Luxembourg - Income Tax

Luxembourg - Income Tax

Taxation of international executives

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Tax returns and compliance

When are tax returns due? That is, what is the tax return due date?

31 March of the following year.

What is the tax year-end?

31 December.

What are the compliance requirements for tax returns in Luxembourg?

If the resident taxpayer’s taxable income includes only one salary subject to the Luxembourg withholding tax on wages and that does not exceed EUR100,000, the taxpayer does not to have to file a tax return. In respect of non-resident taxpayers, the same rule applies to taxpayers who have worked at least 9 months on a continued basis in Luxembourg during the tax year, and derived salary subject to the Luxembourg withholding tax on wages and that does not exceed EUR100,000. Other thresholds may apply depending on the situation.

The Luxembourg government has introduced a temporary tax amnesty regime in order to allow the regularization of unreported assets and income which have not been previously disclosed on Luxembourg tax returns. This regime is temporary and valid from 1 January 2016 for a period of two years, i.e. up to 31 December 2017.

The regime requires the filing of an adjusted income tax return which reports the undeclared income (and related assets) on which taxes had not been paid. The tax authorities have 10 years from the date of the taxable event to carry out an investigation in cases of non-reporting, incomplete or inaccurate tax returns in relation to direct taxes.

The consequences of the regulation are the following:

The taxpayer must pay the full amount of unpaid taxes.

The tax surcharge will apply as follows:

  • For the adjusted income tax return filed between 1 January 2016 and 31 December 2016, the surcharge is 10% of the total amount of unpaid taxes.
  • For the one filed between 1 January 2017 and 31 December 2017, the surcharge is 20% of the total amount of unpaid taxes.
  • The surcharge for non-filing of the income tax return, or for late filing of the income tax return (under normal rules), do not apply.
  • Other penalties (f.g. penalties for late filing may be applied).

Tax rates

What are the current income tax rates for residents and non-residents in Luxembourg?

The tax rates applicable for 2016 are as follows.

Residents and non-residents

Income tax table for 2015

Taxable income bracket   Tax rate on income in bracket
From EUR To EUR Percent
0 11,265
0
11,266 13,173 8
13,174 15,081 10
15,082 16,989 12
16,990 18,897 14
18,898 20,805 16
20,806 22,713 18
22,714 24,621 20
24,622 26,529 22
26,530 28,437 24
28,438 30,345 26
30,346 32,253 28
32,254 34,161 30
34,162 36,069 32
36,070 37,977 34
37,978 39,885 36
39,886 41,793 38
41,794 100,000 39
Over 100,000   40

A fixed monthly cash bonus of EUR 76.88 is granted for each child falling within the scope of the Luxembourg family allowances regime, irrespective of the taxable income of the parents. The child bonus is deducted from the tax liability up to the amount of tax due through the tax return for taxpayers who do not receive family allowances (expatriates not subject to Luxembourg social security for instance).

Taxpayers are divided into three classes.A fixed monthly cash bonus of EUR76.88 is granted for each child falling within the scope of the Luxembourg family allowances regime, irrespective of the taxable income of the parents. The child bonus is deducted from the tax liability up to the amount of tax due through the tax return for taxpayers who do not receive family allowances (expatriates not subject to Luxembourg social security for instance).

Class 2 - married couples who are filing jointly, including couples in a same-sex marriage;

  • persons who became widowed in the 3 years preceding the tax year; and
  • persons who separated or divorced in the 3 years preceding the tax year (as long as they did not apply for this provision within the last 5 years).

Taxpayers in this category apply the tax rates to one half their incomes and then multiply the liability by two (that is splitting system).

Class 1a - The following taxpayers fall under class 1a, as long as they do not fall under class 2:

  • taxpayers separated or divorced and aged 65 or over;
  • single parents; and
  • widow(er)s.

A special reduction is allowed for Class 1a taxpayers with income less than EUR45,060.

Class 1 Taxpayers (singles) who do not belong to either Class 1a or Class 2.

Taxpayers living in a registered partnership can, upon request, be treated as a married couple through the filing of an annual personal tax return, as long as the partnership vs. the marriage has been valid during the whole tax year. In this case, partners will file jointly, and will be granted tax Class 2.

A surcharge amounting to:

  • 7 percent (of the computed income tax liability) for taxable income not exceeding EUR150,000 in tax classes 1 and 1a or EUR300,000 in tax class 2
  • 9 percent (of the computed income tax liability) for taxable income exceeding EUR150,000 in tax classes 1 and 1a or EUR300,000 in tax class 2

is levied as a contribution to the employment fund.

An additional temporary tax of 0.5% applies to the taxable basis reduced by an amount equivalent to 1x the minimum social wage for non-qualified workers, i.e. €1,922.96 (index 775.17 at 1 January 2016), or 3/4 of the minimum monthly social wage, depending on the type of taxable income for taxpayers subject to the Luxembourg social security system.

Residence rules

For the purposes of taxation, how is an individual defined as a resident of Luxembourg?

An individual may be considered a Luxembourg resident for tax purposes to the extent the following circumstances are met, subject to double taxation treaty provisions.

An individual is considered a resident of Luxembourg if his domicile or customary place of abode is in Luxembourg. A person's domicile is the place where he occupies a home under circumstances that indicate he will retain and use it. A customary place of abode is deemed to exist if an individual has been present in Luxembourg for a period of at least 6 months.

  • This is not restricted to 6 months in the calendar year. If an individual arrives on 1 October in year N and is still staying in the country on 2 April in year N + 1, the 6-month' stay will be deemed met. In such case, the individual is deemed to be a resident taxpayer in Luxembourg retrospectively to 1 October in year N.

Is there, a de minimus number of days rule when it comes to residency start and end date? For example, a taxpayer can’t come back to the host country for more than 10 days after their assignment is over and they repatriate.

No, there is no de minimus number of days in Luxembourg. It is essentially based on facts and circumstances.

What if the assignee enters the country before their assignment begins?

The assignee is considered as a Luxembourg tax resident as of the first day he/she arrives in Luxembourg.

Termination of residence

Are there any tax compliance requirements when leaving Luxembourg?

Upon termination of Luxembourg residence (domicile), the taxpayer leaving Luxembourg may have to file an income tax return for income received during the tax year until the date of departure, which is confirmed by the taxpayer’s deregistration at the commune of residence. Compulsory wage tax withholding may be considered as final tax depending on the circumstances. This should be assessed on a case-by-case basis.

What if the assignee comes back for a trip after residency has terminated?

The assignee will not be considered as a Luxembourg tax resident.

Communication between immigration and taxation authorities

Do the immigration authorities in Luxembourg provide information to the local taxation authorities regarding when a person enters or leaves Luxembourg?

Indeed the civil file of a taxpayer is accessible at all levels of the public authorities..

Filing requirements

Will an assignee have a filing requirement in the host country after they leave the country and repatriate?

If the assignee receives, after repatriation, an income which relates to a professional activity performed in Luxembourg (such as cash bonus), this income is taxable in Luxembourg.

Economic employer approach

Do the taxation authorities in Luxembourg adopt the economic employer approach to interpreting Article 15 of the OECD treaty? If no, are the taxation authorities in Luxembourg considering the adoption of this interpretation of economic employer in the future?1

The Luxembourg tax authorities adopt the economic employer approach. In order to keep his/her economic employer in his/her home country (such as the United Kingdom), the individual may, among other criteria, not be integrated in the organization chart of the host employer’s company (Luxembourg). Among other requirements, the risk for the work performed by the individual has to be supported by the home employer (such as the United Kingdom). 

De minimus number of days

Are there a de minimus number of days before the local taxation authorities will apply the economic employer approach? If yes, what is the de minimus number of days? 

There is no de minimus number of days in Luxembourg. 

Depending on the double taxation treaty provisions concluded by Luxembourg and the home country, the salaried income received by a resident of one contracting country may remain taxable in the country of residence if: 

  • the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days during the calendar/fiscal year concerned, or the recipient is present in the other State for a period or periods not exceeding the aggregate 183 days in any twelve month period commencing or ending in the fiscal year concerned, and
  • the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State, and
  • the remuneration is not borne by a permanent establishment which the employer has in the other State. As far as conditions 2 and 3 are concerned, Luxembourg tax authorities will look at the economic employer.
As far as conditions 2 and 3 are concerned, Luxembourg tax authorities will look at the economic employer.

Types of taxable compensation

What categories are subject to income tax in general situations?

As a rule all types of remuneration and benefits received by an employee for services rendered constitute taxable income regardless of where paid, directly or indirectly. Typical items of an expatriate compensation package are fully taxable unless otherwise indicated below:

  • base salary
  • reimbursements of foreign and/or home country taxes
  • school tuition reimbursements
  • cost-of-living allowances
  • expatriation premiums for working in Luxembourg
  • housing allowances are fully taxable
    1. However, where an employer puts accommodation at the disposal of an employee (whether owned or rented by the employer), the taxable value of the accommodation to the employee may be assessed on a flat-rate basis.
  • benefits-in-kind generally form part of taxable compensation
    1. Where a company car is provided, the deemed taxable value of the employee’s private use of the vehicle may be assessed on a flat-rate basis.
  • granting cash interests subsidies, or a loan to an employee interest-free or at a reduced interest rate, are considered earned income from employment, and are taxable either at nominal cash value, or at the difference between the interest rate charged and 1.5 percent in 2015
    1. Exemptions of apply on this taxable deemed income of EUR3,000 per year for a single person, or EUR6,000 (for couples filing jointly and single parents’ households) where the loan is in connection with the employee’s principal private residence, or EUR500 per year (single), EUR1,000 (for couples filing jointly and single parents) if the loan was made for other purposes.

A deferred compensation scheme may result in reduced Luxembourg tax if the deferred payment is paid in a year after departure from Luxembourg. As the bonus is likely to constitute the single income from Luxembourg source during that year, it may be subject to individual income tax at the lower progressive income tax rates.

Tax-exempt income

Are there any areas of income that are exempt from taxation in Luxembourg? If so, please provide a general definition of these areas.

The following categories of income are exempt from Luxembourg tax:

  • A 50% exemption is available for dividends paid by a company qualifying for the EU Parent-Subsidiary Directive, or a company resident in a country with which Luxembourg has concluded a tax treaty, provided that the company is subject to a tax comparable to the Luxembourg corporate income tax
  • A 50 percent exemption may apply on certain annuity payments (subject to conditions)
  • Capital paid out in respect of a life insurance contract (subject to conditions)
  • The first EUR1,500 of investment income
    1. The exemption covers all income from investments such as dividends, interests not been subject to the 10 percent final withholding tax on credit interests paid by resident paying agents to Luxembourg resident individuals. The amount is doubled for couples filing jointly.
  • Interests paid out from home savings and loan contracts (building societies) approved in Luxembourg or another EU Member State, or in another EEA State situated outside the EU (subject to further conditions).
  • State birth allowances and child benefits.

In addition, social security benefits may not be taxable in Luxembourg to the extent that they are granted by a public social security institution, and do not fall within the following categories of income from a salaried occupation in the form of cash remuneration. However,the following benefits are tax exempted:

  • Healthcare in-kind benefits in case of sickness or maternity,
  • Accidents at work, or professional diseases.

Gift and inheritances are not subject to individual income tax in the hands of the beneficiaries, but are subject to the inheritance and gift tax provisions.

Dividend income

Dividends received from an EU resident company or company resident in a State with which Luxembourg has concluded a double taxation treaty provided that the company is subject to a tax comparable to the Luxembourg corporate income tax are 50 percent exempted.

Certain annuity payments

Life annuities from a lifelong usufruct may be 50 percent exempted (under conditions).

Life insurance

See section discussing special expenses.

Investment income

Dividends and interest income are taxable in Luxembourg.

Child benefits

Luxembourg legislation provides child benefits (limited based on children's age) to taxpayers who contribute intothe Luxembourg social security system.

Cash sickness benefits

The sickness indemnity aims to compensate the loss of income due to the fact that the insured person temporarily is not able to work. 

The insured person is entitled to the sickness indemnity as of the first day of non-exercise of the professional activity subject to insurance.

The remuneration is paid by the employer as of the first day of work disability until the end of the month during which the 77th day of incapacity for work is located. At the end of this period, the sickness indemnity is paid by the health fund with a maximum of 52 weeks over a reference period of 104 weeks. 

Cash maternity benefits

Maternity leave

Maternity leave starts eight weeks before the anticipated date of birth and ends eight weeks after the effective date of birth.

The leave after the date of birth will be extended to a total of 12 weeks in case of:

  • pre-mature birth 
  • multiple births or 
  • if the mother is breast feeding. 

Parental leave

All employees who are legally and continuously occupied at a workplace in Luxembourg, and who have been affiliated to the Luxembourg social security for at least 12 months at the birth can be entitled to a parental leave.

If the two parents are entitled to the parental leave, the first parent has to take the parental leave immediately after the maternity leave, and the second parent can take the parental leave anytime until the fifth birthday of the child. If only one parent is entitled to parental leave, he/she can take the leave anytime until the fifth birthday of the child.

The parental leave can be either full time for six months, or part time for a year (the latter being subject to employer’s approval).

Cash benefits following work accident or illness

A work accident is defined as an accident which occurs by reason of, or on the occasion of work.

At the time of the accident, a link must exist between the employment and the activity having caused the injury. The activity must have been performed in the interest of the company by which the insured person is employed, and the latter must have been placed under subordination of his/her employer at the moment of the accident.

An accident while travelling to works is defined as an accident which occurs on the normal and direct way to go from home to the place of work and back.

Expatriate concessions

Are there any concessions made for expatriates in Luxembourg?

The scope of the circular on the tax regime applicable to impatriate workers applies 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.

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.

Persons covered

  • 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 (i.e. companies financially linked and incorporated in at least two other countries).
  • Employees hired abroad by a Luxembourg company or by a company located in the European Economic Area to work in Luxembourg for the company.

Tax regime

This specific tax regime grants, tax exemption of the part of relocation expenses (recurring and non-recurring) that exceed those that would have applied had the employee remained in his home country.

  • Non recurring expenses: removal and repatriation expenses, housing (furniture), special travel costs (e.g. birth, wedding, death of a family member).
  • Repetitive expenses: housing costs (e.g. rent, utilities, heating, etc.), yearly home travel, tax equalization are tax exempt up to the lower of EUR 50,000 (EUR 80,000 when the employee shares a house with his spouse or partner) per year, or 30% of the impatriate worker's total annual fix remuneration.,
  • School fees are tax exempt without any cap.
  • Tax free lump sum indemnity for other repetitive expenses (e.g. cost of living adjustment): fixed at 8 percent of the employee’s fixed monthly remuneration, capped at EUR1,500 per month. Lump sum can be doubled (i.e. 16 percent capped at EUR3,000 per month) where the employee shares housing with his spouse or partner who does not perform any professional activity.

Application

Specific tax regime applies to impatriate workers relocating to Luxembourg if different conditions related to the employee, the Luxembourg employer and the salaried employment in Luxembourg are fulfilled.

Procedure

At the beginning of each year (by 31 January at the latest), the employer is required to provide the Tax Authorities with a nominative list of employees covered by this measure.

If the non-resident employer does not have any legal requirements to withheld taxes and to grant tax credits on salary and does not do it on a voluntary basis, the employee will have to file a Luxembourg individual income tax return to the Luxembourg tax authorities in order to benefit from this regime.

Duration of the specific tax regime

The benefit of the specific tax provisions for impatriate workers is granted for the duration of his impatriation. It applies until the end of the 5th tax year following the impatriate’s starting date in Luxembourg.

Salary earned from working abroad

Is salary earned from working abroad taxed in Luxembourg? If so, how?

The taxable salary of residents cannot be reduced by allocating income to foreign business trips, except where exclusions are available under double taxation treaties.

The principle of a split salary structure consists of diversifying the geographical income sources and location of professional activities in order to apportion the right of taxation of the global income between several countries.

Two possibilities regarding a split salary should be considered.

  • There is no double taxation treaty between Luxembourg and the country concerned so that the foreign income will be subject to Luxembourg taxes with a potential tax credit for foreign taxes suffered. As a result the individual is not likely to benefit from any tax saving, as the total tax burden suffered amounts to at least the Luxembourg taxes on his/her worldwide income.
  • A double taxation treaty is in force between Luxembourg and the country concerned, which provides for an exemption of the employment income from Luxembourg taxes. However, the income is taken into consideration for the determination of the global tax rate applicable to the household’s total taxable income in Luxembourg.

Taxation of investment income and capital gains

Are investment income and capital gains taxed in Luxembourg? If so, how?

Interest

A 10 percent final withholding tax is levied on interest paid by resident paying agents  to resident individuals in Luxembourg, including interest on bank deposits, government bonds, and profit-sharing bonds as long as the interests fall in the Relibi law. The withholding tax constitutes the final tax and is not reported in the individual’s annual tax return (if part of his private wealth). 

For interest, as long as they fall in the Relibi law, paid or credited by foreign paying agents located inside the EU or another covered State situated outside the EU), the Luxembourg resident taxpayer may opt for the 10 percent withholding tax via a specific tax form, and simultaneously pays the 10 percent withholding tax. Deadline is 31 March of the following tax year for both the filing of the tax return and the payment of the 10 percent tax. This tax is final and the interest is not reported in the individual’s annual tax return. If the option is not exercised, the individual has to report the interest income in his/her annual tax return, and the interest will be subject to the upper progressive income tax rates.

Interests paid by a Luxembourg paying agent to a Luxembourg resident are exempt from the 10 percent withholding tax if the amount (paid once a year) does not exceed EUR250. The exemption applies to each individual bank account holder. 

Capital gains on investments

Capital gains on the sale of private assets for six months or less (speculative gain) are taxed as ordinary income at the normal tax rates.

Capital gains held for more than six months are exempt from income tax. 

However, capital gains on the sale of significant shareholdings held more than six months are taxed at half the global rate. A once-off allowance of EUR50,000 (doubled for couples filing jointly) is granted to each taxpayer per 11-year period. A shareholding is significant when the transferor has owned, directly or indirectly, alone or together with his/her spouse/declared domestic partner and minor children, a shareholding of more than 10%, at any point of time during the 5 years’ period preceding the sale or redemption.

Capital gains on sale of real estate

The capital gain is equal to the difference between the sale price and the revalued acquisition cost, including related expenses. 

The capital gains on the sale of immovable property within 2 years or less are taxed as ordinary income at the normal income tax rates.

The capital gains on the sale of immovable property held during more than 2 years are taxed at half of the global tax rate.

In addition, a dependency contribution of 1.4 percent is due for individuals subject to the Luxembourg social security system on the taxable part of the gains as well as a temporary tax for the budget balance of 0.5 percent is due.

A single allowance of EUR50,000 (doubled for couples filing jointly) is granted to each taxpayer per 11-year period. An additional allowance of EUR75,000 is granted for a capital gain on sale of a property inherited in the direct line, which was the parents’ main residence. Each spouse is entitled to this additional allowance in respect of his/her own parents’ property.

Any capital gain on the sale of a taxpayer’s principal residence is exempt. 

Capital losses may be set off against capital gains incurred during the same year.

Step-up system for individuals

Latent capital gains on shares/convertible loans prior to an individual's transfer of residence to Luxembourg are not taxeable in Luxembourg. This applies to taxpayers who hold a significant participation (>10%), and applies retroactively to 2015.

Rental income

Rental income is taxed in the country where the building is located. In case the building is located in a double taxation treaty country, Luxembourg provides for a tax exemption. For Luxembourg residents, the foreign rental income is however taken into account for the determination of the global tax rate applicable to the taxable Luxembourg source income. For real estate located in a non-double taxation treaty country, Luxembourg would tax rental income and allow that taxes paid in the other country are credited against the Luxembourg individual income tax due.

Gains from stock option

Stock option plans are treated as follows:

  • In case of transferable stock options the employee is regarded as receiving a benefit in-kind at the date of grant of the options. The taxable benefit is equal to the difference between the market value of the stock options at the date of grant and the price paid by the employee for this option. A deemed market value may be calculated by the Black-Scholes method, or based on another equivalent financial method. Alternatively the market value of the option can be fixed at 17.5 percent of the value of the underlying, to the extent this valuation is based on reasonable conditions. A dedicated in-depth tax review is required for this valuation.
  • In case of non-transferable stock options, the employee is regarded as receiving a benefit in-kind only at the date of exercise of the stock option. The taxable benefit is in principle equal to the difference between the market value of the share and the exercise price. In presence of a clause of inalienability of the share (after exercise of the option), a tax reduction equal to 5 percent per year of the share value is granted (with a maximum of 20 percent). 
  • The new circular LITL n° 104/2bis issued on the 28 December 2015 states that employers have to inform the Luxembourg tax office in case a stock option and/or a share/phantom stock plan is set up in 2016. The employer must also provide the Luxembourg tax office with a list of employees who will benefit from this plan and a copy of the plan rules. 
  • The Luxembourg tax circular only refers to stock options plans. However, all share-related plans have to be reported (including share plans, warrant plans, etc.) to the Head of the tax office “Bureau RTS” at least two months prior to the setting up of the plan.

 

Non-transferable stock options

Residency status Taxable at: 
  Grant Vest Exercise
Resident N N Y
Non-resident N N Y
Other (if applicable) N/A N/A N/A

Transferable stock options

Residency status Taxable at: 
  Grant Vest Exercise
Resident Y N N
Non-resident Y N N
Other (if applicable) N/A N/A N/A

Foreign exchange gains and losses

In principle, gains relating to goods held in the private wealth are taxable according to the conditions noted earlier (see section Taxation of Capital Gains).

Principal residence proceeds

Sale proceeds relating to the sale of principle residence are in principle tax exempted.

 

Capital losses

Capital losses may only be deducted from taxable capital gains.

Personal use items

In principle, gains relating to the sale of any personal item are taxable according to the conditions noted earlier (see section Taxation of Capital Gains).

Gifts

A gift tax is levied on all assets received if the donor is a Luxembourg resident. Gifts from a non-resident are subject to gift tax only in respect of real estate located in Luxembourg. Inheritance and gift tax are based on graduated rates according to the degree of family relationship of the respective individuals.

Additional capital gains tax (CGT) issues and exceptions

Are there additional capital gains tax (CGT) issues in Luxembourg? If so, please discuss?

Not applicable in Luxembourg.

Are there capital gains tax exceptions in Luxembourg? If so, please discuss?

Pre-CGT assets

Not applicable in Luxembourg.

Deemed disposal and acquisition

Not applicable in Luxembourg.

General deductions from income

What are the general deductions from income allowed in Luxembourg?

Income related expenses

Itemized deductions or a flat-rate deduction may be made. (See also the section on social security contributions.)

Employment income related expenses are deductible. The minimum flat-rate amount is EUR540 for non-travel related expenses (incurred for an employment income unless the taxpayer can prove he had incurred higher professional expenses).

Special expenses

The following items (called special expenses), which are not related to income of a particular source, are deductible within certain conditions and limitations, from total net income.

  • Certain premiums paid for life, sickness, accident and civil liability insurance, limited to EUR672 per member of the taxpayer’s household per year (such as, spouse/partner, minor or dependent children).
  • Premiums paid to voluntary pension scheme (third pillar employer pension scheme see earlier) depending on the age of the investor. The allowance is granted for both spouses if each one takes out separate insurance. No additional deduction is possible for dependent children.
  • Contributions to approved building societies saving schemes in Luxembourg or EU companies, limited to EUR672 per member of the taxpayer’s household, per year. The corresponding credit interests are fully tax exempt (under conditions).
  • Interest expenses on loans and bank facilities limited to EUR336 per member of the taxpayer’s household, per year (and that do not relate to any income).
  • Periodic payments contractually due, such as alimony. Alimony of up to EUR24,000 paid to a former spouse is tax deductible (under certain conditions).
  • If the individual has no itemized special expenses, a standard minimum deduction of EUR480 per year is allowed which is doubled if the taxpayer is married, or lives in a legal partnership and both individuals received salaried income.

Allowances

  • A lump-sum annual deduction of EUR3,600 for a household help or for child care is granted on request (supporting documents are needed/subject to conditions).
  • An education abatement of EUR3,480 (per child) for children not forming part of the taxpayer’s household is granted on request (supporting documents are needed).
  • An extra-professional abatement of EUR4,500 is granted to couples, who are jointly taxed, where they both receive income from salaried independent occupation.

Child bonus

A child bonus in the form of a monthly cash payment of EUR76.88 per child, irrespective of the taxable income of the parents, is granted to taxpayers if the children are entitled to child benefits in Luxembourg. If the children are not entitled to child benefits in Luxembourg, the child bonus can be requested as tax relief through the assessment of the individual income tax return/reclaim in the limits of the income tax due.

Refundable tax credits:

  • tax credit for single parents: EUR750 per year
  • tax credit for employees, pensioners and self-employed workers: EUR300 per year.

Double taxation treaties

Luxembourg has a broad network of income tax treaties (double taxation treaties), some of which cover wealth taxes. Beneficiaries of income tax treaties may in general be exempt from Luxembourg individual income tax on certain income, but such exempt income must nevertheless be reported on the individual income tax return and it is used to increase the rate of tax applied to other taxable income (that is, exemption with progression). Income exempt under Luxembourg double taxation treaties may include salaries paid abroad for services rendered there to foreign companies, income from the rental of foreign real estate, and foreign business income when the taxation right goes to the other contracting state. Foreign tax credits are often available under a double taxation treaty for taxes paid at the source on foreign dividends, interest, and royalties.

When a Luxembourg resident receives income from a country where no double taxation treaty exists, the domestic law grants either a tax credit or a tax deduction for the effective foreign taxes paid on the foreign-sourced income derived from that non double taxation treaty country.

Tax reimbursement methods

What are the tax reimbursement methods generally used by employers in Luxembourg?

May be the case in Luxembourg, but this is less popular considering the higher costs involved at the employer’s level.

Calculation of estimates/prepayments/withholding

How are estimates/prepayments/withholding of tax handled in Luxembourg? For example, Pay-As-You-Earn (PAYE), Pay-As-You-Go (PAYG), and so on.

The tax prepayments and the tax withheld at the source are provisional and can be credited against the final income tax due at the individual’s level. In principle, an overpayment of tax may be refunded. If an expatriate establishes his/her residence in Luxembourg during the course of the year, he/she will generally be required to provide the Luxembourg tax authorities with evidence of his/her salary earned during the part of the year he/she is not resident in Luxembourg. The computation of his/her whole salary allows the determination of a possible refund of tax withheld in excess.

The amounts of the tax prepayments are based upon the amount of individual income tax due for the previous year. The income tax withheld monthly on employment income and pension income is computed according to tax tables set forth by the government. Dividends and interest on profit-sharing bonds paid by a resident company (exception for Luxembourg investment funds among others) to its shareholders or creditors are subject to a withholding tax of 15 percent. The amounts withheld may be creditable against the final individual income tax liability.

Pay-as-you-go (PAYG) withholding

The employer has the legal obligation to make the correct withholding tax on the salaries paid to employees.

Second pillar pensions schemes are subject to 20 percent withholding tax and to 0.9% special tax at the employer’s costs.

Royalties (Luxembourg-sourced) paid to a non-Luxembourg resident is subject to a 10 percent withholding tax.

Director’s fees are subject to a 20 percent withholding tax calculated on the gross amount (or 25 percent of the net amount).

PAYG installments

First pillar pension is taxable in Luxembourg if paid by Luxembourg State. 

Second pillar pension: installments are not taxable upon retirement in Luxembourg if 20 percent tax has been paid upfront (upon payment of the employer’s contributions), in Luxembourg. 

When are estimates/prepayments/withholding of tax due in Luxembourg? For example: monthly, annually, both, and so on.

Tax prepayments calculated by the Luxembourg tax authorities are due four times per year: 10 March, 10 June, 10 September, and 10 December.

The monthly tax on salaried income is withheld by the employer and is due before the 10th of the following month.

Relief for foreign taxes

Is there any Relief for Foreign Taxes in Luxembourg? For example, a foreign tax credit (FTC) system, double taxation treaties, and so on?

In the absence of a treaty, a Luxembourg resident is also subject to tax on all his/her income from foreign sources. The foreign individual income taxes paid on that income may, however, be credited against the Luxembourg tax liability. In principle, the foreign tax credit must be determined separately for the income and tax paid in each foreign country (per country method), and cannot exceed the Luxembourg tax on that income. A global method of imputation is also permitted, within limits, upon request of the taxpayer. In order to be creditable, the foreign tax must be an individual income tax similar to the Luxembourg tax.

Luxembourg has concluded double taxation treaties with various countries. Beneficiaries of income tax treaties may be exempted from Luxembourg income tax on certain income, but Luxembourg generally retains the right to include this income for purposes of determining the applicable tax rate on the income taxable in Luxembourg (exemption with progression).

General tax credits

What are the general tax credits that may be claimed in Luxembourg? Please list below.

Not applicable.

Sample tax calculation

This calculation assumes a married taxpayer resident in Luxembourg with two children whose three-year assignment begins 1 January 2016 and ends 31 December 2018. The taxpayer’s base salary is USD100,000 and the calculation covers three years. The calculation does not take into account the specific tax regime for impatriates2.

This does not take into account any modifications foreseen for the tax years 2017 and 2018.

  2016 2017 2018
  USD USD USD
Salary 100,000.00 100,000.00 100,000.00
Bonus 20,000.00 20,000.00 20,000.00
Cost-of-living allowance 10,000.00 10,000.00 10,000.00
Housing allowance 12,000.00 12,000.00 12,000.00
Company car 9,000.00 9,000.00 9,000.00
Moving expense
reimbursement
20,000.00 0.00 20,000.00
Home leave 0.00 5,000.00 0.00
Education allowance 3,000.00 3,000.00 3,000.00
Interest income from
non-local sources
6,000.00 6,000.00 6,000.00

Average exchange rate for the year 2016 used for calculation: USD1.00 = EUR0.8973

Other assumptions

  • All earned income is attributable to local sources.
  • Bonuses are paid at the end of each tax year, and accrue evenly throughout the year.
  • Interest income is not remitted to Luxembourg.
  • The company car is used for business and private purposes and originally cost USD50,000 (all options/taxes included).
  • The employee is deemed resident throughout the assignment.
  • Tax treaties and totalization agreements are ignored for the purpose of this calculation.

Calculation of taxable income

Year-ended 2016
EUR
2017
EUR
2018
EUR
Days in Luxembourg during year 366 365 365
Earned income subject to income tax      
Salary 89,730.00 89,730.00 89,730.00
Bonus 17,946.00 17,946.00 17,946.00
Cost-of-living allowance 8,973.00 8,973.00 8,973.00
Net housing allowance 10,767.00 10,767.00
10,767.00
Company car 8,075.70 8,075.70
8,075.70
Moving expense reimbursement 17,946.00 0.00 17,946.00
Home leave 0.00 4,486.50 0.00
Education allowance 2,691.90 2,691.90 2,691.90
Total earned income 156,130.20 142,670.70 156,130.20
Other income 2,647.00 2,647.00 2,647.00
Total income 158,777.20 145,318.40
158,777.20
Deductions 16,862.06
15,408.44
16,862.06
Total taxable income 141,900.00
129,900.00
141,900.00

Calculation of tax liability

  2016
EUR
2017
EUR
2018
EUR
Taxable income as above 141,900.00
129,900.00
141,900.00
Luxembourg tax: tax class 2 39,359.00
34,352.00
39,359.00
Domestic tax rebates (dependent spouse rebate) 0.00 0.00 0.00
Foreign tax credits 0.00 0.00 0.00
Total Luxembourg tax 39,359.00
34,352.00
39,359.00

An additional temporary tax of 0.5% applies to the taxable basis reduced by an amount equivalent to 1x the minimum monthly social wage for non-qualified workers, i.e. €1,922.96 (index 775.17 at 1 January 2016), or ¾ of the minimum monthly social wage, depending on the type of taxable income for taxpayers subject to the Luxembourg social security system.

KPMG in Luxembourg has assumed that the social security contributions were due in Luxembourg and the child bonus was paid by the family fund. The 1.4% dependence insurance and the 0.5% additional temporary tax have not been taken into account for these calculations.

Foot Notes

1Certain tax authorities adopt an "economic employer" approach to interpreting Article 15 ofthe OECD model treaty which deals with the Dependent Services Article. In summary, this means that if an employee is assigned to work for an entity inthe host country for a period of less than 183 days in the fiscal year (or, acalendar year of a 12-month period), the employee remains employed by the home country employer but the employee’s salary and costs are recharged to the host entity, then the host country tax authority could treat the host entity as beingthe "economic employer" and therefore the employer for the purposes of interpreting Article 15. In this case, Article 15 relief would be denied and the employee would be subject to individual tax in the host country.  

Sample calculation generated by KPMG Luxembourg, Société coopérative, the Luxembourg member firmof KPMG International, based on Ministère des Finances and might be subject to ulterior modificationsdue to potential changes in the individual tax rates/brackets which may be decided by the government. 

© 2016 KPMG Luxembourg S.à r.l, a Luxembourg private limited company, is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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