Scope of the special levy

The Finance bill for the Financial Year 2021 introduced a special levy on rental income and capital gains deriving from real estate located in Luxembourg and held directly or indirect by investment funds (art. 4 of the law dated 19 December 2020).

The Luxembourg Tax Authorities recently issued a circular dated 20 January 2022 concerning the implementation, declaration, and payment of this special levy. The first returns are due by 31 May 2022.

The special levy is due by the following type of Luxembourg investments funds where those funds take the form of an entity with separate legal personality:

• Specialised Investment Funds (under the law of 13 February 2007)
• Undertakings for Collective Investments (under the law of 17 December 2010)
• Reserved Alternative Investment Funds (under the law of 23 July 2016)

The above funds are however excluded where they take the form of a limited partnership in the form of an SCS (société en commandite simple) even although the SCS does have legal personality. Foreign investment vehicles and SICARs (under corporate or partnership forms) are also excluded.

Tax rate and tax base of the special levy

The special levy is charged at a rate of 20 per cent.

The special levy does not apply to income deriving from real estate located outside of Luxembourg. The income subject to the levy includes rental income, capital gains deriving from the disposal of Luxembourg real estate and capital gains on the disposal of indirect interest (ie held via another tax transparent vehicle) in Luxembourg real estate.

For rental income, the special levy is computed on the gross rental income without any entitlement to deduct any expenses.

For capital gains realised upon disposal of real estate, the special levy is computed on the difference between the purchase price and the price of disposal mentioned in the notary deed. Expenses linked to the disposal will not be deductible. The Circular defined the term disposal as the transfer of ownership in case of sale, exchange, contribution, merger, demerger, liquidation or dissolution.

For capital gains realised upon an indirect disposal of movable property, the special levy is computed on that part of the gain that is attributable to the underlying real estate. Again, expenses linked to the disposal will not be deductible.

The special levy is neither deductible from the income of the investment funds nor does it give rise to a tax credit in respect of any other tax.

Compliance obligations

Investment Funds that are in scope will need to file a one-off declaration as to whether they held real estate in Luxembourg during the financial years 2020 and 2021. In cases where they did hold real estate, they will have to file an additional return concerning the special levy.

The declaration and the return has to be filed through the electronic platform myguichet.lu. For the following years, the special levy will be subject to an annual return. The mere holding of real estate located in Luxembourg would trigger the obligation to file a nil return. The return will have to include an audit report detailing the income subject to the special levy and the detail of the income’s computation.

Filing deadlines and fines

The filing deadline is 31 May of each year. The payment of any special levy that is due must be made before 10 June of the following year.

Failure to comply with the filing obligation can give rise to a fine of up to €10,000. In addition, interest for late payment will be due if the special levy is not paid on the due date.

The circular (only in French) can be found here.