When working in Luxembourg as a freelancer or self-employed person you are required to pay taxes. Fear not, there are some perks however.
Freelancers and self-employed working in Luxembourg have to pay income tax and VAT on profits, as well as make social security contributions. If you register as a freelancer or self-employed person living in Luxembourg, you will pay taxes at the same rates as everyone else. “Entrepreneurial income” includes any income from freelancing or self-employment, and taxable income is computed according to rules like companies. Profits and charges are accounted for on an accrual basis. In some cases a basic formula of income and expenses will do.
This guide to taxes for self-employed and freelancers in Luxembourg includes:
When you register with the Luxembourg tax office and social security, they will ask you to categorise your business. The first step when self-starting a business is to find your fit among the three business categories: commercial activities, skilled craft trades and specific professions. Your business or self (if the business is your name) must register under the Luxembourg Chamber of Commerce, although this is done automatically by tax authorities.
Filing US taxes from Luxembourg
Despite the fact that every US citizen and green card holder is required to file a tax return with the IRS even when living abroad, many expatriates still fail to do so. Many are are unaware of these obligations, thinking that as an expat they do not need to pay or file tax returns in the US. You do! For more information and help filing your US tax returns from Luxembourg, contact Taxes for Expats and see our Guide to taxes for American expats.
No matter what your business, you will need to register for income tax and value added tax (VAT). VAT is the tax added to purchases you make for your business that can possibly be claimed back depending on your industry type. VAT rates are as follows:
- Super-reduced rate: 3% (e.g. foodstuffs, pharmaceuticals, restaurants);
- Reduced rate: 6%;
- Intermediate rate: 12% (e.g. adult clothing, wine);
- Standard rate: 15% (e.g. alcohol, beer, adult shoes).
(The maximum VAT rate is 15%, the lowest in the EU.)
Keep your receipts for purchases that might fall under one of these rates, and at the end of each quarter organize them down in an excel sheet. Make sure the date, business of purchase, amount, VAT percentage, and total are marked from each receipt. When your taxes are filed, your accountant will look at the VAT your business is eligible to claim back, and compare that to your net income. Any excess VAT spending will come back to your business from the government.
Keep in mind that VAT quarterly tax filing is separate from yearly income tax filing, and both must be made when running a business. In a sense, that’s filing some type of tax about five times a year. The very lucky few who are tax savvy can maybe get away with filing on their own, but most freelancers, self-employed workers and small business owners have an accountant to keep their numbers and filing in check.
If your business expands to include employees, know that as an employer you will be responsible for a certain percentage of social security: 3.05% for sickness and 8% for pension for example (the monthly minimum social salary is about €1800 gross).
Where Luxembourg shines with low tax rates is within its intellectual property (IP) rights label that covers everything from usual patents to domain names, trademarks, knowledge skills, designs, copyrights, models, trade secrets, and more. Businesses like Amazon, Skype, iTunes, PayPal and more have European headquarters here because of this widely-accepted IP umbrella.
The catch lies within corporation tax. The usual percentage for a company to pay corporation tax is almost 30% (29.22% to be exact).
However, net income connected to intellectual property received an 80% exemption from the near 30% – which is exactly 5.8% corporation tax now owed. Net income in the eyes of Luxembourg intellectual property regime also include selling something with a profit, as a capital gain, so the 80% exemption is still applied to sales.
This also means that is a company with a registered name or patent is used in connection with selling goods or selling services is entitled to the 80% tax exemption. (This exemption does not apply to parent companies who acquire the business currently using this exemption for their own IP rights.)
So if you are a freelancer or a small business, or searching for work, look into corporation tax benefits and see what advantages it can offer you as a entrepreneur living in Luxembourg on the long term.
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