Subsidiary dividends: exemption through Annex 506A
Let us consider the case of a Luxembourg holding company called Alpha, which owns 100% of the shares in an operating subsidiary. Each year, the subsidiary distributes substantial dividends to Alpha. Without a specific regime, these dividends would be added to Alpha’s taxable profit and subject to the combined rates of corporate income tax and municipal business tax. Fortunately, Luxembourg offers the parent-subsidiary regime (also known as the SOPARFI regime), which allows these dividends to be exempt from tax, thereby avoiding economic double taxation between the subsidiary and the parent company.
To benefit from this exemption, Alpha must meet certain statutory conditions. The parent company must hold at least 10% of the subsidiary’s share capital for an uninterrupted period of at least 12 months. (If the 10% threshold is not met, the exemption may still apply provided that the acquisition cost of the participation amounts to at least €1.2 million for dividend exemption purposes, or €6 million in the case of a capital gain on the disposal of shares.) If Alpha meets these criteria, the dividends received from the subsidiary will be fully exempt from corporate income tax and municipal business tax. Form 506A is the annex to be attached to the corporate tax return (Form 500) in order to formally declare these exempt dividends (as well as any exempt capital gains on the disposal of shares) and to disclose expenses related to these participations. By completing Annex 506A correctly, Alpha ensures that it fully benefits from the tax advantage of the parent-subsidiary regime: no tax is due on qualifying participation income. This represents a significant tax saving and improves the company’s cash flow, while remaining fully compliant with the law.
Intellectual property: the tax advantage of Form 750
Let us now consider Beta, a Luxembourg-based technology startup that has developed innovative software protected by copyright and several patents. Beta’s products attract international clients and generate substantial royalties. Under normal circumstances, these intellectual property revenues would be taxed like any other business income. However, Luxembourg has implemented a specific tax regime for intellectual property rights (commonly referred to as the IP Box regime). This regime, accessed through Annex 750, allows Beta to exempt 80% of its net income derived from qualifying intellectual property. As a result, only a small portion (20%) of this income is effectively subject to tax, reducing the effective tax rate to around 5% instead of the standard rate (approximately 25%).
To benefit from this incentive, Beta must ensure that its intellectual property assets qualify under the law: this typically includes patents, software protected by copyright, or other patentable inventions. Purely commercial trademarks, however, do not qualify for the exemption. In addition, the company must have made a substantial contribution to the development of these assets in order to satisfy the “nexus” requirement set out in the legislation. By completing Form 750, Beta declares the details of its qualifying intellectual property income and ensures the application of the preferential regime. In addition to the significant reduction in tax on royalties, Beta also benefits from a full exemption from net wealth tax on the value of its intellectual property assets – a valuable advantage for a young company whose patents represent a significant portion of its assets.
Investments: obtain an investment tax credit with Form 800
Finally, let us look at Gamma, an industrial SME that has made significant investments during the year: the purchase of modern production machinery, the installation of solar panels at its factory, and the acquisition of electric vehicles for its fleet. These capital expenditures represent a substantial financial effort, but the Luxembourg tax system encourages such investments through the investment tax credit. By attaching Annex 800 to its corporate tax return (Form 500), Gamma can obtain a tax credit that directly reduces its corporate income tax liability.
In practice, the global investment tax credit corresponds to a percentage of the amount of qualifying investments made during the financial year. Following reforms that entered into force in 2024, this rate is set at 12% of the acquisition cost of all eligible assets (machinery, equipment, technical installations, etc.), with no initial cap. For example, if Gamma invested €200,000 in machinery, it could deduct up to €24,000 from its final tax bill through Annex 800. Even more attractive, for certain strategic investments that support the digital or ecological transition, an increased rate of up to 18% is available (this additional benefit requires prior approval from the Ministry of the Economy confirming the “digital/green” nature of the project). In all cases, Form 800 allows Gamma to detail the investments made and to calculate the corresponding tax credit. Ultimately, Gamma significantly reduces its tax payable, thereby rewarding its investment and innovation strategy.
Conclusion
Correctly completing your corporate tax return (Form 500) and its annexes is essential to optimise your company’s tax position while remaining compliant with the law. As illustrated by these examples, each annex corresponds to a specific tax benefit: exemption of subsidiary dividends with Annex 506A, preferential treatment for intellectual property income with Annex 750, immediate tax relief on investments with Annex 800, and so on. And this is not all: depending on your initiatives, additional annexes may apply (for example, Form 805 if you have hired an unemployed person receiving benefits, or Form 810 if you have invested in employee training, giving rise to additional tax credits).
In short, take the time to identify all annexes relevant to your business so that no tax advantage is left unclaimed. In case of doubt, do not hesitate to seek assistance from a chartered accountant or a tax adviser specialised in Luxembourg tax law. A well-prepared tax return, with the correct annexes, means tangible savings for your company and full compliance with the tax authorities of the Grand Duchy.
