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).
Extended business travelers who are not residents of Luxembourg are likely to be taxed on employment income relating to their Luxembourg workdays.
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.
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.
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).
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.
Conditions relating to the employer
The employer should meet the following conditions:
Conditions relating to the employee
The employee must meet the following conditions:
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.
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.
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 received by individuals, employees of managers of alternative investment funds qualifies as other income.
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.
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.
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:
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):
Non tax-deductible contributions (uncapped):
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.
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.
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.
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.
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.
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.
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.
Luxembourg has data privacy laws.
Luxembourg does not restrict the flow of European or foreign currency into or out of the country.
1Same-sex married couples are recognized in Luxembourg since 01.01.2015.