Luxembourg Tax Alert 2024-06

On 17 July, the Luxembourg Finance Minister presented a new package of tax measures benefitting both individuals and companies. A bill of law (Bill 8414 or “Bill”) (PDF, 2.9MB) was filed with the Luxembourg Parliament on the same day. This Bill includes in total 16 new tax measures, which intend to boost and strengthen the competitiveness of businesses and the country, attract new talents, and provide households with much needed financial relief.

In this newsletter, you can find an overview of the main measures introduced by the Bill.

Adaptation of personal income tax brackets and relief for tax class 1A

In accordance with the 2023-2028 coalition agreement of the new government, the Bill introduces several amendments to the Luxembourg income tax law, intended for provide relief for all taxpayers, but mostly benefitting low-income households and single parents:

• Adjustment of the personal income tax brackets by two and half cost of living indexation;
• 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;
• Full tax exemption of the non-qualified minimum social wage.

These measures would become applicable as from tax year 2025.

To increase the attractiveness of working in Luxembourg, Luxembourg introduced in 2021 the participative premium regime.  Under this regime, employers may pay a premium to their employees which would be considered as fully deductible for tax purposes. Employees on the other hand benefit from a tax exemption of 50% on the amount of the premium. This benefit is, however, only granted if certain conditions are met. For example, the aggregate amount of the participation premiums cannot exceed 5% of the company’s profits for the previous year and the premium cannot exceed 25% of the employee’s annual remuneration.  

In the 2023-2028 coalition agreement of the new government, it was foreseen to adapt the participative premium regime to make it attractive. The changes in the new Bill now foresee that the following conditions are changed:

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

The remaining conditions remain unchanged. The amended conditions would become applicable for tax year 2025. 

In 2021, the government provided a legal basis to the impatriate regime and introduced an impatriation premium which (i) is limited to 30% of the gross amount of annual remuneration (excluding any benefits in cash and/or kind) and (ii) is benefiting from a 50% tax exemption. The regime is subject to several conditions.

The new Bill aims to simplify the 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 model provides for a lump-sum regime consisting of a 50% tax exemption of the gross amount of the annual remuneration (excluding any benefits in cash and/or in kind). The gross amount of the total annual remuneration to which the 50% tax exemption applies cannot exceed 400 000 euros.

Conditions to benefit from the new regime remain vastly unchanged, with one key consideration.

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 he or she is benefiting from the regime) to be his or her main activity. Under the new regime, this condition has been modified and notably, whereby the professional activity of the impatriate (i.e., for which he or she is benefiting from the regime), should represent at least 75 % of his working time.

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

The Bill introduces a new bonus for young employees to help them in the first years of their professional life. The granting of the bonus is at the discretion of the employer and limited based on the amount of annual remuneration. In this respect, an employee working full time may receive an annual bonus ranging between EUR 2,500 and 5,000 (depending on annual remuneration), of which 75% would be tax free. Several conditions would need to be fulfilled to benefit from this:

• The employee must be younger than 30 years (determined at the beginning of the tax year)
• The employee must be in his first job with a Luxembourg company or a foreign company with a permanent establishment in Luxembourg and have an indefinite-term contract.
• The employee may benefit from this bonus for a maximum period of 5 years.

The benefit would cease to apply if the employee decides to change the employer. A grand-ducal decree will be published to provide additional administrative clarifications.

The Bill also provides relief for cross-border workers by introducing a new tax credit on overtime hours. Under current Luxembourg income tax law, overtime hours are generally tax exempt, but may be taxed by the taxpayer’s resident country according to certain double tax treaties (“DTT”) (e.g. Germany). These taxpayers may now receive some relief according to this new tax credit.

The new tax credit is subject to certain conditions. The tax credit would not apply automatically, but a request must be done via the filing of the annual tax return or the simplified personal tax return (“décompte annuel”) and would only be available to taxpayers having their tax residence in a country with which Luxembourg has concluded a DTT. The remuneration of overtime hours should moreover be at least EUR 1,200 and effectively subject to tax by the resident state. The total amount of tax credit granted would be capped at EUR 700 per year.

This tax credit would already be available for tax year 2024.

Reduction of the corporate income tax rate

The Bill includes a reduction of the Luxembourg corporate income tax (“CIT”) rate by 1%, as follows:

• Reduction of the CIT rate from 17% to 16% for companies with a taxable income above EUR 200,000. This would result in an aggregate rate of 23.87% for companies that are resident in Luxembourg-City.
• Reduction of the CIT rate from 15% to 14% for companies with a taxable income below EUR 175,000. This would result in an aggregate rate of 21.73% for companies that are resident in Luxembourg-City.

This change would be applicable as from tax year 2025.

In the context of a constant evolving investment fund industry, the government seeks to provide a more competitive tax framework for certain actively managed UCITS ETFs by introducing a full exemption from subscription tax for these types of funds. The definition to fall within the scope of the new exemption is kept quite large but provides a limitation of the benefit to those UCITS ETFs that are listed. The Bill also clarifies that in case there are several units or compartments within the listed UCIT fund, the exemption only applies to the unit or compartment qualifying as ETF.

The exemption would become applicable on the first day of the trimester which follows the date of entry into effect of the law.

Under current Luxembourg income tax law, SPFs are subject to favorable tax treatment, which provides for a full exemption from corporate income tax and net wealth tax. SPFs are however liable to annual subscription tax.

The Bill introduces a modernization of the laws governing the SPF with the overall goal of reducing the abusive use of this vehicle. The new measures would include the increase of the minimum annual amount of subscription tax, as well as the possibility of the Luxembourg indirect tax authorities to apply increased penalties on SPFs where certain requirements are not met, which could lead in certain situations to the withdrawal of the tax status for SPFs.

The amendments would become applicable as from the date of entry into force of the law.

These newly announced tax measures provide much needed relief for both individuals and companies. We particularly welcome the alignment of the subscription tax for certain actively managed UCITS ETFs with passively managed ETFs. This will help maintain the competitiveness of the Luxembourg investment fund sector.

While most of these tax measures were already part of the 2023-2028 coalition agreement, there was one new measure that was announced during the press conference, which was not included in the Bill. It concerns a full deduction of mortgage interest on loans financing the primary residence as from 2024 (for the first year and the following year). Since this measure is not included in the Bill, it remains to be seen whether this measure would be limited in time (e.g. only applicable in 2024 and 2025), or otherwise be applicable indefinitely.

The Bill will now go through the usual legislative process and may be subject to further amendments. Please do not hesitate to contact your KPMG tax professional to discuss any questions you may have.