Since 1 January, the rate of corporation tax (IRC) has been cut from 17% to 16% for companies in the name of "strengthening the competitiveness of companies and the Luxembourg economy", as both prime minister  (CSV) and finance minister  (CSV) have repeatedly stated. In detail, the rate of IRC will fall from 17% to 16% for companies with taxable income in excess of €200,000 and from 15% to 14% for SMEs with income of up to €175,000. A smoothing mechanism will complete the system for companies with taxable income between €175,000 and €200,000.

As a result, in 2025, the overall tax rate will fall from 24.94% to 23.97% for large companies and from 22.80% to 21.73% for SMEs. The difference between the announced rate of 16% and the final tax burden is due to the fact that Luxembourg has adopted the "combined rate" system for corporation tax, comprising a rate set by the central government and one or more rates set by sub-national governments. Four other European countries have adopted this system: Portugal, with a combined rate of 31.5%; Germany (28.9%); Italy (27.8%) and Cyprus (11.3%).

Tax competition

With a tax rate of 23.97%, Luxembourg is close to the OECD average (23.6%) and the EU average (21.2%). These rates have been on a downward trend since 1993, when the average corporate tax rate was 38%, both worldwide and in the OECD and the EU. Most of this decline took place between 1993 and 2011. Since then, while the downward slope has continued, its speed has slowed considerably. The exception is the UK, where the rate has risen from 19% to 25% in 2023.

In 2023, according to data from the International Tax Competitiveness Index 2024 compiled by the NGO Tax Foundation, the lowest top marginal corporate income tax rate in the OECD was in Hungary, at 9%, followed by Ireland (12.5%) and Lithuania (15%). The grand duchy ranks 22nd out of the 38 countries surveyed in terms of corporate taxation.

That said, tax bases can vary widely from one jurisdiction to another. As can important features such as tax depreciation rules and other tax provisions such as accelerated depreciation or capital allowances. In order to assess the effects of these arrangements on the corporate tax base and on tax payable, a comparison of statutory corporate tax rates does not provide an overall picture. This is why the OECD calculates the effective corporate tax rate. That is rate that is always lower than the statutory rate. In 2023, the effective tax rate for all jurisdictions combined averaged 20.2%, or 1.3 percentage points lower than the average statutory tax rate. For Luxembourg in 2023, according to the OECD, the effective rate was 23.2% compared with a statutory rate of 24.9%. These figures are stable compared with 2022.

€259m hit in tax take

According to the 2025 Finance Bill, this reduction will cost Luxembourg €259m. The revenue hit will be distributed as follows: €56m in 2025, €63m in 2026, €70m in 2027 and €70m in 2028. Will this attract more companies, automatically increasing the tax base and therefore tax revenues? This is all the more difficult to say given that this reduction comes just after the effective minimum taxation of multinational companies at 15% comes into force. The impact of this tax cut on public finances has not yet been quantified. Much to the dismay of the Luxembourg Central Bank, which in its opinion on the budget encouraged the finance minister to provide details on this subject, "given their importance for the assessment of public finances".

Uncertain repercussions

For some countries, this minimum effective tax should generate additional revenue. While no tangible figure has yet been estimated for Luxembourg, Ireland has presented a draft budget for 2025 with a surplus of €9bn, or around 3% of gross domestic product.

In Portugal, where the average corporate tax rate is 31.5%, the government of Luis Montenegro, which took office last April, wants to take advantage of this tax surplus to lower the central tax rate for other companies and for SMEs. For the former, the rate would eventually fall from the current 21% to 15%, and for the latter from 17% to 12.5%. These reductions will go hand in hand with a reduction in a series of taxes, easier management and simplification of VAT, and guarantees of payment by the authorities in less than thirty days. The draft 2025 budget reduced corporation tax from 21% to 20% and the tax rate for SMEs from 17% to 16%.

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