Luxembourg Tax Alert 2025-08

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 2026.

• New carried interest regime
• New tax credit for start-ups
• Budget law and other announcements
• Other individual tax measures
• Implementation of DAC9 and other Pillar Two amendments
• Implementation of DAC8
• Public Country-by-Country Reporting
• New double tax treaties
• Fund taxation: withholding tax refund updates
• VAT updates
• EU Tax updates

In July 2025, a bill (Bill 8590) was filed to modernize the personal tax regime applicable to carried interest. The legislative process is still ongoing, and the bill is expected to be voted on by the Parliament in January 2026.

The bill aims to reinforce Luxembourg’s position as a leading jurisdiction for alternative asset management by increasing legal certainty, better aligning with international standards and enhancing tax competitiveness. To achieve this, it would introduce several changes to the current regime, including broadening the scope of eligible carried interest beneficiaries and drawing a clearer line between ordinary gains and “outperformance” returns.

The bill includes two distinct personal income tax treatments:

• Contractual carried interest, where the entitlement arises under the contract and does not require a capital contribution or equity stake. This income would be classified as miscellaneous income under the extraordinary income regime and would benefit from a favorable personal tax rate, equivalent to one-quarter of the standard global income tax rate.
• Investment linked carried interest, where the entitlement is tied to a direct or indirect participation in the alternative investment fund (AIF). In this case, the bill provides that only the “outperformance” proportion (i.e. returns above the hurdle rate, known as carried interest) is subject to a personal tax treatment as speculative gain, which may be tax-exempt under certain conditions.

Once enacted, the law will become applicable as from tax year 2026.

Please refer to KPMG Tax Alert 2025-03 for a detailed overview of the new regime. As part of the legislative process, upon request of the State Council, subsequent clarifications have been made to the scope of beneficiaries.

As from tax year 2026, individuals investing in young innovative companies will be able to benefit from a new tax credit to support their initial investment years. Bill 8526, adopted by Parliament on 17 December 2025, allows the credit to be claimed for qualifying investments made from 2026 onward.

Luxembourg tax residents, as well as non-resident taxpayers opting into the regime, may claim a 20% tax credit on qualifying investments of at least €10,000 in fully paid-up shares, subject to a 30% ownership cap and a ceiling of €1.5 million per entity. Investors must hold the investment for a minimum of three years.

To qualify, start-ups must meet several conditions, including:

• being incorporated for less than five years,
• employing fewer than 50 people, and
• having turnover or total assets below €10 million.

In addition, start-ups will be required to carry out an activity that is considered “innovative”. For an activity to qualify as innovative, start-ups must meet two cumulative conditions: (1) at least two individuals working on a full-time basis, and (2) research and development expenses representing at least 15% of total operating expenses must be incurred during at least one of the three financial years.

Eligible start-ups will be required to issue certificates confirming compliance with the ownership cap and minimum investment threshold within two months, and an additional certificate will be required after year-end to confirm that the eligibility conditions were met for the tax year.

On 17 December 2025, the Luxembourg Parliament also passed the Budget Law for 2026. The law itself introduced only a few direct tax measures. However, when the Budget Bill was presented in October 2025, the government used the occasion to announce a series of other tax measures, affecting both corporate and individual taxpayers, some of which have since been tabled in separate bills.

1) Tax measures in the Budget Law (Bill 8600)

The Budget Law includes a few targeted measures supporting the green transition:

• The maximum CO₂ tax credit for individuals will rise from €192 to €216.
• Excise duties on biofuels will increase slightly, from 8.8% to 9%.

2) Other announced measures not in the Budget Bill

For families, the government announced its intention to maintain certain tax reliefs introduced in 2024–2025, including the tax exemption of the social minimum wage and the single‑parent exemption of €52,400.

In addition, a new annual tax bonus of €922 per child would be introduced for parents who do not qualify for tax class 1a.

For companies, the government announced an additional 1 percentage point reduction in the corporate income tax rate, planned to take effect from 2027.

3) Introduction of incentives for investment in government defense bonds (Bill 8633)

A new bill was passed on 17 December 2025, which contains temporary incentives to encourage investment in government defense bonds, for eligible subscriptions made between 15 January and 15 February 2026. The tax incentives include:

• An exemption from RELIBI withholding tax on interest, and
• A full exemption on interest income.

4) New tax measures related to pensions (Bills 8634 and 8640)

In October 2025, the government presented two bills as part of the pension reform: Bill 8634 and Bill 8640. Both bills were adopted by the Luxembourg Parliament on 18 December 2025. Bill 8634 sets out general updates for the pension regime reform, such as an increase of the contribution rate from 24.0% to 25.5%, while Bill 8640 introduces two specific tax-related measures that are scheduled to take effect from 1 January 2026.

The key tax measures in Bill 8640 are:

• A new monthly allowance of €750 for individuals eligible for early retirement who choose to continue working until the statutory retirement age.
• An increase of the tax-deductibility ceiling for contributions to private complementary (third-pillar) pension schemes to €4,500 (up from €3,200).

The same bill also included a new change not related to pensions. As from 2026, the depreciation rate applicable to investment expenditures incurred in connection with sustainable energy renovations of buildings, or parts of buildings used for rental accommodation, is increased from 6% to 10%, provided that completion of renovation dates back to less than nine years determined on1 January of the tax year.

A new bill on individual taxation, which would replace the current individual tax classes with a single tax class, was presented to the Government Council on 16 December 2025. According to the Minister of Finance, the new bill is expected to be presented to the Finance Commission of the Parliament and the public in early January. It is currently envisaged that this reform will enter into force in 2028. 

On December 17, 2025, the Parliament approved Bill 8591, transposing Council Directive (EU) 2025/872 (“DAC9”) into domestic law and introducing several other changes to the Law of 22 December 2023 on Minimum Taxation (“Pillar Two Law”).

For an overview of the changes, please refer to KPMG Tax Alert 2025-04. During the legislative process, several changes have been made to the text of the bill, mostly to clarify some technical aspects and to ensure a consistent transposition of the OECD January 2025 guidance.

On 19 December 2025, the Luxembourg tax authorities announced an update to the Pillar Two FAQ. A new question was added regarding Article 25, paragraph 4, of the Luxembourg Pillar Two law. This article concerns post-filing adjustments and requires, under certain circumstances, the effective tax rate (ETR) to be recalculated when covered taxes have been included in the ETR but have not been paid within three years from the end of the relevant fiscal year. The FAQ clarifies that, for groups within the scope of Pillar Two, tax assessments will be issued within a timeframe that allows the taxes to be paid within this three-year period, provided the relevant tax returns have been filed within the prescribed deadlines.

Luxembourg is also expected to publish soon the final Grand-Ducal decree on Article 50 of the Pillar Two Law, containing the GIR form. In addition to the GIR, in-scope groups will face several other filing obligations in Luxembourg with a first filing deadline on 30 June 2025 (for calendar year taxpayers in scope for 2024). The filing obligations include a registration requirement for all constituent entities, a notification requirement in case the GIR is filed in another jurisdiction and obtained by Luxembourg via exchange, and a local tax return to declare and pay any top-up tax in Luxembourg under the QDMTT, IIR, or UTPR. These additional forms have not been released yet.

KPMG can assist you with your Pillar Two compliance obligations, whether by offering a fully centralized global compliance model, or simply helping you monitor and fulfill your Luxembourg compliance obligations. Please refer to this website for more information and contact your KPMG partner in case you want to lean more.

A bill was filed in July 2025 (Bill 8592) to transpose Council Directive EU) 2023/2226 of 17 October 2023 (DAC8) into domestic law. The legislative process is still ongoing, and the expectation is for this bill to be voted on by the Parliament in 2026. The bill will bring crypto-assets, e-money and central bank digital currencies within the scope of EU-wide tax reporting for the first time. The new rules also tighten existing CRS standards and are expected to impose heightened due diligence obligations on financial institutions and crypto-service providers operating in the single market. Once enacted, the bill would become applicable as from 1 January 2026.

It has been a few years since Luxembourg adopted the law transposing the EU Directive on public CbCR. The rules introduced an additional requirement for certain multinational groups to report certain tax and related group information in an EU Member State’s commercial business register and on the company’s website. The rules will apply to multinational groups whose total consolidated group revenues exceed EUR 750 million in each of the two preceding consecutive financial years and that either have their ultimate parent undertaking in an EU country or conduct operations in the EU through an EU subsidiary or branch of a certain size.

These requirements already apply to financial years beginning on or after 22 June 2024, bringing the first reporting requirements into effect in June 2026. For example, for a multinational group reporting on a calendar year-end basis, there would be a requirement to publish the report by the end of 2026 with respect to financial year 2025 (i.e., 12 months after the end of the reporting period) if it exceeded the EUR 750 million threshold for the reportable year (2025) as well as for the previous financial year (2024).

With more detailed guidance still pending, uncertainties exist both on the content and on the format and publication procedure of the report. KPMG Luxembourg can help multinationals prepare for this new era of corporate transparency and assist them in navigating the new compliance complexities posed by public CbCR.

For more information, please refer to this KPMG website providing the latest information on the EU's initiatives on public and non-public CbCR.

On 19 November 2025, the OECD published updates to the OECD Model Tax Convention. These updates will be integrated into a revised version of the OECD Model Tax Convention to be released in 2026. Amongst others, the update includes the following:

• Cross-border remote working: The Commentary to Article 5 was updated to clarify the circumstances an individual’s home may constitute a “fixed place of business” for the enterprise for which the individual works. The new Commentary also provides some illustrative examples. The existence of a fixed place of business must be determined based on the facts and circumstances applicable during a given period. Where an individual works from home or another relevant location for less than 50% of any 12-month period, the location is generally not considered a fixed place of business. Where the 50% threshold is met, additional facts and circumstances must be considered, with particular emphasis on whether there is a commercial reason for the arrangement.
• Natural resource extraction: The update includes an alternative treaty provision addressing activities connected with the exploration and exploitation of extractible natural resources. The inclusion of this provision is optional.
• Associated enterprises: The update also includes clarifications on the application of Article 9 and how the arm’s length principle applies to the characterization of debt and equity with respect to financial transactions. In addition, it clarifies the interaction between Article 9 and domestic laws on interest deductibility, including those recommended in the BEPS Action 4 report.
• Tax certainty: The update further includes new specific language to the Commentary on Article 25 addressing tax certainty and the elimination of double taxation in relation to Pillar One Amount B (providing an option to countries to simplify and streamline the application of the arm’s length principle to baseline marketing and distribution activities). The update aims to ensure this optionality in dispute resolution for jurisdictions not adopting Amount B.

As of 1 January 2026, two new double tax treaties will enter into force, the double tax treaty between Luxembourg and Albania, and the double tax treaty between Luxembourg and Montenegro. In addition, Luxembourg has also announced that the Protocol to the double tax treaty between Luxembourg and Moldova will become applicable next year.

With these new treaties, Luxembourg will have 88 double tax treaties in force as from 1January 2026.

Aberdeen I

The Federal Central Tax Office (Bundeszentralamt für Steuern, BZSt) has started processing WHT refund claims after the BFH’s landmark decisions in the KPMG cases (IR 01/20, IR 02/20). Currently, the KPMG test case was referred to the Hessian Tax Court to carry out the review of the dividend payments, review the evidence to be provided and the calculation of interest to conclude the proceedings, for which a decision is expected in 2026.

Both Luxembourg SICAVs and Luxembourg FCPs are now receiving refunds, but FCPs are receiving only partial payments covering only 15% of the claimed 26.375% WHT — on the grounds that the fund could have sought relief under the Luxembourg–Germany DTA (the “quota arrangement”) stemming from the 23 April 2012, amendment protocol (effective from 2014).

There are practical and legal counter‑arguments to the tax authority’s position, additional details available via the KPMG Fund Taxation Alert 2025-08.

Aberdeen II

The German Investment Tax Act (GInvTA), effective 1 January 2018, restructured fund taxation by treating all investment funds, domestic and foreign, as opaque entities and subjecting German‑source dividends to withholding tax (WHT) at 15% (or 26.375% without a valid status certificate). At the same time, German resident investors received compensatory relief through partial exemptions (“Teilfreistellung”) for tax paid at the fund level. Foreign investors generally do not benefit from these partial exemptions, which can lead to a higher effective tax burden for cross‑border investors. Overall, the new version of the GInvTA results in a higher tax burden for foreign investors.

This unequal treatment raises potential conflicts with EU law notably the free movement of capital and the freedom of establishment under the TFEU, and echoes the CJEU’s ruling in the German car toll case (C‑591/17), where domestic compensatory treatment was held to infringe EU law.

A KPMG test case before the Cologne Tax Court is pending, with a decision expected in the first half of 2026. Additional info via the KPMG Fund Taxation Alert 2025-15.

Investment funds have been reclaiming WHT on dividends paid by Italian companies for periods before 1 January 2021, arguing that Italian rules violated the free movement of capital under the TFEU. Courts at multiple levels in Italy have increasingly ruled in favor of investment funds. In recent months, several cases won before the Italian second-instance Tax Court of Pescara have become final after the Italian Tax Authority’s Advocate General decided not to appeal to the Court of Cassation. As a result, the funds concerned are entitled to refunds of the Italian withholding tax withheld, plus late-payment interest.

At this stage, the only way to obtain a refund of Italian withholding tax for the relevant period is to initiate court proceedings. Now is the time for investment funds to take action.

On 11 March 2025, the European Union adopted the VAT in the Digital Age (ViDA) package, a major step forward in modernizing and simplifying the VAT system across Europe. This initiative aims to align VAT rules with the digital economy, making compliance easier, reducing fraud, and avoiding the need for multiple VAT registrations in different countries. To reach these goals, the ViDA package is structured around 3 pillars, each with specific implementation timelines:

1. E-invoicing and Digital Reporting

From 1 July 2030, VAT-registered businesses will be required to issue structured e-invoices following a standard EU format for cross-border business-to-business (B2B) transactions within the European Union, within 10 days of the transaction. ViDA will also phase out the need for EC Sales Lists as relevant data from the e-invoices will be reported to the tax authorities immediately upon issuance by the supplier.

While the EU-wide e-invoicing obligation will only take effect in 2030, some countries, including Luxembourg, may anticipate that date to require structured electronic invoices for domestic B2B transactions.

The ultimate goal of these measures is to achieve full harmonization of e-invoicing and digital reporting obligations across all EU Member States, including for domestic transactions.

2. Platform Economy – 1 July 2028

Starting 1 July 2028, digital platforms acting as intermediaries or agents for short-term accommodation rentals (up to 30 nights per customer) and passenger transport will be classified as "deemed suppliers" for VAT purposes. Consequently, these platforms will be liable for VAT on these services, unless the underlying supplier provides its valid VAT identification number of the Member State where VAT is due and confirms to the platform operator it will account for VAT on the supply.

Additional measures and SME regime specificities might be implemented by the Member States.

3. Single VAT registration – 1st July 2028

The third pillar aims to simplify VAT registration obligations for businesses operating in Member States where they are not established. The key changes, set to take effect mainly from 1 July 2028, include notably the extension of the reverse-charge mechanism and One Stop Shop (OSS) regime.

The ViDA reform promises to bring much-needed clarity and efficiency to VAT processes, enhancing compliance and reducing fraud while supporting economic growth in the digital age. As these changes are set to impact nearly all businesses, particularly those operating across multiple EU countries, it is crucial for businesses to assess the implications of the ViDA package and prepare for the necessary system and process adjustments, notably relating to the e-invoicing requirements set by the first pillar. Staying informed about immediate requirements while preparing for broader EU changes is essential.

This newsletter highlights a few EU initiatives that taxpayers should pay attention to in 2026. Please refer to KPMG ETF 572 - EU direct tax initiatives: 2025 year-end state of play prepared by the KPMG EU Tax Centre for a full and comprehensive overview of these and other EU initiatives.

Tax decluttering and simplification – Tax Omnibus proposal

A key priority for the EU in 2026 will be the continuation of the efforts to enhance competitiveness and simplify EU legislation. As part of this agenda, the European Commission (“Commission”) has announced the forthcoming “Omnibus Simplification Package”, a set of simplification initiatives intended to address various interactions between various pieces of EU legislation. The package is expected to be published in the second quarter of 2026 and is anticipated to introduce amendments to several Directives, including the Anti-Tax Avoidance Directive (ATAD), the Parent Subsidiary Directive, the Interest and Royalty Directive, and the Merger Directive.

DAC recast

The Commission is also expected to release a Directive on Administrative Cooperation (DAC) recast proposal in the second quarter of 2026. In its work program, published on 21 October 2025, the Commission highlighted its intention to consolidate the various DAC amendments (DAC1 to DAC9) into one single text to improve clarity. In addition, several amendments are considered, to remove duplications and resolve existing inconsistencies. Most notably, the Commission also intends to review the mandatory disclosure rules under DAC6 and will assess the possibility of integrating certain criteria from the Unshell proposal (which is expected to be formally withdrawn) into the hallmarks of DAC6. A call for evidence and public consultation on the DAC recast proposal was launched by the Commission on 16 December 2025. The consultation document builds on the results from the DAC evaluation and seeks further feedback, in particular, on DAC4 (country-by-country reporting) and its interplay with Pillar Two, DAC6 (EU Mandatory Disclosure Rules) and DAC7 (reporting obligations on platforms operators). For more information, please refer to the KPMG Euro Tax Flash 571.

EU Directive on Faster and Safer Relief of Excess Withholding Taxes (FASTER)

The FASTER Directive, scheduled to take effect in 2030, aims to overhaul how cross-border withholding tax relief is processed across the EU. The framework introduces a digital tax residence certificate, a standardized relief-at-source system and a uniform quick-refund mechanism intended to replace the patchwork of national approaches that investors and intermediaries currently navigate. Meanwhile, Germany’s MiKaDiv rules, expected to apply from 2027, will require German paying agents to report detailed investor information to local tax authorities.

For more information, please refer to the KPMG Fund Taxation Alert 2025-02.

• Business in Europe: Framework for Income Taxation (BEFIT) Directive proposal (pending): This proposal, issued in September 2023, sets out common rules for determining the corporate tax base for EU-based entities meeting a certain threshold. Since its issuance, the proposal has been the subject of several discussions in Council working groups, during which Member States raised a number of concerns, notably regarding its interaction with existing tax legislation. The report to the European Council, approved on 12 December 2025 by the Economic and Financial Affairs Council (ECOFIN), mentions that discussions on this proposal did not progress during the second half of 2025 due to prioritization of other tax initiatives.
• Rules to prevent the misuse of shell entities for tax purposes (Unshell proposal) (pending withdrawal): In December 2022, the Commission issued a proposal for a Directive aimed at fighting the use of shell entities and arrangements for tax purposes. The proposal has been subject to numerous discussions in the Council working groups. Several compromise texts were submitted, but Member States have not been able to reach consensus on the initiative.  In October 2025, the work program of the Commission noted that the Unshell proposal will be formally withdrawn within six months. Instead, it is expected that, as part of the upcoming DAC recast, the Commission will consider the option of reflecting certain substance criteria outlined in the Unshell proposal in the hallmarks of potentially aggressive tax planning arrangements for the purposes of DAC6.
• Transfer Pricing Directive (pending withdrawal): In 2023, the Commission released a proposal for a Transfer Pricing Directive, intended to transpose common transfer pricing principles, including the OECD arm’s length principle and its guidelines, into EU law. However, agreement could not be reached and the Commission work program advised that the TP Directive proposal will be formally withdrawn within six months. Instead, the Commission will continue exploring a new EU Transfer Pricing Platform to develop non-binding, consensus-based solutions to practical transfer pricing issues. The December 2025 ECOFIN report does not mention any further progress or roadmap on this EU Transfer Pricing Platform.
• Debt-equity bias reduction allowance (DEBRA) (pending withdrawal): In May 2022, the Commission released a proposal for a Directive aimed at introducing a new notional allowance on equity, together with a new limitation on interest deductibility, which would need to be applied alongside the interest limitation rules under ATAD. A few months later, at the ECOFIN meeting in December 2022, it was agreed that the DEBRA proposal should be suspended until other proposals in the area of corporate income taxation announced by the Commission have been put forward. Since then, none of the Council Presidencies has relaunched the initiative, and in its work program of October 2025, the Commission noted it would formally withdraw the proposal within six months.