Luxembourg Tax Alert 2024-12

On 11 December three bills (bills 8414, 8388 and 8186A) were passed by the Luxembourg parliament, providing for new tax cuts (Tax Relief Package), 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. 

Whilst the following tax alert is focusing on individual taxation for households and employees, please refer to our separate tax alert for an overview of the impacts for corporate taxpayers and investment funds.

As mentioned in our previous Tax Alert 2024-06 providing more details on the Tax Relief Package embedded in bill 8414, the Tax Relief Package would mean less personal tax for every taxpayer, especially low income households, through an adjustment of the personal income tax brackets by two and half index brackets on 1 January 2025. This follows an initial adjustment of four index brackets on 1 January 2024 leading to further personal tax cuts. As a consequence, the existing personal income tax rates will apply to increased personal income tax brackets, lowering the global personal income tax charge in all tax classes.

The newly adopted bill 8414 also focuses on single-parent families and adopts a tax relief for taxpayers falling within tax class 1A (single-parent households, people over 64 and widows) by (i) adapting the progressivity of the tax brackets, (ii) increasing the single parent tax credit as well as (iii) increasing the tax deduction for dependent children who are not part of the applicant's household, all applicable as from tax year 2025.

In addition, under the law amended by the newly adopted bill 8388, the application of the moderation and child tax enhancement in situations involving the separation of parents and joint exercise of parental authority will change as from tax year 2025. Should the parents agree on the joint custody of a child after a separation, they can also agree on which of the two parents will be able to benefit from tax advantages in the form of access to tax class 1A. In the event of a disagreement between the parents, the tax office may take into account several criteria, such as "the child's actual predominant residence", the income or the financial situation of each of the parents, and then grant tax class 1A to the one deemed most in need.

Under the new provisions introduced by bill 8414, a full personal tax exemption of the non-qualified minimum social wage will also apply on 1 January 2025 for all tax classes.

Changes passed under bill 8414 in relation to existing measures

Enhancement of Participative Premium:

• Increase of the annual remuneration cap from 25% to 30% of the employee’s annual remuneration, and
• Increase of the employer allocation rate from 5% to 7.5% of the company’s profit for the previous year.

The remaining conditions stay unchanged. The amended conditions are applicable from tax year 2025.

Simplification of the impatriate tax regime:

Instead of the current regime which is based on an exemption of the actual expenses borne by the employer and the partial exemption of the impatriation premium, the new regime provides for a lump-sum regime consisting of a 50% tax exemption of the gross amount of the annual remuneration (excluding any benefits in kind as well as most fully or partially tax exempt benefits in cash). The gross amount of the total annual remuneration to which the 50% tax exemption applies cannot exceed EUR 400,000.

Conditions to benefit from the new regime remain vastly unchanged, with two key considerations:

• Under the previous regime (i.e. currently applicable), one of the conditions is for the impatriate’s professional activity in Luxembourg (i.e. for which they are benefiting from the regime) to be their main activity. Under the new regime, this condition has been modified and notably the professional activity of the impatriate (i.e. for which they are benefiting from the regime), should represent at least 75 % of their working time.
• For companies having existed for at least 10 years on 1 January of the tax year, the number of impatriates entitled to the above exemptions shall not exceed 30 per cent of the total workforce of the Luxembourg company in which the impatriate carries out their professional activity. The percentage will be computed based on the new regime including all employees, impatriates, working on a full-time and on a part-time basis (counting in full-time equivalent).

Individuals who already benefit from the currently applicable impatriate regime shall remain under the current regime provided they continue to meet its conditions, unless they expressly request to the Luxembourg Tax Authorities the application of the new regime as from 2025. Such a choice shall then be irrevocable.

It is now absolutely necessary to review the impatriate tax regime applicable to impatriates currently benefitting from the regime to assess whether the 2025 regime could be more beneficial. The composition of the package of remuneration supporting the 2025 impatriate tax regime is subject to possible interpretation, that may be clarified in the future by a tax circular.

New incentives passed under bill 8414

• The new bonus for young employees is adopted from tax year 2025.
• The new relief for cross-border workers (not applicable to civil servants) introducing a new tax credit on overtime hours is adopted with effect from tax year 2024. The remuneration of overtime hours should, amongst other conditions, be at least EUR 1,200 and effectively subject to tax by the resident state. The total amount of tax credit will be gradually granted and capped at EUR 700 per year as soon as the income subject to double taxation would exceed EUR 4,000.

Compensation measures passed under bill 8388

Taxpayers who have earned professional income for which Luxembourg has the right to tax and who are classified for each of the 2023 and 2024 tax years in the same tax class, will obtain upon request, for the 2024 tax year, a tax credit, referred to as the scale tax credit "CIB" (crédit d’impôt barème). CIB replaces the former CIC (crédit d’impôt conjoncture). CIB will apply once in the presence of several professional incomes generated at the level of the  household. The tax credit will be gradually reduced based on the level of professional income generated and can reach EUR 108 maximum. The tax credit applies upon request of the taxpayer through the filing of a personal tax return, tax “décompte” (simplified tax return) or specific request.

As from 1 January 2025, the mandatory electronic filing procedure will be extended to the withholding tax returns on directors’ fees, salaries and pensions to be filed by the Luxembourg debtors of the related income (including, amongst others, employers).

These newly adopted tax measures provide much needed relief for both individuals and companies. This new tax environment creates also new tax opportunities to employers and employees.

It is now absolutely necessary to review the opportunity offered by the new bonus for your young employees, the participative premium for 2025, as well as the impatriate tax regime applicable to those currently benefitting from the regime to assess whether the 2025 regime could be more beneficial. Note the composition of the package of remuneration supporting the 2025 impatriate tax regime is subject to possible practical interpretation, that may eventually be clarified in the future by a tax circular.

Please do not hesitate to contact your KPMG tax professional to discuss any questions you may have.