Luxembourg Tax News - Issue 2014-03

Luxembourg Tax News - Issue 2014-03

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New tax circular on impatriate workers

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:

  • Employees usually working abroad, assigned by a company located outside of Luxembourg to perform an employment activity in a Luxembourg company, member of the same international group; and
  • Employees directly hired abroad by a Luxembourg company, or a company located in the European Economic Area to perform an employment activity in the company.

The following conditions should be met at the level of the impatriate:

  • He must fulfill the criteria of a Luxembourg resident;
  • He must neither have been a Luxembourg tax resident nor have been living less than 150 km from the Luxembourg border, nor have been subject to personal income tax on professional income during the 5 years preceding the starting date of his/her professional activities in Luxembourg.

The following conditions should be met at the level of the company:

  • The company must employ, or commit to employ in the mid-run at least 20 employees working full-time.

 

Application of the regime

 

Conditions relating to the employee in case of assignment

  • The assigned employee should have been employed in the international group for 5 years at least, or have gained a 5 years’ professional specialized experience in a similar activity;
  • A working relationship must exist between the home company and the employee during the period of assignment;
  • The assignment must foresee a guarantee for the return of the employee in the home company;
  • An assignment contract should be signed between the home company and the Luxembourg company.

 

Conditions relating to the employee in case of recruitment

  • The employee must have acquired an in-depth specialization in a sector or a profession suffering recruitment difficulties in Luxembourg.

 

Conditions relating to the employer

  • The number of impatriate workers should be limited to 30% of the total number of employees (working full-time) of the company, except for companies which exist for less than 10 years.

 

Conditions relating to the new dependent employment in Luxembourg

  • The activity performed by the impatriate worker should be his/her main activity;
  • The annual fixed remuneration (excluding benefits in kind and in cash) of the employee should at least amount to EUR 50,000 (gross);
  • The impatriate worker should not replace any employee not covered by the Circular;
  • The know-how and the specialized knowledge of the impatriate worker should benefit the local employees.

 

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:

  • Removal expenses in respect of the domicile transfer to Luxembourg;
  • Furnishing and housing equipment cost;
  • Special travel costs (e.g. birth, wedding, death of a family member);
  • Repatriation expenses (back to home country).

 

Recurring relocation expenses in case of crossborder domicile transfer: Luxembourg relocation expenses

  • Housing expenses in Luxembourg, provided that the employee maintains his/her former habitual home in his/her home country (e.g. rent, utilities, property tax, …). If the former habitual home of the employee is not maintained in the home country, then the eligible expenses will be limited to the housing costs difference between the home country and Luxembourg;
  • Yearly travel expenses between Luxembourg and the home country (for the employee, spouse or partner, and the children of the employee’s household);
  • Tax equalization 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.

 

School fees

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.

 

Procedure

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.

 

Conclusion

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

 

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