Why do business in Luxembourg?
Due to its small size, Luxembourg is rarely considered a trading destination for many overseas companies. This is arguably what makes it perfect for any business, especially an SME.
The authorities of Luxembourg are wholly welcoming of overseas investment to complement domestic business, and the geographical location of the country offers great links to some of the biggest economic powerhouses in Europe.
World Bank Ease of Doing Business Ranking (1-190)
Tax rates 2020
How to set up payroll in Luxembourg
Setting up a business payroll in Luxembourg is undoubtedly rewarding, but it can also be complicated. Before embarking on such a journey, ensure that you understand the red tape and administration that will follow.
The first thing anybody aiming to start a venture in Luxembourg must do is register and obtain a business license with the Luxembourg Chamber of Trade. This will typically come under one of three core categories.
- Commercial activities – retail, manufacturing, treat estate, catering and hospitality
- Skilled craft trades – fashion, health, food, construction and the arts
- Specific professions – architects, interior designers, surveyors, accountants, consultants and attorneys
This does not cover every possible occupation. Doctors, bankers, lawyers and other roles have their own unique laws. The trinity of business types above cover most business structures in Luxembourg, though. Once you are certain which trade your business falls into (feel free to reach out to UnaTerra to discuss this further), you can apply for a business permit.
You can register your business online for income tax, VAT (charged at 17% in Luxembourg) and social security payments for your employees. There will be fees here – possibly up to €1,000 in total – and the forms must be completed in French, so you may need to hire a translator. Before you attempt this, however, you’ll need a physical local address. This is where your permit will be mailed to.
Expect to wait around 12 weeks before your business is fully operational and you are ready to start making hires. It’s advisable to hire from the local job market, though any potential employee that holds an EU or EEA passport can legally work in Luxembourg without a visa or work permit.
Luxembourg employment law and HR considerations
It costs roughly 1.1 times an employee’s annual salary to make a hire in Luxembourg. This is because employer contributions to social security in Luxembourg total 27.44% of a gross salary.
Most of this is paid into the Caisse National de Santé, Luxembourg’s equivalent of the National Health Service, though it also covers government-sanctioned sick and maternity pay, insurance for accidents in the workplace, unemployment, invalidity and low-income family benefits, and a national pension.
Beyond this generous social security package – which employees also pay into on a sliding scale, depending on their salary – there are few mandatory benefits that employers must provide. Employees in Luxembourg are entitled to a minimum of 26 days of paid leave per annum (plus 11 public holidays) and are entitled to carers leave if family members require assistance.
Many companies also offer a bonus payment of an additional month’s salary every December (some companies offer one-and-a-half months of salary), known as the prime de fin d’année. While not mandatory, this benefit is extremely commonplace. Expect pushback from employees if you do not include this in a contract as standard.
Naturally, employees in Luxembourg will also need to pay income tax. This is assigned according to salary as follows:
- Salary of €11,265 or lower – 0%
- Salary of €11,266 – €13,172 – 8%
- Salary of €13,173 – €15,008 – 9%
- Salary of €15,009 – €16,880 – 10%
- Salary of €16,881 – €18,752 – 11%
- Salary of €18,753 – €20,624 – 12%
- Salary of €20,625 – €22,568 – 14%
- Salary of €22,569 – €24,512 – 16%
- Salary of €24,513 – €26,456 – 18%
- Salary of €26,457 – €28,400 – 20%
- Salary of €28,401 – €30,344 – 22%
- Salary of €30,345 – €32,288 – 24%
- Salary of €32,289 – €34,232 – 26%
- Salary of €34,233 – €36,176 – 28%
- Salary of €36,177 – €38,120 – 30%
- Salary of €38,121 – €40,064 – 32%
- Salary of €40,065 – €42,008 – 34%
- Salary of €42,009 – €43,952 – 36%
- Salary of €43,953 – €45,896 – 38%
- Salary of €45,897 – €100,001 – 39%
- Salary of €100,002 – €149,999 – 40%
- Salary of €150,000 – €200,003 – 41%
- Salary over €200,004 – 42%
These income taxes are withheld at payroll, and filed with the Administration des contributions directes, or ACD, by the employer.
Setting up a subsidiary entity in Luxembourg
The fastest way for an overseas business to get up and running in Luxembourg is to open a branch. To achieve this, you’ll need a legal address in Luxembourg, a representative employee within the branch, and to provide the following documents – translated into French – pertaining to your parent company.
- Certificate of Incorporation
- Memorandum and Articles of Association
- Certificate of Good Standing
These documents must be filed with the Trade and Companies Register of Luxembourg. The process typically takes a few weeks, and your business may benefit from lower incorporation fees than when setting up a subsidiary entity. The business tax rate is the same for a branch or a subsidiary at 24.94% of gross profit.
Of course, you may prefer to set up an independent business, separated from a parent company. While this takes longer and potentially costs more, it also provides complete legal separation from the parent business. This could be invaluable if you run into legal or financial difficulty in Luxembourg.
You may wish to consider opening a special limited partnership, as this business structure has no minimum capital. A special limited partnership – known in Luxembourg as a société en commandite spéciale, abbreviated to SCSp – is made up of one or more partners. An SCSp is not considered a separate legal entity from the individuals that make up the partnership. Be aware that this means that the primary partner holds personal liability for all financial and legal affairs of the business.
If this sounds intimidating, you can register a limited liability company – known in Luxembourg as a société à responsabilité limitée, or SARL. You’ll need a business license, and to deposit a minimum of €12,000 into a bank account (local or overseas) before registering the business, in addition to a legal address in Luxembourg. This could take up to 12 weeks. It does grant legal separation between business and individual, though. As a result, the SARL is the most popular business structure for most SMEs in Luxembourg.
As we have touched upon, there are a handful of things to consider when looking to trade in Luxembourg. The first, and most important, is that you must have a local address before attempting to register your business and gain your industry-specific trading license. You do not necessarily need to live at this residence – a business in Luxembourg does not need to have a local director. All the same, your business will not be registered with an international legal address.
You should also understand the cultural nuances of doing business in Luxembourg. By and large, the working culture is extremely formal. Always dress to impress, and punctuality is vital. Arriving for a meeting late, or even after your associates, is deemed poor manners. Equally, business associates in Luxembourg take the separation of their working and private lives life very seriously. Be polite and make small talk, but try to avoid asking questions that could be deemed too personal.
One other thing to note is that Luxembourg is a famously proud and independent country. The national motto is, “we want to stay what we are.” Despite boasting a population of just 633,000, Luxembourg has not adopted the cultural practices of neighbouring countries France, Germany or Belgium. Foreigners are welcome in Luxembourg but avoid linking Luxembourg to these countries while making conversation or adopting business etiquette. This will offend, and potentially cost you a deal.
Setting Up in Luxembourg FAQs
Existing foreign companies are welcome to set up a branch of their business in Luxembourg. Alternatively, if you wish to open a subsidiary, the business structures available are:
• Special limited partnership (Société en commandite spéciale, or SCSp), which is not recognised as a legal entity and responsibility is carried by the individual partners
• Private limited liability company (Société à responsabilité limitée, or SARL)
• Public limited liability company (Société anonyme, or SA)
Expect to wait around 12 weeks for your business enterprise in Luxembourg to be fully operational and ready to take on new hires.
It costs roughly 1.1 times an employee’s annual salary to make a hire in Luxembourg, once all additional payments and taxes have been taken into consideration.
If you plan to open a special limited partnership, there is no minimum share capital requirement. If you plan to set up a private limited liability company, the minimum share capital is €12,000, to be paid upon incorporation. For a public limited company, it’s €30.000.
This depends on the legal structure of your company. Regardless of whether this is a legal requirement or not for your business model, however, it’s certainly advisable. A local bank account will make trading much easier.
The Labour Code of Luxembourg limited employees to a 40-hour working week, divided over five 8-hour days, unless the employee is considered senior and high-ranking.
The maximum period anybody can spend at work in a single day is 10 hours, and the week cannot exceed 48 hours. Asking employees to work on Sunday, unless your industry dictates this is a necessity, is generally considered strictly off-limits.
Beyond the standard social security benefits provided to employees, most businesses in Luxembourg pay a ‘Christmas bonus’, known as the prime de fin d’année.
This is typically an additional month’s salary (some businesses go further and offer an extra half-month on top of this), paid in December. Most employees will expect a prime de fin d’année to be written into their contract.
You may also wish to offer your employees additional perks, including sustenance vouchers, mental health support and flexibility around caring for children and elderly family members.
If you wish to dismiss an employee with immediate effect, you will be expected to provide a reason for the decision. If you are prepared to allow the employee to serve out a notice period, no reason is required. You’ll just need to inform the employee of their termination in writing.
It’s easier for small companies to terminate employees without administration. If your business hires 15 employees or more, the Economic Committee of the Ministry of the Economy must be notified of any dismissal. If your business is staffed by more than 150 people, a formal hearing must also be held.
Employees in Luxembourg are entitled to a minimum of 26 paid holiday days per year. If a written holiday request is to be denied, the employer must justify this decision. Luxembourg also observes 11 public holidays per year.
You will be welcome to set up a branch of your business in Luxembourg. This will be faster than opening a subsidiary, and you will be subject to fewer audits than a private business. The UK and Luxembourg enjoy a double tax treaty, so you will not be taxed twice. Your parent business will be liable for any economic or legal difficulties experienced by the Luxembourg branch, though.
Any employee that holds a passport from an EU or an EEA country can legally work in Luxembourg without restriction. If this does not apply, a visa or work permit will be required.
There are three primary forms of visa for employees hoping to live and work in Luxembourg.
• C Visa – a short stay visa that allows somebody to live in and work in Luxembourg for 90 days. This could be 90 consecutive days or various visits over 180 days that total 90 days in the country
• D Visa – a long stay visa that is the most popular choice for employees of a business based in Luxembourg. A D visa typically lasts for one year and can be renewed. After 5 years of renewals, the employee can apply for permanent residency in Luxembourg
• EU Blue Card – a special visa for highly skilled and qualified employees. To qualify for an EU blue card, employees must earn a minimum salary of €78,336 per annum. The EU blue card is initially issued for 2 years and can be renewed
A C visa for Luxembourg costs €60, while a D visa costs €50. An EU blue card application costs €80.