Luxembourg applies a participation exemption regime under which qualifying dividends and capital gains are exempt from tax in Luxembourg.
Dividends (and liquidation proceeds) are exempt under the participation exemption regime if the following conditions are met:
- The recipient entity holds at least 10% of the share capital of the distributing entity or the participation so held has an acquisition price of at least EUR 1.2 million; and
- The recipient entity holds or commits to hold such participation for a continuous period of at least 12 months.
Capital gains realized on the disposal of qualifying shareholdings are exempt under the participation exemption provided the disposing company holds at least 10% of the share capital or a participation with an acquisition price of at least EUR 6 million and the disposing company has held or commits to hold the qualifying shareholding for at least 12 months.
The above exemption in respect of dividend income and capital gains is available only if the subsidiary is either:
- A fully taxable Luxembourg company;
- A company resident in another EU Member State and covered by the EU Parent-Subsidiary Directive; or
- A fully taxable non-EU company i.e., it is subject to a profits tax of at least 8.5% on a taxable basis similar to the Luxembourg taxable base.
Note that from 1 January 2016, the benefits of the participation exemption are denied if the dividends were deductible to the paying EU subsidiary, as well as in defined abuse cases (see Sec. 13.1.). Further, effective from 1 January 2021, the participation exemption regime pursuant to the Parent-Subsidiary Directive is no longer available with respect to dividends received from a Gibraltar company since such companies were determined by the Court of Justice of the European Union (CJEU) in its GVC Services case not to be covered by the Directive. Instead, dividends received from Gibraltar companies henceforth may be eligible for the participation exemption regime under the standard rules (notably subject to a profits tax of at least 8.5% on a taxable basis similar to the Luxembourg taxable base, subject to certain conditions).