luxembourg city).
The LCIT rate indicated above consists of Luxembourg corporate income tax (impôt sur le revenu des collectivités – “CIT” – at a rate of 16%), Luxembourg municipal business tax (impôt commercial communal – “MBT” – at a rate of 6.75% for Luxembourg City) and a contribution to the unemployment fund (contributions au fonds pour l’emploi – at a rate of 7% applied to the Luxembourg CIT to be paid).
LuxCo is also subject to the standard net wealth tax (NWT) which is levied annually at a digressive rate starting at 0.5% on its unitary value (broadly speaking, net asset value) as at 1 January each year.
Alternatively, LuxCo may be subject to the minimum NWT ranging from EUR 535 to EUR 4,815 (depending on the size of the balance sheet of LuxCo).
In practice, whether the standard NWT or the minimum NWT amount will be due depends on which amount is higher.
Equity financing from Chinese resident parent company to Luxembourg resident subsidiary
LuxCo may be financed with a mixture of debt and equity. The debt to equity ratio should respect market conditions.
Withholding tax on dividend payments to Chinese parent company
A dividend distribution by LuxCo to a Chinese resident parent company (ChinaCo) will, in principle, be subject to 15% withholding tax (WHT) in Luxembourg, unless an exemption applies based on Luxembourg domestic rules or an exemption or reduced rate(s) apply based on the Luxembourg-China DTT.
- A domestic WHT exemption would apply on dividend distributions made by LuxCo to ChinaCo provided that the following conditions are met:ChinaCo has directly held a minimum participation representing at least 10% in the capital of LuxCo. Alternatively, this 10% minimum holding requirement can be replaced by a minimum acquisition cost of EUR 1.2M;
- ChinaCo has held (or commits to hold) the minimum participation for an uninterrupted period of at least 12 months; and
- ChinaCo is a corporation subject to a corporate income tax in China which is similar to Luxembourg CIT, i.e. the corporate income tax in China has a similar tax base and the rate of tax is at least 8% for FY 2025. A shadow computation should be made to determine if ChinaCo is a company subject to corporate income tax in China that is comparable to Luxembourg CIT. A shadow computation is a comparative calculation which compares the Chinese tax liability of the ChinaCo to the tax liability that the ChinaCo would be liable to pay in Luxembourg if the ChinaCo were a Luxembourg fully taxable entity.
If the conditions of the Luxembourg WHT exemption are not met, then Article 10(2) of the Luxembourg-China DTT provides for reduced WHT rates on dividends which shall not exceed:
- 5% of the gross amount of the dividends if the beneficial owner of the dividends is a company which holds directly at least 25% of the capital of the company paying the dividends; or
- 10% of the gross amount of the dividends in all other cases.
Debt financing from Chinese resident parent company to Luxembourg resident subsidiary – tax deductibility of interest payments
Interest payments by LuxCo to ChinaCo in respect of a loan granted by ChinaCo should, in principle, be tax deductible provided that the loan is at arm’s length and reflects economic reality.
However, the following Luxembourg rules may limit the tax deductibility of such interest expense, depending on the circumstances:
- general limitation of deductibility of expenses / recapture rules (i.e. the loan relationship rules);
- the transfer pricing rules;
- the anti-hybrid mismatch rules; and/or
- the interest limitation rules.
Analysis should be made depending on actual facts and circumstances.
Debt financing from Chinese resident parent company to Luxembourg resident subsidiary – withholding tax on interest payments
As a general rule, the payment of interest should not be subject to WHT in Luxembourg to the extent that the following conditions are all met:
- the debt-to-equity ratio of LuxCo respects market conditions;
- the loan bears an arm’s length interest, which is a fixed percentage of the principal; and
- the loan does not have any equity, profit-participating or convertible features.
If the above listed conditions are not all met, there is a risk that the Luxembourg tax authorities could reclassify the interest payment as a hidden dividend distribution that would potentially be subject to 15% WHT (subject to our comments in the section relating to the WHT on dividend payments).
Intellectual property – withholding tax on royalties paid to Chinese parent company
As a general rule, the arm’s length payment of royalties by LuxCo to ChinaCo should not be subject to WHT in Luxembourg.
Intellectual property – tax treatment of licence granted by Chinese parent company to Luxembourg resident company
As a general rule, the arm’s length payment of royalties by LuxCo to ChinaCo in relation to a licence granted by ChinaCo should be tax deductible in Luxembourg.
The payment of royalties made by LuxCo in relation to the grant of a licence of intellectual property by ChinaCo may be subject to Luxembourg Value Added Tax (VAT) under the reverse charge mechanism.
Intellectual property – tax incentives
There is an 80% LCIT exemption on the net eligible adjusted income derived from an eligible intellectual property (Eligible IP) asset (as defined in Luxembourg tax law).
The market value of Eligible IP assets is exempt from Luxembourg NWT.
Tax credits for the acquisition of software from an unrelated party may be available.
Intra-group transactions – anti-avoidance rules including transfer pricing
Various Luxembourg anti-avoidance rules may be relevant to intra-group transactions (in addition to the anti-avoidance rules mentioned above in relation to the tax deductibility of interest payments). These include:
- the general anti-abuse rule (GAAR);
- the controlled foreign companies (CFC) rules;
- the mandatory disclosure rules; and
- the transfer pricing rules.
Sales tax/VAT
Depending on the actual facts and circumstances, LuxCo may qualify as a Luxembourg VAT taxpayer.
A Luxembourg VAT taxpayer is any person, who independently and on a regular basis carries out an economic activity, whatever the purpose or results of that activity. Pure Luxembourg holding companies do not qualify as Luxembourg VAT taxpayers.
Luxembourg VAT may apply to the supply of goods and services provided and received by a Luxembourg VAT taxpayer, depending on the nature of the operation.
If LuxCo is a Luxembourg VAT taxpayer, it should register for Luxembourg VAT purposes and submit VAT return(s).
Typically, a Luxembourg VAT taxpayer can offset the VAT it pays on received supplies of services/ goods (input tax) against the VAT it charges on its own supplies services/ goods (output tax), with the Luxembourg VAT taxpayer paying or reclaiming the difference to / from the Luxembourg indirect tax authorities.
Some supplies, such as certain financial services, may be exempt from Luxembourg VAT.
The current standard rate of VAT in Luxembourg is 17%. Depending on the nature of the supply, reduced rates may apply instead.
Pillar Two
The EU’s Pillar Two rules aim to ensure that multinational enterprise groups (MNE) and large-scale domestic groups pay a minimum level of tax (an effective tax rate of 15%) on the income arising in each of the jurisdictions where they operate, by imposing a top-up tax. The rules apply to groups which (i) have an annual revenue of EUR 750m or more in their ultimate parent entity’s consolidated financial statements in at least two of the four fiscal years immediately preceding the relevant fiscal year, and (ii) have either a parent entity or a subsidiary located in an EU member state.
Luxembourg has transposed the EU’s Pillar Two rules into its domestic legislation, with effect as of 1 January 2024.
In summary, the Luxembourg Pillar Two rules provide for three different taxes:
- an income inclusion rule (IRR) i.e. the collection by the parent entity of a MNE located in Luxembourg of its share of top-up tax relating to any entity of the group that is subject to low tax;
- an undertaxed profit rule (UPR) i.e., the allocation of any residual amount of top-up tax in cases where the entire amount of top-up tax could not be collected by the parent entity through IRR;
- a qualified domestic minimum top-up tax rule (QDMTT) i.e. the application of a Luxembourg top-up tax on the low taxed profits of the Luxembourg entities of a MNE group.
The IRR and QDMTT are effective as of 1 January 2024 while the UPR is effective as of 1 January 2025.
Use of trading losses
Tax losses incurred by LuxCo after 2017 can be carried forward for 17 years to offset any taxable profit that LuxCo will generate in future tax years, and should be utilised on a first-in first-out basis.
Tax losses that were incurred by LuxCo before 2017 can be carried forward for an unlimited period of time.
Surrendering losses within group
Under certain conditions, an application for the Luxembourg tax unity regime to apply can be made. The Luxembourg tax unity regime could apply, upon request, if both the percentage condition and the minimum duration condition are met.
- The percentage condition is fulfilled if: the Luxembourg integrating company (as defined in Luxembourg law) holds, directly or indirectly, at least 95% of the Luxembourg integrated company(ies) (as defined in Luxembourg law) (i.e. vertical tax unity); or
- at least 95% of the Luxembourg integrated companies are, directly or indirectly, held by the same shareholder (as defined in Luxembourg law) (i.e. horizontal tax unity).
For completeness, the 95% ownership threshold may be reduced to 75% if:
- the participation held in the Luxembourg companies promotes the expansion of, and ameliorates, the Luxembourg national economy; and
- the Luxembourg Ministry of Finance approves such request.
The minimum duration condition is fulfilled if the other conditions (i.e. the percentage condition) for the application of the Luxembourg tax unity regime remain continuously valid for at least five consecutive years.
The Luxembourg tax unity regime broadly aims to combine the taxable results of each Luxembourg integrated company belonging to the tax unit at the level of a single Luxembourg company.
As a result of this, any tax loss incurred by one (or several) member(s) of the tax unit may offset the tax profits realized by the other member(s) of the tax unit.
Payroll taxes relating to employing staff in Luxembourg
In general, the employees of LuxCo who work in Luxembourg will be subject to Luxembourg personal income tax (including the solidarity surcharge on Luxembourg personal income tax) and social security contributions in relation to the remuneration derived from their employment activity (salary income and benefits).
LuxCo is responsible for withholding the tax and social security contributions from the gross remuneration to be paid to its employees, with reference to the applicable Luxembourg personal income tax rates (up to 45.78%).
LuxCo declares and pays to the Luxembourg tax authorities the relevant WHT amount within ten days following the end of the declaration period. The frequency of the declaration and payments depends on the amount of WHT to be paid (monthly if the WHT amounts to at least EUR 750).
Tax issues relating to secondees sent from China to Luxembourg resident company
In general, remuneration paid to a Chinese resident individual in respect of an employment exercised in Luxembourg should be taxed in Luxembourg provided that the employee functions are either performed in Luxembourg or “put in value” in Luxembourg (i.e. the employment agreement is with LuxCo and the remuneration is paid by LuxCo).
However, the remuneration will be taxable only in China if:
- the secondee is not present in Luxembourg for more than 183 days in the calendar year concerned;
- the secondee’s remuneration is paid by, or on behalf of, a non-Luxembourg resident employer; and
- the remuneration is not borne by a permanent establishment or a fixed base which the employer has in Luxembourg.
If the Chinese secondee becomes tax resident in Luxembourg, the Chinese secondee may be able to benefit from the Luxembourg expatriate regime.
Generally speaking, under this regime, certain costs / expenses (such as relocation, travel, housing, school costs) paid by the employer (as part of the employment package) of the Chinese secondee may benefit from a tax exemption from Luxembourg personal income tax (up to 45.78%) at the level of the Chinese secondee for a maximum of 8 years provided that certain conditions are met.
Tax on disposal of shares in Luxembourg resident company
Under Luxembourg domestic law, ChinaCo will be subject to Luxembourg CIT and contribution to the unemployment fund (at a combined rate of 18.19%) on any capital gain realised by ChinaCo upon the disposal of shares representing a participation of at least 10% of the share capital of LuxCo, unless:
- the disposal of the shares takes place more than 6 months after their acquisition; or
- a provision of the Luxembourg-China DTT provides for a different allocation of the taxing rights on such capital gain.
Notwithstanding the above, under Article 13(5) of the Luxembourg-China DTT, any capital gain realised by ChinaCo on the disposal of shares representing a participation of at least 25% in LuxCo may be taxed in Luxembourg.
In addition, Article 13(6) of the Luxembourg-China DTT provides that any capital gain realised by ChinaCo on the disposal of shares representing a participation of less than 25% of the share capital of LuxCo should only be subject to tax in China (to be confirmed by local counsel in China).
In light of the Luxembourg domestic law and the Luxembourg-China DTT, ChinaCo will:
- be subject to Luxembourg CIT if it sells a participation of at least 25% in LuxCo within the 6 months of its acquisition; and
- not be subject to Luxembourg taxation provided that: - the shares which are disposed of represent a participation of less than 25% in the share capital of LuxCo; or - the disposal of the shares in LuxCo takes place more than 6 months after their acquisition.
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