Luxembourg Tax Alert 2024-14

The tax landscape is evolving rapidly, with numerous new tax measures entering into force. This newsletter offers a comprehensive overview of the key tax measures for 2025.

• Budget law / Housing measures
• Amended Pillar Two law
• New package of tax provisions for corporate taxpayers, investment funds, individuals, and employees
• Fund taxation: withholding tax refund updates
• VAT updates
• EU Updates

On December 19, 2024, the Parliament approved the 2025 budget law. A request for an exemption from the second vote was introduced to the State Council. The budget law contains only a limited number of tax measures, as most tax measures were included in separate bills.

The main indirect tax measure introduced in the 2025 budget law concerns the ‘Bëllegen Akt’ tax credit for the acquisition of a primary residence in Luxembourg, which currently amounts to EUR 40,000 per individual buyer. This tax credit will be supplemented by an additional reduction of 50%of the taxable base for registration and transcription duties on the acquisition of real estate. To benefit from this reduction, the property must be the buyer’s primary residence or be acquired with the intention of renting the property out (under certain conditions). The reduction of the taxable base will be applicable for properties acquired between October 1, 2024 and June 30, 2025.

Earlier this year, the Luxembourg parliament already adopted a comprehensive package of housing measures to boost the housing market. The package consists of temporary measures, applicable for the 2024 tax year only, and tax measures which are applicable indefinitely. Regarding the measures for the 2024 tax year, the government lodged a bill of law (bill 8470 [PDF, 1.9MB]) on December 18, 2024 to extend these temporary tax measures for an additional six months:

• “Bëllegen Akt” tax credit for the main residence: Extension of the temporary increase from EUR 30,000 to EUR 40,000 per individual (double for couples) for the acquisition of the main residence, documented by notarial deed by June 30, 2025.
• Bëllegen Akt” tax credit for investment: Extension of the registration duty credit of EUR 20,000 per individual (double for couples) for the acquisition of an eligible real estate property documented by notarial deed by June 30, 2025. This credit is applicable for off-plan properties, if the rental period is at least two years.
• Capital gains on sales of real estate property: Extension of the reduction on capital gains tax on real estate property sales to 25% of the global rate if owned for at least two years. As of July 1, 2025, taxation would be 50% of the global rate if owned for more than five years, as opposed to the current application of a two-year holding period to benefit from a taxation at 50% of the global rate.
• Exemption of capital gains from social housing rental management and energy performance class A+: Extension of the exemption of capital gains on real estate property transferred to accommodations used for social housing rental management in Luxembourg or belonging to energy performance class A+.
• Accelerated Amortization: Extension of the increase of the accelerated amortization rate (6%) and period (six years) for off-plan property deeds signed before June 30, 2025, with the total annual deduction capped at EUR 250,000.

The bill now needs to follow the usual legislative process, during which changes may still occur. 

On December 19, 2024, the Parliament also passed the draft law (bill n°8396) amending the Law of 22 December 2023 on Minimum Taxation (“Pillar Two Law”). A request for an exemption from the second vote was introduced to the State Council. The amended legislation incorporates into the Pillar Two Law several changes from the four sets of OECD Administrative Guidance (published by the OECD in February 2023, July 2023, December 2023, and June 2024). The amended law and related parliamentary commentary also provide additional clarifications on certain technical aspects and some fixes to the current text of the Pillar Two Law. All changes would apply retroactively for financial years starting on or after December 31, 2023.

For more information, please refer to our previous newsletters on the initial bill published in June (KPMG Tax Alert 2024-05) and the additional amendments published in October (KPMG Tax Alert 2024-09).

On December 11, 2024, three bills (bills n°8414, n°8388 and n° 8186A) were approved by the Luxembourg parliament, providing for new tax cuts (“Tax Relief Package”), as well as amendments and clarifications of existing tax laws and modernization of the direct tax administrative procedure. A request to be exempted from the second vote was filed with the State Council.

The full package introduces important changes impacting corporate taxpayers, investment funds, and individuals:

Main measures for corporate taxpayers and investment funds:

• Reduction of the corporate income tax rate by 1% as from tax year 2025;
• Amendments to the minimum net wealth tax (“MNWT”) to align the MNWT for all types of taxpayers, irrespective of the proportion of financial assets held;
• Clarification that the repurchase (or withdrawal) and cancellation of shares (including classes of shares) followed by the reduction of the share capital within a period of maximum 6 months qualifies as a partial liquidation under conditions;
• Introduction of a waiver for the participation exemption regime as from tax year 2025 for income arising from certain participations;
• Technical amendment to the interest limitation rules to provide for the application of the existing so-called "equity escape clause" in the context of a single entity group;
• Exemption of actively managed UCITS ETFs from subscription tax;
• Modernization of the law governing family wealth management companies (société de gestion de patrimoine familial or “SPF”);
• Modernization of certain direct tax administrative procedures.

Most of the tax cuts and technical clarifications will be effective as from 2025. For an overview of these measures, please refer to Luxembourg Tax Alert 2024-11.

Measures for individual taxpayers and employees:

For individuals the following measures will be applicable as from tax year 2025:

• Adjustment of the personal income tax brackets by two and half index brackets;
• Tax relief for taxpayers falling within tax class 1A (single-parent households, people over 64 years of age and widows) by (i) adapting the progressivity of the income tax brackets, (ii) increasing the single parent tax credit, and(iii) increasing the tax deduction for dependent children who are not part of the applicant's household;
• Full tax exemption of the non-qualified minimum social wage.

For employees, the following measures have been introduced:

• Enhancement of the participative premium and simplification of the impatriate regime;
• Introduction of a new bonus for young employees;
• Introduction of a new tax credit on overtime hours with effect;
• Mandatory electronic filing of withholding tax returns on directors’ fees, salaries and pensions.

For an overview of these measures, which should apply as from tax year 2025, save for the credit on overtime hours applicable from tax year 2024, please refer to Luxembourg Tax Alert 2024-12.

On 21 August 2024 the German Federal Fiscal Court (Bundesfinanzhof or BFH) issued a positive decision on the KPMG test cases (IR 01/20, IR 02/20) on the refund of dividend withholding tax to foreign investment funds for refund years prior to 2018.

For more information on the decision and the latest developments, please refer to Luxembourg tax alert 2024-07 (for an overview of the case) and Fund Taxation Alert 2024-10 (for latest developments).

Upcoming changes applicable as from 2025

On December 19, 2024, the VAT bill of law (bill n°8406) submitted this summer by the government was approved by the Luxembourg Parliament. The new law provides for the transposition of two European Directives, which provide (amongst others) for the restructuring of the special scheme for small enterprises, changes in place of supply rules for digital events and new VAT developments in the art sector. The rules will become applicable as from January 1, 2025.

For more information, please refer to Luxembourg Tax Alert 2024-08.

Directors’ fees

At the end of last year, the Court of Justice of the European Union (“CJEU”) rendered its decision in the case “TP v Administration de l’Enregistrement, des Domaines et de la TVA” (C- 288/22) ruling that “TP”, a member of the board of directors of public limited companies, may not be performing its economic activity on an independent manner and therefore may not qualify as a “taxable person” under article 9 of the VAT Directive (see our previous Luxembourg tax alert 2023-20), meaning directors’ fees received would not be subject to VAT.

The decision of the Luxembourg District Court was eagerly awaited and occurred on November 22, 2024, confirming the non-applicability of VAT to the directors’ fees received by “TP” and requesting a cancellation of the tax assessments issued by the Luxembourg VAT authorities against TP.

As expected, the VAT authorities were prompt to issue a circular clarifying the broader implications of the District Court’s ruling, which only confirmed the non-applicability of VAT to the directors’ fees received by “TP” from the Luxembourg public limited companies for which he was acting as a board member (please refer to our previous Luxembourg tax alert 2024-10). Please refer to our Luxembourg Tax Alert 2024-13 for further details in this respect. 

DAC9: On October 28, 2024, the European Commission adopted a proposal  establishing a framework for the exchange of information required under the EU Minimum Tax Directive (“DAC9”). Following the release, an initial exchange of views was held in a Council working group in November 2024. According to the December 2024 ECOFIN Council report, the proposal is considered a priority file and requires further technical work for it to proceed quickly. The proposed Directive is also highlighted in the Polish program for their upcoming presidency of the Council. Please refer to Euro Tax Flash Issue 551 from KPMG’s EU Tax Centre for an overview on DAC9.

Proposed EU Directive on Faster and Safer Relief of Excess Withholding Taxes (FASTER): The Directive to introduce safer and more efficient withholding tax procedures was formally adopted by the Council of the EU on December 10, 2024. The adoption follows the ECOFIN Council’s agreement on a compromise text (general approach) in May 2024 and the subsequent adoption by the European Parliament (i.e., non-binding opinion on the final text).  Key features of the Directive include: (1) a common EU digital tax residence certificate, (2) two fast-track procedures complementing the existing standard refund procedure in each member state, and (3) the introduction of National Registers for financial intermediaries that will be able to facilitate the fast-track procedures. EU member states will need to transpose the Directive into domestic legislation by December 31, 2028. The rules will become applicable as of January 1, 2030. Please refer to Euro Tax Flash Issue 541 from KPMG’s EU Tax Centre for an overview on FASTER.

Proposal to prevent the misuse of shell entities (“Unshell”): During 2024, discussions continued with respect to the Directive proposal on preventing the misuse of shell entities for tax purposes, with the Belgian Presidency of the EU Council presenting a possible way forward in June. In the second half of the year, the Hungarian Presidency presented a new approach and drafting suggestions concerning scope, hallmarks and reporting obligations. According to the December 2024 ECOFIN Council report, EU member states’ delegations in the Council working groups requested further clarification regarding the relationship of the proposal with the Directive on Administrative Cooperation (“DAC”) and stressed the need to avoid excessive administrative burden for businesses and authorities.

Transfer Pricing Directive proposal: The proposal was extensively discussed during 2024, with the majority of EU countries not seeing the possibility of further progress on the proposal in its current form. Concerns revolve around risk of creating a double standard in the field of transfer pricing (i.e., at the OECD level and at the EU level), as well as around the loss of flexibility available to member states in negotiating and applying the OECD Transfer Pricing Guidelines. According to the December 2024 ECOFIN Council report, member states have discussed the option of establishing a new EU Transfer Pricing Platform, its institutional set-up, structure, mandate, governance and voting rules. Such a platform would be established outside the framework of a Council Directive and would be aimed at determining consensus-based non-legally binding solutions to practical transfer pricing issues. According to the report, further work would be required on such a “soft law” approach subject to the requirements of Article 296(3) of the Treaty on the Functioning of the European Union (TFEU).

BEFIT Directive proposal: The Directive proposal on a common EU corporate tax framework has been subject to discussions in the Council working groups during 2024. Whilst member states generally support the overall objectives of simplifying corporate taxation rules in the EU and reducing the administrative burden for businesses and tax authorities, multiple concerns were expressed during the Council working group meetings under both the Belgian and Hungarian presidencies (e.g., impact on sovereignty and revenue, interplay with existing rules, administrative burden). The December 2024 ECOFIN Council report notes that further reflection and technical work will be required with a preference expressed by several member states for giving priority to certain elements of the proposal, as a way forward.

Head Office Tax (“HOT”) System Directive proposal: Issued in September 2023, the HOT Directive proposal would allow certain EU-based standalone SMEs operating in other member states only through permanent establishments (PEs) to make a five-year election to determine the taxable results of the PEs according to the rules of the member state of their head office. According to the December 2024 ECOFIN Council report, the proposal cannot be supported by member states due to a number of fundamental concerns, which were not elaborated on in the report. The report further states that member states discussed in parallel the need for a broader analysis of measures to support SMEs that would go beyond taxation measures.

VAT in the Digital Age (“ViDA”): The ViDA package has been politically agreed by EU Member States on November 5, 2024 and should be formally adopted further to a re-consultation with the EU Parliament. The ViDA package includes three pillars (Digital Reporting Requirements, Platform Economy and Single VAT Registration) to improve VAT efficiency for all and reduce fraud. With respect to the Digital Reporting Requirements, businesses, particularly those with multinational operations, must review and update invoicing and VAT reporting systems ahead of July 1, 2030 to ensure compliance with upcoming e-invoicing and digital reporting obligations across the EU. However, once adopted, which would likely happen early 2025, e-invoicing will become possible for domestic transactions in EU member states, with no derogation needed from the EU Council. In this respect, significant changes in the internal systems and processes must be anticipated as EU member states will probably introduce these changes before July 1, 2030. Moreover, even if harmonization is foreseen at a later stage, different rules will apply in the EU member states in several areas in the first instance (e.g. online platforms, SME VAT exemption, definition of “short-term” accommodation rentals). Thus, it will be important to monitor the different EU member states’ requirements in the short-term.