On 27 January 2014, the Luxembourg Tax Authorities published a new circular (L.I.R. n° 95/2) on the tax regime applicable to impatriate workers ('the Circular').
The scope of the Circular has now been extended and the tax regime may now apply to impatriate workers in Luxembourg, who were either hired abroad by a Luxembourg company, or by a foreign company situated in the European Economic Area.
This Circular applies retroactively as from 1 January 2014 and replaces circular L.I.R. n° 95/2 of 21 May 2013 (newsletter issue 2013-06). Specific tax provisions will apply in Luxembourg to impatriate workers relocating to Luxembourg as of 1 January 2014. These provisions aim at exempting certain costs and expenses in relation to the workers’ impatriation to Luxembourg.
Scope of the Circular
The aim of the Circular is to attract foreign workers to Luxembourg to respond to a need for skill and labor.
As for the persons covered, the Circular applies to:
The following conditions should be met at the level of the impatriate:
The following conditions should be met at the level of the company:
Application of the regime
Conditions relating to the employee in case of assignment
Conditions relating to the employee in case of recruitment
Conditions relating to the employer
Conditions relating to the new dependent employment in Luxembourg
Application of the exemption
Assignment costs typically represent a heavy financial burden to employers. Thus, the principle of the Circular is the exemption of the part of relocation expenses exceeding those, which would have been incurred had the worker remained in his/her home country. The Circular stipulates that the costs should remain reasonable.
Non recurring relocation expenses:
Recurring relocation expenses in case of crossborder domicile transfer: Luxembourg relocation expenses
In any case, these recurring expenses can neither exceed EUR 50,000 per year (or EUR 80,000 per year if the employee shares a house with his/her spouse or partner), nor 30% of the impatriate worker's total annual fixed remuneration.
Are also tax exempt, the school fees borne by the employer for the children of the impatriate worker, of his/her spouse or partner, if the children move with their parent(s) and have to change school.
Lump sum indemnity for other recurring expenses
This lump sum covers the cost of living adjustment (COLA) and other relocation-related expenses not covered anywhere else by the Circular. The lump sum is fixed at 8% of the employee's fixed monthly remuneration, capped at EUR 1,500. The lump sum can be doubled (i.e. 16% and capped to EUR 3,000) to the extent the employee shares a common residence or domicile with his/her spouse or partner, and the latter does not perform any professional activity.
Tax treatment of the expenses and charges
At the level of the Luxembourg employer, the aforementioned expenses are considered tax deductible. Expenses borne by the employer for impatriate workers are in the limit of the present Circular not considered as 'employment income' according to Article 95 of the Luxembourg Income Tax Law (LITL).
Any other allowances and benefits in kind, which are not covered by the Circular, remain subject to Luxembourg common tax rules (Article 104 LITL and related tax circulars).
Duration of the tax treatment
The benefit of the specific tax provisions for impatriate workers is granted for the duration of his/her impatriation. Ultimately, it applies until the end of the 5th tax year following the impatriate’s starting date in Luxembourg.
At the beginning of each year (i.e. by 31 January at the latest), the employer is required to provide the Tax Authorities with a nominative list of employees benefiting from the regime.
Moreover, the circular stipulates that in case the foreign employer has no wage tax withholding obligations in Luxembourg, and did not elect to levy wage tax in Luxembourg on a voluntary basis, then the concerned impatriate workers will have to file an individual income tax return in order to benefit from this regime.
Entry into force
The provisions of the Circular will apply to impatriate workers relocating to Luxembourg as from 1 January 2014.
The new Circular offers great opportunities to increase international assignments, and designs new assignment policies for international groups. In this regard, KPMG provides all the necessary assistance you may require to utilize the provisions of the Circular in the most efficient manner.
For further information, please do not hesitate to contact us.
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination