Luxembourg is a choice jurisdiction for Shipowners and Investors
While Luxembourg does not provide any specific State aid to the maritime sector, Luxembourg Accredited Shipping Companies can reduce their tax liability by availing themselves of a number of fiscal incentives available more generally to Luxembourg-resident entities.
Vessel Acquisitions Credits
Resident companies may apply for two investment tax credits (ITCs):
- Complimentary Investment Tax Credit assessed at 13% of the acquisition value of qualifying investments made during the tax year. It is applied to the difference between the net book value of the qualifying assets for the current year and the reference value of the qualifying asset, calculated according to the average net book value attributed to the same category of assets over the preceding five years. The reference value is deemed to amount to at least EUR 1,850;
- Global Investment Tax Credit assessed at 8% of the value of the first EUR 150,000 of qualifying investments made during the tax year, and 2% on the amount exceeding EUR 150,000
The resident company applies the ITCs against its corporate income tax. The credits can be aggregated for a total deduction equivalent to approximately 15% of qualifying investments (ex. vessel purchase price).
Both ITCs can be carried forward up to a maximum of 17 years.
Investments in newbuilding and second-hand vessels operating in international maritime traffic qualify for the two ITCs, provided they have not previously benefited from them.
A lessor in a financial lease agreement can benefit from the ITCs, unless the lease is for an irrevocable term and for the full acquisition price of the qualifying vessel in which case the lessee may benefit from the entitlement.
Where the vessel is leased to a non-resident entity, the resident lessor may benefit from the ITC provided the agreement takes the form of an operational lease. The characterization of an agreement as an operational lease or a financial lease is determined by its contractual provisions.
Deductible Vessel Depreciation
Luxembourg provides for tax-deductible linear or declining balance depreciation.
Linear depreciation, the default method of calculation, represents the difference between a vessel’s acquisition value and its estimated residual value, divided in equal yearly instalments over the remaining useful life of the asset. The value of a vessel with a useful life of 12 years (minimum vessel depreciation period) would depreciate annually at a rate representing 8.33% of the acquisition price.
Under the declining balance depreciation method, depreciation rate may be accelerated by up to three times the linear rate, provided it does not exceed 30%. A vessel with a useful life of 12 years can depreciated at an increased rate representing 25% of the acquisition price.
An undertaking may change from the declining-balance method to the straight-line depreciation method, but not vice versa. Extraordinary depreciation is permitted in specific cases of technical or economic obsolescence. The written-off amount must be deducted from the relevant financial year’s operating results.
Capital Gains Roll-Over for Fleet Renewal
Luxembourg does not distinguish between income and capital gains. Unless they qualify for the participation exemption regime, capital gains are generally taxed as ordinary income at the standard corporate rate. Capital losses are eligible for relief in the same way as operating losses.
Taxation of capital gains may be deferred by reinvesting capital gains realized from vessel sales in qualifying replacement assets prior to the end of the financial year of disposal.
The Luxembourg-resident entity must have owned the vessel for at least 5 years preceding the sale, therefore the roll-over relief may be particularly attractive for shipowners considering fleet renewal.
Vessels operated in international waters are considered qualifying replacement assets, along with Luxembourg real estate, equity holdings in a Luxembourg-resident or non-resident company and non-depreciable fixed assets.
The reinvested gain will be deducted from the net book value of the replacement asset. Any gains on the sale of the replacement asset may similarly be reinvested in another qualifying replacement asset.
Exceptionally and under certain circumstances, a reinvestment based on a financial year prior to the year the capital gains were realised, is possible. There must be a demonstrable intent to reinvest the gain in the financial year following the disposal and the gain must be accounted for in a dedicated reserve. Failure to reinvest the gain in qualifying replacement assets prior to the conclusion of the subsequent financial year will however result in its release and taxation.
Capital gains from the disposal of domestic or foreign shareholdings may also be exempt from Corporate Income Tax.
Participation Exemption for Dividends and Capital Gains
A withholding tax of 15% is levied on dividends (except liquidation payments) paid to resident and non-resident companies. Double taxation treaty exemption or reductions may apply.
Dividends and capital gains derived by a Luxembourg entity from a qualifying participation may however be exempt from Luxembourg withholding tax if they satisfy the requirements of the participation exemption.
The distributing or sold entity must be either:
- an entity resident in an EU Member State falling within the scope of the EU Parent-Subsidiary Directive (2011/96/EU); or
- a fully taxable resident corporation, or a non-resident corporation subject to a tax corresponding to Luxembourg’s Corporate Income Tax.
The recipient entity must be either:
- a fully taxable Luxembourg resident entity;
- a Luxembourg permanent establishment of a company resident in an EU Member State falling within the scope of the EU Parent-Subsidiary Directive (2011/96/EU);
- a corporation resident in a State with which Luxembourg has concluded a double tax treaty;
- a corporation or a cooperative company resident in a State which is a party to the EEA other than a Member State of the EU.
The shareholding must also be held directly by the recipient entity for an uninterrupted period of at least 12 months during which such period the participation cannot fall below 10% of the share capital or the purchase price below €1.2 million for dividends and €6 million for capital gains. Shares held through a partnership may be considered as a direct holding.
Dividend payments received by a qualifying Luxembourg parent entity from a qualifying subsidiary located in another EU Member State will not benefit from the participation exemption where the payments are deductible in that other Member State.
Losses incurred as of January 1, 2017 can be carried forward for a maximum period of 17 years. Losses incurred before this date can be carried forward indefinitely.
Losses can be deducted from profit generated in subsequent financial years thereby reducing the tax base.
Losses cannot however be carried back.
Group Company Fiscal Consolidation
Luxembourg’s optional Fiscal Unity regime allows Group companies to tax group profits on a consolidated basis. Profits and losses of individual group companies are offset, allowing for taxation on the aggregate amount at the group level as a single taxpayer.
The regime applies to both Luxembourg resident companies and Luxembourg Permanent Establishments of non-resident entities.
Tax losses incurred during consolidation which remain following consolidation are attributed to the parent company. Tax losses preceding the consolidation period may only offset profits of the company which incurred them.
Fiscal consolidation does not apply for Net Worth Tax purposes.
Taxable resident capital companies with at least 95% of their capital held directly or indirectly by another taxable capital company or by a Permanent Establishment of a non-resident capital company fully liable to a tax similar to corporate income tax, are allowed to consolidate their tax results with the parent company or the resident Permanent Establishment;
Group companies must begin and end their financial years on the same date;
Tax unity must last for at least 5 financial years and the minimum shareholding rates must be maintained throughout this period.
The Minister of Finance may exceptionally admit Groups which do not satisfy the above shareholding threshold into the fiscal unity regime where the shareholding rate of at least 75% is particularly important to the promotion and structural development of the national economy.
Direct and indirect shareholdings
The holding of shares through a general partnership, a limited partnership, an economic interest group, a European economic interest group or a civil company is deemed to be a direct holding in proportion to the shares held in the invested net assets of the entity concerned.
Where the shareholding is indirect, the companies through which the parent company or the resident Permanent Establishment are holding 95% of the subsidiary must be capital companies subject to a tax that corresponds to corporate income tax.
Horizontal Fiscal Unity
Horizontal fiscal unity without the participation of the parent company is permitted where the group companies are held by a common parent company established in an EEA Member State, provided the parent company is subject to tax in its resident state which is comparable to Luxembourg corporate income tax.
A written request to the tax authorities for tax consolidation must be submitted jointly by the parent company and the relevant subsidiaries prior to the end of the first financial year for which fiscal unity is sought.
Provisions for Large-Scale Repair and Maintenance Work
Luxembourg-resident shipping companies may deduct provisions for reasonably foreseeable large-scale vessel repairs and maintenance in the year in which they are booked.
Flat Rate Taxation of Non-Resident Seafarers
Wages of non-resident seamen employed by a Luxembourg-resident Accredited Shipping Company active in international maritime transport are taxed at a flat rate.
The withholding tax amounts to 10% of the gross wages after a 10% deduction and a tax allowance of € 1,800 per month, or € 72 per day without considering the tax class that would have applied if the taxpayer had not been subject to flat-rate taxation.
Marine Insurance Policy Exemption
An exemption applies to marine policies for hull insurance and associated ship liability risks covering vessels registered in the Luxembourg Ship Registry used in international traffic.