Whilst some countries have had comprehensive rules on controlled foreign corporations for years, Luxembourg only introduced such rules recently, further to the implementation of a European directive. Detailed guidance was finally provided in the form of a circular issued on 4 March 2020.
Hence, Luxembourg-resident legal entity (for ex. – public limited company or a limited-liability company) or a Luxembourg permanent establishment (hereinafter the ‘Company’) may, under certain conditions, be subject to the controlled foreign corporation (CFC) rules set out in Article 164 of the Income Tax Act for tax years commencing on or after 1 January 2019.
A CFC is a legal entity or permanent establishment whose income is not subject to tax or is exempt from tax in Luxembourg when both control and taxation requirements are met. The control requirement will be met if the Company, alone or together with associated enterprises, (a) holds, directly or indirectly, more than 50% of the CFC’s voting rights, (b) holds, directly or indirectly, more than 50% of the CFC’s capital, or (c) is entitled to receive more than 50% of the CFC’s profits. In its circular, the Administration provides several examples and mentions a number of factors to be taken into account, the most interesting of which are summarised in the article and includes –
Permanent establishment (PE) CFC
Concept of an associated enterprise
Imputation of tax paid by the CFC
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