Luxembourg's 2027 Budget Bill: Lower Corporate Tax Rate and Unlimited Tax Loss Carryforwards
Luxembourg's 2027 Budget Bill: Lower Corporate Tax Rate and Unlimited Tax Loss Carryforwards
Under the current Luxembourg tax rules, tax losses incurred after 31 December 2016 may only be carried forward for a maximum period of 17 years, whereas losses incurred before 1 January 2017 may be carried forward indefinitely.
The 2027 Budget Bill proposes to abolish this limitation, thereby restoring unlimited tax loss carryforwards for all tax losses, irrespective of when they were incurred.
Importantly, the explanatory memorandum to the Budget Bill expressly confirms that the proposed amendment would also apply to tax losses incurred after 31 December 2016.
Addressing a potential mismatch under the participation exemption regime
The proposed reform would be particularly relevant for Luxembourg holding companies, as it would eliminate a potential asymmetry arising from the interaction between the 17-year limitation on tax loss carryforwards and the recapture mechanism applicable under the Luxembourg participation exemption regime.
Under the current rules, expenses and write-downs relating to qualifying participations may give rise to tax losses that can only be carried forward for 17 years. However, these expenses and write-downs may remain subject to recapture upon a subsequent disposal of the relevant participation, even after the corresponding tax losses have expired.
This may result in an asymmetrical tax treatment: the original tax losses may no longer be available to offset taxable income, while the corresponding expenses or write-downs remain subject to recapture upon disposal.
By restoring unlimited tax loss carryforwards, the proposed amendment would remove this potential mismatch and ensure greater consistency between the tax treatment of participation-related expenses and the subsequent recapture mechanism.
Beyond holding companies, the reform would also benefit businesses with long investment horizons, significant start-up costs or substantial accumulated tax losses.
The second proposed measure is a reduction in the standard corporate income tax (CIT) rate from 16% to 15%, effective from the 2027 tax year.
Taking into account the 7% solidarity surcharge on CIT and the municipal business tax applicable in Luxembourg City, the combined corporate tax rate would decrease as follows:
| Tax Component | 2026 | 2027 (proposed) |
|---|---|---|
| Corporate income tax (CIT) | 16.00% | 15.00% |
| Solidarity surcharge | 1.12% | 1.05% |
| Municipal business tax (Luxembourg City) | 6.75% | 6.75% |
| Combined corporate tax rate | 23.87% | 22.80% |
The combined corporate tax rate for companies established in Luxembourg City would therefore decrease from 23.87% to 22.80%, representing a reduction of 1.07 percentage points.
This measure would further improve Luxembourg's tax competitiveness and reinforce its attractiveness as a location for international investment and business activities.
Both measures are included in the proposed 2027 Budget Bill and remain subject to parliamentary approval.
If adopted as proposed, these reforms would represent a further positive development for Luxembourg's corporate tax environment.
While the reduction in the corporate income tax rate would provide an immediate benefit to profitable companies, the abolition of the 17-year limitation on tax loss carryforwards could have an even more significant long-term impact, particularly for holding companies and investment structures.
BDO Luxembourg will continue to monitor the legislative process and keep you informed of any significant developments.