On 17 July 2024, bill of law 8414 (Bill) was submitted to Parliament, introducing changes designed to make Luxembourg more attractive and more competitive, and reduce the tax burden on individuals.
Companies and funds
1% decrease in the corporate income tax rate
Taxable profits of Luxembourg companies are, as a rule, subject to corporate income tax (CIT) and municipal business tax (MBT). The CIT is currently levied at a maximum rate of 17% (18.19% including the 7% surcharge for the employment fund) on companies whose annual taxable income exceeds EUR 200,000. An intermediary CIT rate of EUR 26,250 plus 31% of the income exceeding EUR 175,000 applies to companies with taxable income between EUR 175,000 and EUR 200,000. Finally, a lower CIT rate of 15% applies to companies with taxable income not exceeding EUR 175,000.
The Bill proposes to reduce the CIT rate by one percentage point, bringing the maximum CIT rate down from 17% to 16% and the lower CIT rate down from 15% to 14%.
Accordingly, the aggregate rate of CIT, MBT in the city of Luxembourg (6.75%) and the contribution to the employment fund will be reduced from the current 24.94% to 23.87%.
This reduction will bring Luxembourg's nominal tax rate closer to the average statutory tax rate in 2023, both in the EU (21.2%) and the OECD (23.6%).
This measure will apply as from the 2025 tax year.
Exemption from subscription tax for actively managed UCITS ETFs
The introduction of a subscription tax exemption for listed undertakings for collective investment in transferable securities (UCITS ETFs) aims to improve the Luxembourg tax framework for these investment funds in the context of a growing ETF market. UCITS are not subject to CIT, MBT or net wealth tax (NWT).
In order to benefit from the exemption, the UCITS must be traded throughout the day on at least one regulated market or multilateral trading facility on which at least one market maker intervenes to ensure that the price of its units or shares does not deviate significantly from its net asset value and, where applicable, its indicative net asset value. The term "indicative net asset value" should be understood to mean the measurement of the intra-day value of the net asset value of a listed UCITS on the basis of the most up-to-date information in accordance with the definition contained in the ESMA Guidance.
In addition, if there are several classes of units or shares that exist within the UCITS ETF or one of its sub-funds, the exemption only applies to the classes of units or shares that qualify as ETFs.
Once passed, this measure will apply from the first day of the quarter following publication of the Law in the Luxembourg Official Journal (Law).
Various measures for SPFs
SPFs are private wealth management companies exempt from CIT, MBT and NWT. They are however subject to an annual 0.25% subscription tax, with a minimum of EUR 100 and a maximum of EUR 125,000. The subscription tax is assessed as at 1 January on the paid-up capital, the share premium and debts which are in excess of 8 times the paid-up capital and share premium. The Bill proposes to increase the minimum subscription tax to EUR 1,000, and for the amount of debts to be assessed on the first day of the financial year (to clarify the calculation of the tax base for companies that do not have a financial year corresponding to the calendar year.).
In addition, the Bill clarifies the applicable audit procedures, introducing the possibility of imposing administrative fines of up to EUR 250,000 in the event of serious breaches of the SPF Law, particularly the provisions relating to the tax status of an SPF, such as the obligation for the acquisition, holding, management and realisation of financial assets to be its exclusive object to the exclusion of any commercial activity, the prohibition on an SPF interfering in the management of companies in which it holds a participation or on holding real estate assets, and the eligibility criterion for investors in the SPF. The Bill also adjusts the existing procedure for withdrawing the tax status of an SPF.
The first set of measures will apply from the first day of the quarter following publication of the Law in the Official Journal. The measures relating to audit and withdrawal procedures will apply to taxpayer breaches occurring after the Law enters into force.
Individuals
Boost to profit-sharing scheme
Under the profit-sharing scheme, employers can provide a "profit-sharing bonus" to their employees which is 50% tax-exempt under specific conditions. The Bill introduces two significant enhancements aimed at improving these conditions:
- At present, the maximum amount of bonus that can be granted to employees is capped at 5% of the employer's profit in the previous fiscal year. The Bill increases this cap to 7.5%.
- The tax exemption for the profit-sharing bonus is currently limited to 25% of the employee's gross annual remuneration (excluding cash and in-kind benefits) for the year in which the bonus is paid. The Bill raises this limit to 30% of the employee's annual remuneration.
Simplification of inpatriate tax regime
To support companies and attract highly skilled employees to Luxembourg, a favourable tax regime known as the inpatriate tax regime was established some years ago. This regime grants tax exemptions for various items such as actual expenses and inpatriate allowances.
The Bill aims to streamline this scheme with the following improvements:
- Inpatriates will benefit from a 50% exemption of the gross amount of the total annual remuneration paid by their employer, excluding cash benefits fully or partially exempt under Article 115 of the 1967 Income Tax Law and benefits in kind. The gross amount of the total annual remuneration to which the exemption applies cannot exceed EUR 400,000.
- Taxpayers who have benefited from the inpatriate tax regime under the rules applicable up to the 2024 tax year will remain subject to those rules for subsequent tax years, provided the qualifying conditions are met. However, taxpayers may opt to apply the new regime starting from the 2025 tax year by notifying the Tax Authorities. This election is irrevocable from the year it is exercised and remains valid for up to 8 tax years following the year the employee begins work in Luxembourg.
The eligibility conditions for the regime, its duration, and the declaration procedures and obligations, remain unchanged.
New premium for young employees
To complement the new rent allowance for young workers introduced on 1 June 2024, aimed at facilitating the start of their career, the Bill introduces an optional "young employee premium" with a tax exemption for up to 75% of its amount.
The maximum annual amount of the premium applicable to full-time positions that will be eligible for exemption is:
- EUR 5,000 for gross annual remuneration up to EUR 50,000;
- EUR 3,750 for gross annual remuneration over EUR 50,000 up to EUR 75,000;
- EUR 2,500 for gross annual remuneration over EUR 75,000 up to EUR 100,000.
A young employee premium does not qualify for exemption if the employee's gross annual remuneration exceeds EUR 100,000.
"Gross annual remuneration" is total remuneration before incorporating cash and in-kind benefits for the tax year in which the premium is allocated.
The tax exemption for the premium applies if, at the time of payment by the employer, the following conditions are met:
- The employee is under 30 years old at the start of the relevant tax year.
- The employee is employed under their first permanent employment contract with an employer established in Luxembourg (or established abroad with a permanent establishment in Luxembourg).
- The first premium was paid less than 5 years before 1 January of the tax year.
If the employee changes employer, the employee will no longer qualify for the young employee premium tax exemption. The exemption only applies in relation to permanent employment contracts signed on or after the effective date of the new Law.
Introduction of tax credit for overtime
The Bill proposes the introduction of a "tax credit for overtime" (CIHS) of up to EUR 700 per year for any non-resident taxpayer who is taxable in Luxembourg and receives wages for overtime work as part of their salaried employment.
The taxpayer may benefit from the CIHS if the following conditions are met:
- The taxpayer is a resident of a country with which Luxembourg has a double taxation treaty that grants Luxembourg the right to tax the gross remuneration from employment received by the taxpayer.
- The treaty specifies that the taxpayer's country of residence eliminates double taxation through a tax credit for the remuneration mentioned in (i), or it states that the taxpayer's country of residence will tax such remuneration if it is not effectively taxed in Luxembourg.
- The domestic law of the taxpayer's country of residence does not include any provision that explicitly grants the taxpayer a partial or full exemption, or any other tax reduction, for overtime work.
The CIHS will be granted to the taxpayer on request as part of their tax return or annual tax statement.
Modifications to individual income tax scale
Following the earlier adjustment of the individual income tax scale by 4 index brackets starting in the 2024 tax year, the government has approved a measure to further adapt the scale by an additional 2.5 index brackets effective from the 2025 tax year.
This additional measure aims to gradually address the gap resulting from the scale not having been adjusted since 2017, despite the triggering of 8 consecutive index brackets during this period.
Tax relief for individuals in tax class 1A (single parent families)
The unique circumstances of taxpayers in tax class 1A are often highlighted, as their situation may be more precarious than other households.
Therefore, the Bill includes a significant adjustment to the tax rate for tax class 1A. This could, in some cases, reduce the tax burden by between EUR 2,250 and EUR 2,600 per year for annual taxable adjusted incomes exceeding EUR 50,000.
Adjustment of single parent tax credit (CIM) and reduction for children not part of taxpayer's household
In the same vein, the CIM amount will be increased to EUR 3,504 (up from EUR 2,505 currently). The upper limit of the adjusted taxable income to which the maximum CIM amount applies remains unchanged at EUR 60,000. Beyond this threshold, the tax credit decreases linearly to reach a minimum amount of EUR 750 for adjusted taxable income of EUR 105,000 and above.
The threshold at which the CIM amount goes down is increased to EUR 2,712 (from EUR 2,424 currently). Therefore, if the child's various allowances exceed this amount, the CIM will be reduced accordingly.
Additionally, the maximum reduction for children not part of the taxpayer's household will increase from EUR 4,422 to EUR 5,424.
Elimination of tax burden on minimum social wage for unskilled workers
The amount of the minimum social wage tax credit (CISSM) will be increased to a maximum of EUR 81 per month, ensuring that a worker earning the unskilled worker minimum social wage and belonging to tax class 1 will no longer pay any tax.
The measures concerning individuals will generally apply as from the 2025 tax year, save for the tax credit for overtime, which will apply from the 2024 tax year.
Next steps
The proposed measures are welcome as they show Luxembourg's strong commitment to boosting the country's economy and promoting inclusive and sustainable growth. The Bill will now follow the normal legislative process. The Law will enter into force on the day following its publication in the Official Journal. The application date of each measure is detailed above.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.