Luxembourg’s participation exemption regime provides for an exemption from income, withholding and net wealth tax for qualifying investments held by qualifying entities. The exemption from income tax is extensive, covering dividends, capital gains and liquidation proceeds. In addition, no withholding tax applies on dividend distributions if the conditions for the participation exemption are met. Finally, participations qualifying for the participation exemption are exempt from net wealth tax.
The domestic participation exemption regime has been modified with effect as of 1 January 2016 in order to comply with the amendments of July 2014 and January 2015 made to the EU Parent-Subsidiary Directive to introduce a general anti-abuse rule and an anti-hybrid rule.
The conditions that must be met to qualify for the exemptions are summarized below. In some cases, tax treaties may provide for more favorable conditions. Whether the exemptions apply to a particular set of circumstances must be determined on a case-by-case basis.