Luxembourg’s tax authorities have issued a new Circular modifying the scope and application of the impatriate tax regime rules with the aim of attracting more foreign workers with specialized skills and highly-desired ‘know-how’.
The Luxembourg tax authorities have published a new Circular aimed at attracting skilled foreign workers – those with specialized skills and highly-desired ‘know-how’.
The scope of the new Circular is broader than the prior Circular issued in May 2013. Luxembourg’s impatriate tax regime1 may now apply 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 in response to a need for skilled and specialized labor in the Grand Duchy. Due to the issuance of the Circular, employers will have further clarity with respect to the conditions and procedures for hiring skilled foreign workers in or bringing foreign workers into Luxembourg (called “impatriates”). For many employers, the Circular offers opportunities to potentially increase international assignments, and revise relevant assignment and hiring policies.
Assignment-related costs (e.g., moving, housing, travel, school fees, etc.) typically represent a heavy financial burden to employers. The Circular may help companies control their assignment-related costs with such provisions as the exemption of the part of relocation expenses exceeding those which would have been incurred had the worker remained in his/her home country.
For many employers, the Circular offers opportunities to potentially increase international assignments, and revise relevant assignment and hiring policies.
This new Circular (L.I.R. no. 95/2) published on 27 January 2014, applies retroactively from 1 January 2014, and replaces circular L.I.R. n° 95/2 of 21 May 20132. Specific tax provisions will apply in Luxembourg to impatriate workers relocating to Luxembourg as of 1 January 2014. There are provisions that exempt certain costs and expenses in relation to this broadened scope of workers and their “impatriation” to Luxembourg.
As for the persons covered, the Circular applies to:
The following conditions should be met at the level of the impatriate:
The following conditions should be met at the level of the company:
The employee must have acquired an in-depth specialization in a sector or a profession experiencing recruitment difficulties in Luxembourg.
The number of impatriate workers should be limited to 30 percent of the total number of employees (working full-time) of the company, except for companies that have existed for less than 10 years.
As noted earlier, one of the principles of the Circular is the exemption of the part of relocation expenses exceeding those, which would have been incurred had the worker remained in his/her home country. The Circular stipulates that the costs should remain reasonable.
Luxembourg Relocation Expenses
In any case, these recurring expenses can neither exceed EUR 50,000 per year (or EUR 80,000 per year if the employee shares a house with his/her spouse or partner), nor 30 percent of the impatriate worker's total annual fixed remuneration.
Also tax exempt are the school fees 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.
Lump Sum Indemnity for Other Recurring Expenses
This lump sum covers the cost of living adjustment (COLA) and other relocation-related expenses not covered anywhere else by the Circular. The lump sum is fixed at 8 percent of the employee's fixed monthly remuneration, capped at EUR 1,500. The lump sum can be doubled (i.e., 16 percent and capped to EUR 3,000) to the extent the employee shares a common residence or domicile with his/her spouse or partner, and the latter does not perform any professional activity.
At the level of the Luxembourg employer, the aforementioned expenses are considered tax deductible. Expenses borne by the employer for impatriate workers, as covered by the present Circular, are not considered as 'employment income' according to Article 95 of the Luxembourg Income Tax Law (LITL).
Any other allowances and benefits-in-kind, which are not covered by the Circular, remain subject to Luxembourg common tax rules (Article 104 LITL and related tax circulars).
The benefit of the specific tax provisions for impatriate workers is granted for the duration of the worker’s impatriation. Ultimately, it applies until the end of the fifth 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 from the regime.
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 worker will have to file an individual income tax return in order to benefit from this regime.
The provisions of the Circular will apply to impatriate workers relocating to Luxembourg from 1 January 2014.
The scope of the circular has now been extended such that the tax regime may now apply 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.
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 worker will have to file an individual income tax return.
1 This regime was provided for in Tax Circular No. 95/2 of 31 December 2010 and modified by Tax Circular no. 95/2 of 21 May 2013.
2 For prior coverage, see Flash International Executive Alert 2013-082, 23 May 2013.
This article is excerpted, with permission, from “New Tax Circular on Impatriate Workers” in Luxembourg Tax News (Issue 2014-03, February 2013), a publication of the KPMG International member firm in Luxembourg.
For further information or assistance, please contact your local IES/People Services professional or one of the following professionals with the KPMG International member firm in Luxembourg:
Frédéric Scholtus, Director
Tel. +352 22 51 51 5333
André Kayser, Manager
Tel. +352 22 51 51 5393
Marie-Eve Garsou, Assistant Manager
Tel. +352 22 51 51 5588
The information contained in this newsletter was submitted by the KPMG International member firm in Luxembourg.
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