Economic substance : what is it ?
It is the concrete economic reality of an activity. Clue of such geographical evidence are for example :
- company headoffice, bank account, products storage location or the workforce daily location, etc.
- the clients location,
- the place where all the management decisions are made, where the services are providede or the goods sold,
A company registered in a country should have an significant economic substance in this very country. It is just about coherence.
Economic substance, which consequences ?
The economic substance location determines the applicable tax regime on the profits.
Thus, the company headoffice location is not the sole criteria from a tax point of view. Setting up a company n one country to benefit from a local tax regime while the company management is assumed abroad is not coherent. It is clearyly a tax risk.
A company formation should be implemented on a long term view.
Letter-box companies concept
It is precisely this type of company which has no economic substance in the country where they are registered. Thus, these companies can be easily attacked by foreign aggrieved tax administrations.
These companies are not created anymore in Luxembourg, especially for trading activities. The VAT, tax on profits and social charges consequences are so important. Luxembourg is very attentive to watch the new companies and be sure that they abide but the law (Luxembourg and european law and all international standard).The 2011 law about trading activities is very clear. Own premisses and real economic substance are compulsory to setting up de company in Luxmebourg.
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