Luxembourg – Review of Important 2015/2016 Tax Rules for Employers, Individuals

Luxembourg – Review of Important 2015/2016 Tax Rules

In this GMS Flash Alert, we highlight some tax-related developments in Luxembourg that occurred at the end of 2015 and in early 2016 that may impact individuals (including those on international assignment) and their employers.

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In this GMS Flash Alert we highlight some tax-related developments in Luxembourg that occurred at the end of 2015 and in early 2016 that may impact individuals (including those on international assignment) and their employers.1  We highlight measures that provide for: 

  • a “step-up in basis” mechanism for individuals transferring their tax residency to Luxembourg; 
  • the possibility that individuals who were not tax residents in Luxembourg for the entire year could be taxed in Luxembourg as if they had been residents for the whole year; 
  • a tax amnesty regime for the years 2016 and 2017;
  • a decrease in the tax-free reimbursement payable by an employer to an employee for the employee’s claimed expenses tied to the use of his private car for professional/business purposes; and  
  • in a separate development, new rules employers must follow in relation to employee stock option plans – these rules apply to all stock option schemes (and to any other type of long-term incentive scheme).

WHY THIS MATTERS

These measures will impact the compliance obligations of individuals and their employers – therefore individuals, employers, and their tax service providers should take note. The measures also introduce more streamlined and flexible rules where partial-year nonresident taxpayers are concerned. And, the tax amnesty program offers an opportunity for concerned taxpayers to regularize their affairs with the tax authorities with reduced penalties. 

Introduction of a “Step-up in Basis” Mechanism

Bill n. 6891 introduced a “step-up in basis” system into Luxembourg tax law for individuals transferring their tax residency to Luxembourg.  When a taxpayer becomes Luxembourg tax resident, the acquisition price of his shares and convertible loans that represent substantial shareholdings (i.e., participations of more than 10 percent) will be deemed to be the market value of said assets at the date the individual became a Luxembourg resident taxpayer.  The initial acquisition date of the assets transferred must still be considered to calculate the holding period. 

Such taxpayers will not be taxed in Luxembourg on the latent capital gains of these assets prior to their transfer of residence.  

Election to Be Taxed as a Resident Extended to Full-Year Nonresidents

In order to comply with European Union (EU) principles, Bill n. 6891 introduced an option for all individuals who were not tax residents in Luxembourg for the entire year to be taxed in Luxembourg as if they had been full-year residents. This option, an improvement of Article 154 alinea 6 LITL, allows these taxpayers to benefit from a full year’s tax rates, exemptions, and tax deductions/credits in respect of their declared worldwide income. This option already existed, but was limited to employees and retired persons who were tax resident for only part of the year.

Consequently, when a taxpayer paid – or had taxes withheld – on his salary and pension in excess of what actually should have been due, the taxpayer may seek a tax refund via a tax return. 

Introduction of a Tax Amnesty Regime

The Budget Bill introduced a temporary tax amnesty regime for the years 2016 and 2017 for the benefit of Luxembourg taxpayers (residents and nonresidents).  To benefit from this tax amnesty, the taxpayer will have to voluntarily file a unique tax return adjusting the prior year tax return(s) to disclose both undeclared income and related assets, and pay the tax due plus a penalty of 10 percent of the total tax due if reported in 2016, or of 20 percent if reported in 2017.  (Taxpayers who are found to be non-compliant and do not subject themselves to the tax amnesty regime will likely be subject to normal rules and procedures, which entail heavier sanctions.)

Applicability of Above Measures

All measures are generally applicable as from 2016, except for the “step-up” provision and the change to the election to be taxed as a resident, both of which apply retroactively starting January 2015. 

Lump-Sum Reimbursement for Private Car Use – New Amount of the Lump-Sum Reimbursement as of 1 August 2015

The tax-free reimbursement payable by an employer to an employee for the employee’s claimed expenses tied to the use of his private car for professional/business purposes decreased from EUR 0.40 per km to EUR 0.30 per km as of 1 August 20152.

All amounts paid above the lump sum of EUR 0.30 per km are considered as a benefit-in-kind and thus taxable as salaried income.  This benefit is subject to wage tax and to the so-called 0.5-percent temporary tax for the budget balance (l’impôt d’équilibrage budgétaire temporaire).  It is also subject to social security contributions (up to the ceiling, except for the 1.4-percent “dependence insurance”).

As of 1 August 2015, for any reimbursement made at EUR 0.40 per km instead of EUR 0.30 per km, the taxable benefit-in-kind would amount to EUR 0.10 per km.

The employer has the responsibility to process the correct wage withholding tax on that benefit-in-kind.

Rules Governing Stock Option Plans

The new circular LITL n° 104/2bis was issued by the Head of the Luxembourg tax authorities on 28 December 2015.3 

Employers planning to institute a stock option scheme (or any type of Long-Term Incentive Plan) for their employees4, must notify the Head of the tax office, “Bureau RTS,” which oversees these Luxembourg employers, at least two months before setting up the scheme.  In addition, they must include both a copy of the scheme and the list of the salaried beneficiaries.

Furthermore, employers have to communicate with minimal delay to the Head of the relevant Bureau RTS those stock option schemes set up before 1 January 2016, and whose options have not yet been granted.

FOOTNOTES

1 See the laws published in the Luxembourg government’s official journal (in French):

Mémorial A n° 242 du 23.12.2015 .  

Mémorial A n° 245 du 24.12.2015.

2  Règlement du Gouvernement en Conseil du 19 juin 2015 portant fixation de l’indemnité kilométrique pour les voitures utilisées pour voyages de service (Mémorial A - N° 134 du 17 juillet 2015, page 2885).

3  For Circulaire du directeur des contributions, L.I.R. n°104/2bis du 28 décembre 2015, (in French), click here.

4  As foreseen by the circular LITL n° 104/2 of 20 December 2012.

RELATED RESOURCE

For reports on these measures from the KPMG International member firm in Luxembourg, see: Luxembourg Tax NewsIssue 2015-31 – December 2015 (“New individual and corporate tax measures“) and Luxembourg Tax NewsIssue 2015-32 – December 2015 (“Stock option plans“) 

CONTACTS

For further information or assistance, please contact your local GMS or 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

frederic.scholtus@kpmg.lu

 

Marisa Hosnar, Senior Manager

Tel. +352 22 51 51 5425

marisa.hosnar@kpmg.lu

 

André Kayser, Manager

Tel. +352 22 51 51 5393

andre.kayser@kpmg.lu

 

Marie-Eve Garsou, Manager

Tel. +352 22 51 51 5588

marie-eve.garsou@kpmg.lu

The information contained in this newsletter was submitted by the KPMG International member firm in Luxembourg.

© 2016 KPMG Luxembourg, Société coopérative, a Luxembourg entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Flash Alert is an Global Mobility Services publication of KPMG LLPs Washington National Tax practice. The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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