When foreign investors open subsidiaries of international companies in other countries, they benefit from the parent-subsidiary regime that applies to income, capital gains and shareholdings. The purpose of this regime is to avoid double taxation. Because subsidiaries are opened as any other legal entity in Luxembourg, they still have to observe the taxation system for companies in Luxembourg.
Parent-subsidiary regime applicability
The parent company and the subsidiary must meet certain conditions in order for the regime to be applicable. They must be capital companies and corporate income tax payers. They also need to meet some requirements in terms of shareholdings. In order to be able to exempt the income from the shareholdings, the parent company would have to hold at least 10% of the subsidiary's share capital for at least 12 months or the purchase price would have to be at least 1.2 million euros. Similarly, the capital gains from the transfer of shares are exempted, if the parent company holds at least 10% of the subsidiary's share capital or if it has purchased a holding of at least six million euros.
Exemptions for dividends
According to the parent-subsidiary regime, subsidiaries are not required to pay withholding tax on income from capital for the distribution of dividends to the parent company. However, the company distributing the dividends must declare the amount of tax-exempted income from capital in a special form that must be submitted to the Luxembourg Inland Revenue within a specific time-frame.
Also, when paying the income from important shareholdings to the parent company, the subsidiary is exempt from corporate income tax and business tax. The beneficiary must declare the received dividends in annex and in the corporate income tax return.
A subsidiary in Luxembourg is an extension of the parent company that has legal entity in Luxembourg. Unlike the
branch, it is not dependent on the parent company. However, the parent company holds the majority of its capital.