Luxembourg – Individuals Stand to Benefit under the New Budget Bill

Luxembourg’s Finance Minister presented a new package of tax measures benefitting both individuals and companies on 17 July.  Draft legislation (Bill 8414 or “Bill”)¹ was filed with the Luxembourg Parliament on the same day. This Bill includes in total 16 new tax measures, which are intended to boost and strengthen the competitiveness of businesses and the country, attract new talents, and provide households with much-needed financial relief.

The Bill’s measures are due to come into force as noted below. As the Bill is still undergoing parliamentary review, measures may be subject to amendment. In this newsletter, we focus on the main measures affecting individuals and their employers.

Adaptation of Personal Income Tax Brackets and Relief for Tax Class 1A

In accordance with the 2023-2028 coalition agreement of the new government,² the Bill introduces several amendments to the Luxembourg income tax law, intended to 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 times the 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.

Changes to the Participative Premium

To increase the attractiveness of working in Luxembourg, the government 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 percent on the amount of the premium. This benefit is, however, only granted if certain conditions are met.  For example, the aggregate amount of the participative premiums cannot exceed currently 5 percent of the company’s profits (or of the fiscally integrated group’s companies (hereafter ‘the Group’), if elected) for the previous year and the premium cannot exceed 25 percent of the employee’s annual remuneration. 

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

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

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

Changes to the Impatriate Regime

In 2021, the government provided a legal basis to the impatriate regime and introduced an impatriation premium which:

(i) is limited to 30 percent of the gross amount of annual remuneration (excluding any benefits in cash and/or kind) and

(ii) is benefiting from a 50-percent tax exemption.  

(For related coverage, see GMS Flash Alert 2020-507, 23 December 2020.) 

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-percent 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-percent tax exemption applies cannot exceed EUR 400,000.

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 such that the professional activity of the impatriate (i.e., for which he or she is benefiting from the regime), should represent at least 75 percent of his or her working time.

An existing condition for applying the regime provides that the number of impatriates entitled to the impatriate regime should not exceed 30 percent of the total workforce (full-time jobs) of the company in which the impatriate works. This condition is not required for companies that have been in existence for less than ten years. The new Bill proposes that this condition would be checked by including part-time employees for the calculation of the maximum number of employees eligible for the regime.

Individuals who already benefit from the current impatriate regime shall remain under such regime provided they continue to meet the conditions of the latter regime unless they expressly request of the Luxembourg tax authorities the application of the new regime as from 2025.  Such choice shall then be irrevocable and supported by an upfront review of the impatriate’s remuneration package.

New Bonus for Young Employees

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 EUR 5,000 (depending on annual remuneration), of which 75 percent would be tax free.  Several conditions would need to be fulfilled to benefit from this:

• The employee must be younger than 30 years old (determined at the beginning of the tax year);
• The employee must be in his or her 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 five years.

The benefit would cease to apply if the employee decides to change his/her employer. A Grand-Ducal decree will be published to provide additional administrative clarifications, notably how to apply the benefit when the employee would work part-time/part-year for the employer, or if the employer would be part of a fiscally integrated group.

New Tax Credit for Cross-Border Workers

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 (i.e., both the main salary and the supplementary payment for the overtime activities) may be tax exempt, but may be taxed by the taxpayer’s resident country according to certain double taxation 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 made 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 exceed 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 per individual.

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

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