Find out some of the most important measures affecting individual taxpayers following the Luxembourg tax reform for 2017
Following the announcement of the tax reform in February and further clarifications presented in April, on 26 July 2016 the Luxembourg government lodged the draft law for the tax reform before the Luxembourg parliament. Once voted in, most of the measures are expected to enter into force from 1 January 2017 onwards (with some exceptions).
The reform is comprehensive and designed to create social fairness, increase competitiveness, and strengthen employment. It entails the introduction of a significant number of new tax measures concerning both corporate and individual taxpayers in the field of direct and indirect taxes. We have highlighted below some of the most important measures affecting individual taxpayers. Measures concerning corporate taxpayers are summarised in a separate newsletter.
The following measures are included in the draft law in order to support households’ purchasing power of the middle class.
Abolishing the temporary tax for the budget balance
The 0.5% temporary tax for the budget balance would be abolished.
The global tax schedule would be revised, and additional income brackets and tax rates would be inserted. In addition, a marginal tax rate of 41% will be introduced on the portion of annual income of €150,000 or more. A 42% rate will be introduced for singles on the portion of annual income of EUR 200,004 or more (for taxpayers in tax class 1).
Option for individual taxation of couples and registered partners
Married couples and registered partners could opt to be taxed individually.
Married couples must therefore file a joint non-revocable application at the latest by the 31 December of the tax year preceding the tax year concerned, unless they are getting married during that tax year or become resident taxpayers during the tax year concerned; in the latter, the joint taxation application should be filed by the 31 December of the tax year concerned.
The above applies also to registered partners who file a joint non-revocable application at the latest by the 31 March of the tax year following the tax year concerned.
For couples with children requesting to file separately, most tax deductions applicable to the household should then, in principle, be equally split between spouses/registered partners. The tax class applicable in these circumstances would be the tax class 1, however couples may opt for a different allocation of the taxable income.
In principle, the extra-professional abatement would amount to € 2,250 per spouse/registered partner filing separately.
Final withholding tax on interest
The final withholding tax on interest paid out to Luxembourg resident individuals (RELIBI) would be increased from 10% to 20%. The tax is only due if the annual amount of interest exceeds €250 per individual and per paying agent.
The face value of lunch vouchers would be increased from €8.40 to €10.80.
Family related tax measures
The tax credit granted to single parents would increase to €1,500 if the yearly adjusted taxable income is below €35,000, but remain at €750 if the yearly income exceeds €105,000. The tax credit would only be reduced if the annual child alimonies exceed €2,208 (instead of €1,920). This tax credit is available on a prorated basis (for each full taxation month) in case the taxpayer is not subject to the Luxembourg individual income tax during the full tax year concerned.
The deductible amount of education allowance for children not part of the household would increase from €3,480 to €4,020. This allowance is not granted when both parents are living with their child in the same household.
There would be an increase in the maximum tax amount deductible for combined childcare costs, housekeeping costs, and home assistance for the disabled, from €3,600 to €5,400 per year.
Increase of further tax credits/deductions
Premiums for voluntary pension schemes (3rd pillar) would be deductible up to €3,200 per year irrespective of the subscriber’s age.
The tax credit for salaried individuals, pensioners and independent workers would vary between €300 to €600 depending on the level of income of the taxpayer. For taxpayers with an annual income exceeding €80,000, the tax credit will be abolished.
The ceiling for the tax deduction in relation to the payment of debit interest (i.e. consumer loans, credit cards…) is merged with the ceiling for the tax deduction on insurance premiums. Therefore the combined annual ceiling applicable is €672 per member of the household.
Taxation of non-residents
The taxation of married non-resident taxpayers would be substantially amended. Non-resident couples would be taxed as single taxpayers in tax class 1 during the civil year, unless the spouses are taxable in Luxembourg on at least 90% of their yearly worldwide income from Luxembourg source, in which case, they can opt to be jointly taxed (in tax class 2) at the tax rate applicable on their household’s worldwide income. At least, one of the spouses should meet the 90% threshold. This measure may have a cash flow impact for the couples.
The joint taxation option may apply after the year-end concerned to registered partners (under further conditions).
Furthering the purchase of houses
The maximum tax amount deductible for contributions qualifying for home savings plans would be increased from €672 to €1,344 for individuals aged between 18 to 40 years. In the other cases, the initial ceiling of €672 would remain applicable per member of the household.
In addition, the amount of mortgage interest deduction related to the main residence will be increased as follows:
The rental income of a property occupied by the owner would be deemed equal to €0.
In order to expand the supply of affordable housing, net rental income derived from approved bodies (covered by the modified law of 25 February 1979 concerning the housing support) can benefit from a 50% exemption.
To support sustainable individual transportation, zero-emission vehicles purchased by a private individual would benefit from a tax allowance varying from €300 to €5,000. This tax allowance is not applicable to company cars/cycles.
The monthly valuation of the salaried benefit in kind for company car would be amended by Grand-Duchy Regulation and may vary from 0.5% to 1.8% (of the price of the vehicle purchased at new) depending on the ecological impact of the vehicle. The above is applicable to new vehicles, while the 1.5% lump sum rate would remain applicable to vehicles covered by a contract ongoing on 1 January 2017.
Pensions to orphans
Pensions paid out to orphans (i.e. the legitimate(-d) children and assimilated) further to the death of one of the parents would be fully tax exempt.
Transmission of individual business
In order to facilitate the transmission of an individual business to the next family generation or to employees, a tax deferral should be introduced for the capital gain realised on real estate assets (land and buildings) held by the enterprise (under certain conditions).
Self-employed persons shall no longer be exempt from keeping accounting records. Like other entrepreneurs, self-employed persons should be required to keep accounting records, if the total annual turnover (including VAT exempt turnover) exceeds €100,000. Only agricultural or forestry businesses may still be exempt from keeping accounting records and may still apply cash basis accounting.
Taxpayers still can benefit from a tax amnesty by filing a corrective income tax return between until 31 December 2017 and by paying the amount of tax due (including an increase of the tax due of 10%, for a regularization in 2016, or 20% in 2017) within one month following the receipt of the revised tax assessment.
Secondary VAT liability for directors
The directors, liquidators, and trustees should be regarded as jointly and personally liable for the VAT payment of the taxable persons they administrate or manage. Therefore, the head of the Luxembourg VAT authorities should be entitled to issue a notice of secondary liability (“décision d’appel en garantie”).
Several measures are expected to be introduced in direct and indirect tax law in order to better fight tax fraud and money laundering. The purpose of the reform is notably to distinguish between three types of tax fraud: “simple” tax fraud, “aggravated” tax fraud, and tax evasion (“escroquerie fiscale”). Thus, the draft law introduces a new concept of “aggravated” tax fraud for direct and indirect tax purposes which would be considered a criminal offence.
Furthermore, the money laundering infraction would be extended to cases of “aggravated” tax fraud and tax evasion.
It is noteworthy that the undue reimbursement of VAT may also be sanctioned by the Luxembourg VAT authorities from 2017 onwards.
Among the various other proposed measures, one should note that the filing of a deliberately incomplete or incorrect direct tax return and the non-filing of direct tax returns should be subject to an administrative fine. The fine depends on the amount of the understated tax (or unduly reimbursed tax) and should range between 5% and 25% of that amount.
The draft law further provides that penalties that can be imposed in case of late filing of direct tax returns would be increased to a maximum amount of €25,000.
To enhance VAT compliance, the amount of certain administrative penalties shall be significantly increased beginning 2017.
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 of the particular situation.