Luxembourg Tax Alert 2017-18 | KPMG | LU

Luxembourg Tax Alert 2017-18

Luxembourg Tax Alert 2017-18

Update to Luxembourg’s 2018 tax reform

1000

Contact

Associate Partner

KPMG in Luxembourg

Contact

Related content

Update to Luxembourg’s 2018 tax reform

On 3 October 2017 new guidance was released by the Luxembourg tax authorities regarding the option for joint taxation, full individual taxation, or individual taxation with reallocation of income for resident and non-resident taxpayers. This newsletter contains details on the most relevant aspects of this new guidance.


Tax card 2018

As of 3 October 2017, the Luxembourg tax authorities are sending letters to all married non-resident taxpayers who receive employment income or pension in Luxembourg. The purpose of these letters is to enable the taxpayer:

  • to apply for one of the three options of taxation; and
  • to propose a personalised tax rate that will be included in their 2018 tax cards, based on the information at the disposal of the tax authorities.


The three options are as follows:

  • Fully individual taxation: each income is allocated to each spouse individually and deductions are equally split between both spouses.
  • Individual taxation with reallocation of income: the total income of the household is, by default, allocated equally between spouses without taking into account the level of their individual income. A different allocation can be requested by the taxpayers.
  • Joint taxation: the total income of the household is subject to the favourable tax rate of tax class 2.


Example of impact of the options:

  • Taxpayer A and spouse (Taxpayer B) residing in France
  • Taxpayer A’s income: €50,000 (taxable in Luxembourg)
  • Taxpayer B’s income: €25,000 (taxable in Luxembourg)
  • Extra-professional abatement: €4,500
  • Total taxable income: €70,500
  • Exempted income from taxpayer B: €15,000
  • Worldwide income of the household: €85,500

Assumptions Tax class Taxpayer A Spouse Total tax
Joint taxation 2 €5,220.53 €5,220.53 €10,441.05
Individual taxation without reallocation 1 €8,805.00 €2,814.18 €11,691.18
Individual taxation with reallocation (50/50) 1 €5,220.53 €5,220.53 €10,441.05
Individual taxation with reallocation (75/25) 1 €12,039.64 €854.81 €12,894.45

 If no tax rate is provided, or the personalised tax rate is incorrect, an application should be submitted to the tax office. Such applications can be submitted online, or in writing. The advantage of submitting online is that it will be processed faster. Ultimately, the application should be submitted before 31 March 2019. However, to have the correct tax class stated on the tax card and thus implemented through the payroll, the application should be submitted before 31 October 2017.


Taxation of non-residents of Luxembourg
By default, non-resident taxpayers will be taxed as single taxpayers in tax class 1 during the tax year (i.e. no more under the more favourable tax classes 1A or 2). However, non-resident taxpayers can still qualify for tax class 2 if the part of their worldwide household income that is taxable in Luxembourg meets certain thresholds:

  • 90% threshold: If one spouse is taxable in Luxembourg on at least 90% of his/her annual worldwide income, both spouses can still benefit from tax class 2.

Example
— Taxpayer A’s taxable income in Luxembourg: €50,000
— Spouse’s taxable income outside Luxembourg: €25,000
— Worldwide household taxable income: €75,000
— Luxembourg taxable income of taxpayer A is 100% of worldwide income. Taxpayer A and spouse qualify for tax class 2.

For this 90% threshold, the first 50 days worked outside Luxembourg are deemed to be taxable in Luxembourg. For the calculation of the non-Luxembourg workdays, those first 50 days are exempted in Luxembourg.

Example
— Taxpayer A’s total gross salaried income: €50,000. He/she worked 60 days outside Luxembourg, out of 200 total workdays. As a result, the Luxembourg taxable income for the 90% threshold valuation is €47,500 for Taxpayer A.
— Taxpayer A’s final taxable income in Luxembourg: €35,000
— Spouse does not generate income.
— Worldwide household taxable income: €50,000
— Luxembourg taxable income is thus 95% of worldwide income.

The 90% threshold is met. This is due to the fact that Taxpayer A can include the 50 first workdays outside Luxembourg in the computation as taxable income from Luxembourg. For the 90% threshold, both spouses still qualify for tax class 2 since the ten days remaining performed outside Luxembourg are lower than 10% of the worldwide income. Thus the 90% threshold is still be applicable in the case at hand.

Alternative threshold for Belgian residents: taxpayers may be granted tax class 2 to the extent that more than 50% of their household’s professional income is taxable in Luxembourg.

  • €13,000 threshold : if none of the thresholds above are met, tax class 2 would still be available if the annual taxable income not subject to Luxembourg taxation is less than €13,000.

    Example
    — Taxpayer A’s taxable income is €25,000. He/she worked 75 days outside Luxembourg out of 200 total workdays. As a result, his/her Luxembourg taxable income for the 90% threshold valuation is €21,875.
    — The spouse’s taxable income in France: €50,000
    — Worldwide household taxable income: €75,000
    — Luxembourg taxable income is thus 87.50% of Taxpayer A’s worldwide income.

    The 90% threshold is not met and the 50 days threshold is not met. However, because the taxable income that is not subject to Luxembourg taxation (€9,375) is less than €13,000, both spouses still qualify for tax class 2.

If the taxpayer is eligible for tax class 2 based on the above, and this is to be included in the 2018 tax card, an application should be submitted to the tax office before 31 October 2017. If no application is submitted, the taxpayer can still benefit from tax class 2 through the filing of a Luxembourg tax return. The ultimate filing deadline is 31 March 2019.


KPMG comment
The additional threshold of “50 days outside Luxembourg” is good news, as it will likely allow more cross-border workers to maintain the benefit of tax class 2. However, applying for tax class 2 also means that the household’s worldwide income will need to be declared in Luxembourg and will be taken into account to calculate the effective tax rate applicable to the Luxembourg taxable income, i.e. possibly increase the household’s total tax liability. 

Special attention should be paid to the strict deadlines fixed with respect to the taxation of the 2018 income:

  • 31 October 2017: to ensure the right tax class in the 2018 tax card
  • 31 March 2019: to claim a modification of the tax class/taxation option through the tax return

Any tax advice in this communication is not intended or written by KPMG to be used, and cannot be used, by a client or any other person or entity for the purpose of (i) avoiding penalties that may be imposed on any taxpayer or (ii) promoting, marketing, or recommending to another party any matters addressed herein.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 endeavour 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.

Connect with us

 

Request for proposal

 

Submit