Luxembourg

Luxembourg

Individuals domiciled in Luxembourg are subject to income tax on their worldwide income unless exempt under the provisions of a treaty. Under Luxembourg tax law, the concept of ‘domicile’ is essentially equivalent to the term ‘residence’ as used in most jurisdictions. In this article, the two terms are used interchangeably. Non-residents are subject to income tax on certain categories of income from Luxembourg sources. The official currency of Luxembourg is the euro (EUR).

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Key message

Extended business travelers who are not residents of Luxembourg are likely to be taxed on employment income relating to their Luxembourg workdays.

Income tax

Liability for income tax

Individual liability to Luxembourg tax is determined by residence status. A person can be a resident or a non-resident.

An individual will be considered domiciled in Luxembourg for tax purposes if either of the following circumstances are met, subject to tax treaty provisions.

  • The individual maintains a permanent home in Luxembourg. When an individual’s family (spouse and children) resides in Luxembourg, the individual may be considered to have a home in Luxembourg. Special rules may apply, however, for married couples1 where one of the spouses lives abroad.
  •  An usual abode is deemed to exist if the individual remains in Luxembourg for more than 6 consecutive months (short periods of absence are disregarded). Tax residence applies as from the first day of the individual’s presence in Luxembourg. However, this is not restricted to 6 months in the same 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 months’ stay will be deemed to have been met. The individual will be deemed to have been resident in Luxembourg from 1 October in year N.

Tax trigger points

To consider the start and end dates of residency status, there is no minimum threshold/number of days that would exempt an individual from paying tax in Luxembourg. The determination is essentially based on facts and circumstances. The assignee is considered to be a Luxembourg tax resident as of the first day the individual arrives in Luxembourg (according to Luxembourg domestic tax rules).

Types of taxable income

For extended business travelers, the types of income that are generally taxed are employment income (including non-cash benefits), Luxembourg-sourced income, and gains from taxable Luxembourg assets (such as real estate). Salaried benefits arising from the allocation of transferable stock options to employees may have a deemed market value according to the "Black-Scholes" method, or fixed at 17.5% of the value of the underlying share (subject to reasonable conditions).

Specific tax regime for impatriate workers 

On 27 January 2014, the Luxembourg Tax Authorities published a circular (L.I.R. n° 95/2 of 27 January 2014) regarding the tax regime applicable to impatriate workers ('the Circular'). This Circular applies retroactively as from 1 January 2014 and replaces the circular n° 95/2 of 21 May 2013 (see our newsletter issue 2013-06). Specific tax provisions will apply in Luxembourg to impatriate workers relocating to Luxembourg as of 1 January 2014, to the extent that specific conditions related to employees, employer, and salaried employment in Luxembourg are fulfilled. These provisions aim at exempting part of impatriate workers' costs and expenses in relation with their impatriation to Luxembourg. Extended business travelers who do not become residents of Luxembourg would not qualify for this tax regime.

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; 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.

Conditions relating to the employer

The employer should meet the following conditions:

  • Must employ (or commit to employ) at least 20 local full-time staff in the mid-term.
  • If established in Luxembourg for ten years or more, no more than 30% of the employer’s work force may benefit from the impatriate regime.
  • In case of intra-group assignment:
    • Must be part of an international group.

Conditions relating to the employee

The employee must meet the following conditions:

  • Must be a Luxembourg tax resident.
  • Must have his primary employment in Luxembourg.
  • Must have a minimum gross annual salary of EUR 50,000.
  • During the five preceding years:
    • May not have been a Luxembourg resident or subject to Luxembourg income tax on professional income.
    • Must have lived at least 150 kilometer from the Luxembourg border.
  • May not replace a non-impatriate employee.
  • Must be hired to share his knowledge and experience with the Luxembourg staff.
  • In case of intra-group assignment:
    • Must have the right to return to the home country employer.
    • Must have five years of seniority within the group/sector.
  • In case of direct recruitment:
    • Must have acquired a deep specialization in a sector or profession characterized by difficulties in recruitment in Luxembourg.

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 incurred had he remained in his home country. The Circular stipulates that the costs should remain reasonable.

  • non-recurring expenses: removal expenses in respect of the domicile transfer to Luxembourg, housing (furniture, etc.), special travel costs (e.g. birth, wedding, death of a family member), etc.
  • recurring expenses in case of cross-border domicile transfer (limited thresholds): housing costs (e.g. rent, utilities, heating, etc), yearly home travel, tax equalization. These recurring expenses are limited to the lesser of EUR 50,000 per year (or EUR 80,000 per year if the employee shares a house with his/her spouse or partner) and 30% of the impatriate worker's total annual fixed remuneration.
  • school fees (primary and secondary education): 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.
  • tax-free lump-sum indemnity for other recurring expenses (i.e. cost of living adjustment and other relocation-related expenses not covered anywhere else by the Circular): fixed at 8 percent of the employee’s fixed monthly remuneration, capped at EUR 1,500. The lump-sum indemnity can be doubled (i.e. 16 percent capped at EUR 3,000) to the extent the employee shares a common residence or domicile housing with his spouse or partner, and the latter does not perform any professional activity.

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.

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 of the regime. The employer will maintain sufficient evidence to support the eligibility in case of an audit. In case of doubt, an application can be filed with the tax authorities to obtain certainty about the eligibility.

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.

Carried interest

Carried interest received by individuals, employees of managers of alternative investment funds qualifies as other income.

Tax regime:

Payment of carried interest not represented by units, shares or other securities are taxed as extraordinary income at a quarter of the global tax rate (around 11% in 2017) plus 1.4% dependence insurance.

  • The tax regime applies to individuals who became tax residents in Luxembourg in 2013 or in the 5 subsequent years (year 2018 included).
  • The provisions only apply for income realized within 10 years after the year the individual took his functions in Luxembourg.
  • They do, however, not apply to individuals that have been Luxembourg tax residents, or taxed on professional income in Luxembourg anytime in the last 5 years preceding the year 2013.
  • Neither do the provisions apply to carried interest where prepayments have been made.
  • Carried interest realized upon sale of units, shares or securities covered by the new law are treated as capital gains, and taxed accordingly.
    • tax free if held for more than 6 months,
    • except if the individual holds, or held a substantial participation, i.e. a shareholding of more than 10%, at any point of time during the 5 years’ period preceding the sale or redemption.

Tax rates

Net taxable income is taxed at graduated rates ranging from 0 percent to 45.784 percent, with a top rate of 45.784 percent for the part of the taxable income exceeding EUR 200,004 (EUR 400,008 for spouses/partners filing jointly), including a 7 to 9 percent unemployment contribution.

Excluding specific earned income, Luxembourg source income may be subject to a 15% minimum income tax (increased by the surcharge for unemployment fund) at the level of non-resident individuals. However they may opt for the application of standard progressive tax rates instead of the 15% taxation. Progressive rates are applied by adding EUR 11,265 to the actual income.

For the years 2015 and 2016 an additional temporary tax of 0.5% for the budget balance was applicable to any income tax taxable in Luxembourg.

Social security

Liability for social security

In Luxembourg, registration with the Social Security Authorities is compulsory for all employees. An exemption from paying Luxembourg social security contributions may be granted under a multilateral social security agreement, or a bilateral one concluded between Luxembourg and the individual’s home country. Generally, the benefits might cover:

  • old-age pension, disabilities pension, survivors’ pension
  • health and medical expenses
  • allowances in cash for children.

The employee’s part of social security contributions ranges between 12.2 percent and 12.45 percent. The employer’s part of social security contributions ranges between 12.42 percent and 15.08 percent. Both are capped.

Employee’s part (capped):

  • pension (1st pillar): 8 percent
  • sickness: 2.8–3.05 percent
  • maximum annual income basis subject to contributions: EUR 119,915.16 (index 794.54).

Non tax-deductible contributions (uncapped):

  • dependency insurance: 1.4 percent minus a deduction of EUR 499.65 per month on gross salary. No ceiling is applicable.

Compliance obligations

Employee compliance obligations

Tax returns are due by 31 March of the year following the tax year-end concerned, which is on 31 December. Filing of tax returns may be required from non-residents who derive Luxembourg-sourced income under certain conditions. A filing extension until June 30 is available upon request. The enforcement of filing deadlines will increase in 2017, with a significant increase in potential penalties.

Employer reporting and withholding requirements

The Luxembourg employer has the legal obligation to withhold the correct amount of tax on salaries paid to employees.

Advance payments of tax, together with tax withheld at the source, are deductible from the final income tax liability. Any overpayment of tax may be refunded subject to conditions. Tax withheld on wages and pensions is adjusted annually.

The Luxembourg government has transposed in the Luxembourg Tax Law of a section of the EU Directive in respect of the automatic exchange of information on salaries, pensions and directors’ fees.

Therefore, Luxembourg paying entities/employers have to report prior end of February 2017 the information related to calendar year 2016 salaries to the Luxembourg tax authorities.

After 30 June 2015, the EU Member States of residence of the employees will be automatically provided information on these income (i.e. salaries, pensions and directors’ fees), and will be able to tax these income based on the applicable tax treaty provisions.

If an expatriate establishes residence in Luxembourg during the course of the year, the expatriate will generally be required to provide the Luxembourg tax authorities with evidence of salary earned during the part of the year the expatriate was not resident in Luxembourg. The computation of the expatriate’s salary for the entire year allows the determination of a possible refund of tax withheld in excess.

Generally the amount of tax prepayments is based on the amount of income tax due for the previous year. The income tax withheld monthly on employment or pension income is computed according to tax tables set forth by the government.

Other issues

Work permit/visa requirements

Visa, work and residence requirements should be checked before the individual enters Luxembourg. The type of documentation required will depend on the purpose of the individual’s entry into Luxembourg.

Double taxation treaties

In addition to Luxembourg’s domestic arrangements that provide relief from international double taxation, Luxembourg has entered into double taxation treaties with 80 countries to prevent double taxation and allow cooperation between Luxembourg and overseas tax authorities in enforcing their respective tax laws.

Permanent establishment implications

There is the potential that a permanent establishment could be created as a result of extended business travels, but this would be dependent on whether the employee has a fixed place of business, the type of services performed and/or the level of authority the employee has (such as the power to negotiate and sign contracts on behalf of the employer). For a complete check of these implications, reference should be made to article 5 of the OECD Model Convention and to available treaty provisions.

It should be noted that on October 2015, the Organization for Economic Co-operation and Development (OECD) published a final report on Action Point 7 of the Action Plan on Base Erosion and Profit Shifting (BEPS) initiative (Preventing the Artificial Avoidance of Permanent Establishment Status), which entails a significant change to the current article 5 of the OECD Model Tax Convention. The purpose of the redefined definition is to prevent the use of certain strategies to circumvent the permanent establishment status, resulting in a shift of profits from the place of sale to a foreign jurisdiction.

Indirect taxes

Value-added tax (VAT) should be applicable to sale of goods and supply of services. Individuals carrying out economic activities (trading, producing, consulting etc.) independently should in principle register for Luxembourg VAT purposes. The standard VAT rate applicable in Luxembourg is 17 percent.

Transfer pricing

Luxembourg applies the OECD transfer pricing guidelines for multinational enterprises and tax administration, as well as certain provisions set forth under the BEPS actions. Hence, the Luxembourg tax authorities may raise transfer pricing questions when the employee is being paid by an entity in one jurisdiction but performing services for the benefit of the entity in another jurisdiction and no corresponding recharge is performed, in other words, if a cross-border benefit is being provided. The transfer price would be dependent on the nature and added value of the services performed.

Local data privacy requirements

Luxembourg has data privacy laws.

Exchange control

Luxembourg does not restrict the flow of European or foreign currency into or out of the country.

Footnote

1Same-sex married couples are recognized in Luxembourg since 01.01.2015.

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