Tax returns and compliance
Termination of residence
Economic employer approach
Types of taxable compensation
Salary earned from working abroad
Taxation of investment income and capital gains
Additional capital gains tax (CGT) issues and exceptions
General deductions from income
Tax reimbursement methods
Calculation of estimates/prepayments/withholding
Relief for foreign taxes
General tax credits
Sample tax calculation
All income tax information is summarized by KPMG Tax S.à.r.l., the Luxembourg member firm of KPMG International, based on Ministère des Finances.
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?
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:
What are the current income tax rates for residents and non-residents in Luxembourg?
The tax rates applicable for 2017 are as follows.
Income tax table for 2017
The 2017 income tax table for single taxpayers (tax class 1) is as follows:
|Taxable income bracket||Tax rate on income in bracket|
|From EUR||To EUR||Percent|
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;
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:
For tax class 1a the taxable amount is calculated as follows:
50% of the difference between net taxable income and EUR 45,060, provided that the maximum rate cannot exceed 39% for the income bracket between EUR 37,842 and EUR 100,002, 40% for the income bracket between EUR 100,002 and EUR 150,000, 41% for the income bracket between EUR 150,000 and EUR 200,004 and 42% for the income in excess of EUR 200,004.
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.
Starting the year 2018, married couples and registered partners can now opt to be taxed individually. Married couples must then 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 situation, the joint taxation application should be filed by the 31 December of the tax year concerned (i.e. the application for 2018 should be filed before 31 December 2017). This election can be made every year for the following tax year.
The above applies also to registered partners who file a joint non-revocable application at the latest by 31 March of the tax year following the tax year concerned (i.e. the application for 2018 should be filed before 31 March 2019).
For couples 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 will be the tax class 1. However, couples may opt for a different allocation of the taxable income. Such different allocation of income will have no impact on the ceilings of deductions for special expenses.
The extra-professional abatement will amount to € 2,250 per spouse/registered partner filing separately.
A surcharge amounting to:
is levied as a contribution to the employment fund.
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.
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.
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. The deadline for filing such return is also March 31 of the following year. 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.
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..
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. Compulsory wage tax withholding may be considered as final tax depending on the circumstances. This should be assessed on a case-by-case basis.
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. When determining the economic employer, the Luxembourg tax authorities look at, among other criteria, the integration into the Luxembourg organization. Also, for whose risk and benefit the activities are performed play an important role in the determination of economic employer. The recharge of salary costs can play a role in this determination, but is not a decisive factor on its own. Even without a recharge of salary costs to Luxembourg, the Luxembourg company might be regarded as the economic employer based on other elements.
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.
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:
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 only income from Luxembourg source during that year, it may be subject to individual income tax at the lower progressive income tax rates.
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:
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 are not considered income from a salaried occupation in the form of cash remuneration. However, the following benefits are tax exempted:
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.
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.
Life annuities from a lifelong usufruct may be 50 percent exempted (under conditions).
See section discussing special expenses.
Dividends and interest income are taxable in Luxembourg.
Luxembourg legislation provides child benefits (limited based on children's age) to taxpayers who contribute intothe Luxembourg social security system.
The sickness indemnity aims to compensate the loss of income due to the fact that the insured person is temporarily 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.
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:
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 sixth birthday of the child (12th birthday for adopted children). If only one parent is entitled to parental leave, he/she can take the leave anytime until the sixth 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).
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.
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.
The aim of the circular is to attract foreign workers to Luxembourg to respond to a need for skill and labor.
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.
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.
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 withhold 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.
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.
Is salary earned from working abroad taxed in Luxembourg? If so, how?
Residents of Luxembourg are subject to Luxembourg tax on their worldwide income, including salary earned from working abroad. The taxable salary of residents cannot be reduced by allocating income to foreign business trips, except where exclusions are available under double taxation treaties. In such instances there is a tax relief to avoid double taxation.
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.
Are investment income and capital gains taxed in Luxembourg? If so, how?
A 20 percent (2016: 10 percent) final withholding tax is levied on qualifying (under the ‘Relibi’-law) interest paid by resident paying agents to resident individuals in Luxembourg, including interest on bank deposits, government bonds, and profit-sharingbonds . 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 20 percent withholding tax via a specific tax form, and simultaneously pay the 20 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 20 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 20 percent withholding tax if the amount (paid once a year) does not exceed EUR 250. The exemption applies to each individual bank account holder.
Capital gains on the sale of private assets held for six months or less (speculative gain) are taxed as ordinary income at the normal tax rates. For a limited time from 1 July 2016 to 31 December 2017 (inclusive), the taxation of such gains realized during this period will be reduced to one-quarter (1/4) of the taxpayer’s global tax rate.
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 EUR 50,000 (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.
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.
Until the end of 2017 a temporary measure applies regarding the capital gains on the sale of immovable property held during more than 2 years. These capital gains are taxed at a quarter of the global tax rate. This provision is subject to the condition that the immovable property was held in the context of the taxpayer’s private wealth.
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.
A single allowance of EUR 50,000 (doubled for couples filing jointly) is granted to each taxpayer per 11-year period. An additional allowance of EUR 75,000 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 in Luxembourg is taxed at the progressive tax rates as regular income. Rental income is taxed in the country where the property is located. In case the property 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 the taxes paid in the other country are credited against the Luxembourg individual income tax due.
Stock option plans are treated as follows:
|Residency status||Taxable at:|
|Other (if applicable)||N/A||N/A||N/A|
|Residency status||Taxable at:|
|Other (if applicable)||N/A||N/A||N/A|
In principle, gains relating to goods held in the private wealth are taxable according to the conditions noted in the section Taxation of Capital Gains.
Sale proceeds relating to the sale of principal residence are in principle tax exempted.
Capital losses may only be deducted from and up to the amount of taxable capital gains in the same year, there is no carry-over to other years.
In principle, gains relating to the sale of any personal item are taxable according to the conditions noted in the section Taxation of Capital Gains.
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.
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?
Not applicable in Luxembourg.
Not applicable in Luxembourg.
What are the general deductions from income allowed in Luxembourg?
Itemized deductions or a flat-rate deduction may be made. (See also the section on social security contributions.)
Employee’s contribution to a qualifying occupational (second pillar) pension scheme up to EUR 1,200 per year is deductible.
Employment income related expenses are deductible. The minimum flat-rate amount is EUR 540 for non-travel related expenses (incurred for an employment income unless the taxpayer can prove he had incurred higher professional 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.
A child bonus in the form of a monthly cash payment of EUR 76.88 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:
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.
What are the tax reimbursement methods generally used by employers in Luxembourg?
The current-year gross-up method is most commonly used in Luxembourg.
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.
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 percent special tax, fully borne by the employer.
Royalties (Luxembourg-sourced) paid to a non-Luxembourg resident are 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).
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 qualifying 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.
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).
What are the general tax credits that may be claimed in Luxembourg? Please list below.
This calculation assumes a married taxpayer resident in Luxembourg with two children whose three-year assignment begins 1 January 2017 and ends 31 December 2019. The taxpayer’s base salary is USD 100,000 and the calculation covers three years. The calculation does not take into account the specific tax regime for impatriates.
This does not take into account any modifications foreseen for the tax years 2018 and 2019.
|Interest income from
Average exchange rate for the year 2016 used for calculation: USD1.00 = EUR0.9490
Calculation of taxable income
|Days in Luxembourg during year||366||365||365|
|Earned income subject to income tax|
|Net housing allowance||11,388.00
|Moving expense reimbursement||18,980.00||0.00||18,980.00
|Total earned income||165,126.00
|Total taxable income||153,705.57
Calculation of tax liability
|Taxable income as above||153,700.00
|Luxembourg tax: tax class 2||41,896
|Domestic tax rebates (dependent spouse rebate)||0.00||0.00||0.00|
|Foreign tax credits||0.00||0.00||0.00|
|Total Luxembourg tax||41,896.00
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 has not been taken into account for these calculations.
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 firm of KPMG International, based on Ministère des Finances.
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