“That’s it, I’ve decided to go for it! It’s time for me to start my own business and stand on my own two feet”. Is this a thought going through your mind? If so, it may be good to know the tax implications of creating a business. That way, there’ll be no unpleasant surprises later. To understand all of this, we asked for help from an expert: Jean-Paul Olinger, Director of the Union des Entreprises Luxembourgeoises (UEL). Interview.
Mr Olinger, is Luxembourg a welcoming country for start-ups?
Of course! Our country’s location and population mean it has always been international and cosmopolitan, and therefore also very open-minded. Luxembourg is business-friendly. You just have to look at the number of incubators that come here to realise that it’s the ideal place to start a business!
Let’s say that I’m planning to launch my own company specialising in the internet of things (IoT). What tax considerations should I bear in mind before starting work?
Tax is not an isolated field but an important part of a series of issues that surround the project itself, the business sector, and the parties involved.
As a “startupper”, you must begin to flesh out your plans and ask yourself the right questions: in what timespan do I want to bring this project to fruition? What budget or funding do I have? Do I want to do this on my own or with others? How much growth can I expect? Where are my suppliers and clients located? Does the start-up have all of the necessary technical skills, or should it hire specialists? From Luxembourg or abroad?
Once the project is established and the business plan drawn up, one key point is the legal form.
Why is the legal form so important?
The choice of a company’s legal form influences not only the entrepreneur’s liability, day-to-day management and division of power within the company, but also the taxation of investments made, income generated and then distributed, and any start-up losses suffered by the company.
What are the different options?
You can choose between a sole proprietorship and trading company, the latter in the form of a partnership (société en nom collectif – SENC, société en commandite simple – SECS) or a capital company (société à responsabilité limitée – Sàrl, société à responsabilité limitée simplifiée – Sàrl-s, société anonyme – SA, société en commandite par actions – SECA). The new simplified sàrl (sàrl-s) allows you to start with less capital and avoid certain regulatory constraints. The benefits are legal, and not tax-related.
For a sole proprietorship, tax on profits is deducted directly from the owner’s or partners’ income, whereas profits realised by a capital company are taxable at the company level, not on its partners or shareholders.
What is the difference between these two types of business?
The two types are not taxed in the same way. For a sole proprietorship, tax on profits is deducted directly from the owner’s or partners’ income, whereas profits realised by a capital company are taxable at the company level, not on its partners or shareholders. The latter will be taxed when they withdraw their share of the company’s profits in the form of dividends.
But do these different legal forms have anything in common?
So how do I decide?
Unfortunately, there is no one-size-fits-all solution. The most appropriate form must be chosen on a case-by-case basis after an analysis. It is better to get expert help when setting out.
Specialists can also advise you on the possibility of arranging a deferred remuneration system from the outset, in the form stock-options, or the impatriate regime, which is interesting if the start-up is considering hiring specialists from abroad because under certain conditions it gives tax-exemption to benefits generally awarded to expatriates, including the reimbursement of removal costs, housing expenses and school fees.
Let’s say that I have been to see a specialist and we are opting for a sàrl. What are my tax obligations during my business’s first year?
Once you have the permits/accreditation needed to run your business, and draft articles of association for your sàrl, the company will be incorporated in the presence of a notary. The stamp duty will be paid to the Land Registration and Estates Department (AED) when the notarised deed is registered.
In general, once registered, the Luxembourg tax authorities (ACD) send the start-up an information letter directly, showing the case number and relevant tax office. Failing this, the company is required to contact the ACD itself. This letter may be accompanied by an opening declaration (or initial declaration) to be completed by the start-up. On the basis of this questionnaire, the relevant tax office may set quarterly prepayments of income tax, business tax and wealth tax, if applicable.
In theory, the start-up should also be registered for VAT. To do this, it must file an initial declaration with the AED, either online via MyGuichet, or by post using the relevant forms.
As an employer, your start-up also has obligations relating to withholding tax on salaries. Indeed, it is required to declare and pay the tax that it has deducted from wages paid to staff.
Once registered with the ACD and AED, the start-up will receive the 11-character national registration number, as well as a VAT identification number made up of an identical and unique group of 8 figures, preceded by the letters LU. The VAT identification number is used in intracommunity trade. The national registration number is used in communications with the ACD and AED.
And in subsequent years?
Like employees, start-ups have to declare their income (and, where appropriate, wealth) on their annual tax return, and pay the amount due.
And as you have filled in an initial declaration, and are therefore registered for VAT, you must also declare and make monthly/quarterly/annual payments of the tax owed, calculated on the basis of your annual revenue.
There are further social security obligations as an independent contractor and employer if the start-up plans to recruit staff. Indeed, the income tax owed by the employee is deducted from wages directly by the employer, who pays it on to the ACD.
Starting a business is both exciting and complex, as you have to know about tax matters, which are by no means straightforward.
To finish, do you have any advice to give me about launching my start-up?
Starting a business is both exciting and complex, as you have to know about tax matters, which are by no means straightforward. I would recommend having the right people around you and asking for the advice or services of tax professionals, for example through tax coaching. These people can guide you through each stage of the process.
More information about taxation can also be found on the business portal www.guichet.lu, which acts as a “virtual information desk” for the Luxembourg government, collecting useful information on the creation, day-to-day management, development and sale of a business, and on www.houseofentrepreneurship.lu, the new platform bringing together all stakeholders along the value chain for starting and developing businesses in Luxembourg.
Start-ups can also request Business Mentoring from the Economic Interest Group (EIG) Business Support. This programme was inspired by a concept developed in Canada, and consists of unpaid support for a young entrepreneur (protégé) from an experienced business leader (mentor) over a 12- or 18-month period. It is intended for all owners of a business in Luxembourg, whether this is in the start-up, growth or transfer/takeover stage.”