background image
12.3.1. Main Rules

Effective 1 January 2019, Controlled Foreign Company (CFC) rules have been introduced in consonance with EU Anti- Tax Avoidance Directive (ATAD). Under the CFC rules, low taxed CFC income arising from non-genuine arrangements undertaken for the purpose of obtaining a tax advantage is attributed to the resident Luxembourg shareholder on a current basis.

A foreign entity or permanent establishment will be considered as a CFC if:

  • A tax resident of Luxembourg independently or jointly with associated enterprises holds directly or indirectly a participation of more than 50% in the voting rights, capital, or rights to the profit of the entity; and
  • Tax paid in the jurisdiction of the CFC is less than half of the tax rate that would be imposed if the CFC were resident in Luxembourg.  

  

A foreign entity will be exempted from the applicability of the CFC rules if it satisfies any of the following conditions:

  • CFC's accounting profits do not exceed EUR 750,000; or
  • CFC's accounting profits do not exceed 10% of operating costs for the tax period.

The tax authorities have clarified that the term ‘control’ is to be understood from legal and economic perspectives and needs to be established at any point during the fiscal year of the taxpayer.

An associated enterprise for the purpose of CFC rules will include a person or an organization which owns/holds 25% of the voting rights, or capital, or rights to profit in the other entity or where a third party owns or holds 25% in two or more enterprises.

The CFC rules provide that the following factors should be considered in determining the tax base:

  • Non-distributed income of the CFC, where non-genuine arrangements have been put in place for the purpose of obtaining a tax advantage, should be included;
  • Income included should be limited to amounts generated through assets and risks associated with important functions assumed by the controlling taxpayer, with the allocation of the income of a CFC calculated in accordance with arm’s length principle; and
  • Income included should be calculated in proportion to the taxpayer’s participation in the entity, and where CFC profits are distributed, previously included income will be deducted for determination of tax on distribution.