12 August 2024 Luxembourg proposes various measures affecting individual and corporate tax
The Luxembourg government recently submitted a draft law (Draft Law) to Parliament containing a variety of tax measures. Overall, the proposed changes aim to alleviate the tax burden on households and enhance Luxembourg's appeal as a work and investment location, with provisions for both corporate and individual taxpayers. Key suggested amendments affecting individual taxpayers and employers include the expansion of the employee profit-sharing regime (prime participative in French), improvements to the expatriate regime, the introduction of a bonus for certain young employees (young employee bonus) and a new tax credit for cross-border workers, as well as an adjustment to the income tax brackets. The Draft Law aims to enhance the existing profit-sharing regime by raising certain limits, while maintaining the fundamental structure of the system. The regime is applicable from 2021 and permits employers to distribute profit-sharing bonuses to freely selected employees. An employee who receives one of these profit-sharing bonuses benefits from a 50% income tax exemption on the bonus amount, while amounts paid under the regime are fully deductible to the employer for corporate income tax purposes.
The Draft Law would increase these two limits: the total bonus allocation a company may grant would increase from 5% to 7.5% and the individual bonus limit would increase from 25% to 30%. The employer will continue to have specific reporting obligations to the tax authorities (wage tax office) and special rules will continue to apply (with the same increase in limits) if the employer is part of a fiscal unity. To bolster Luxembourg's appeal as a destination for highly skilled professionals, the Draft Law proposes a significant overhaul of the expatriate tax regime, aiming for greater simplicity and effectiveness. The reformed regime would provide a 50% exemption of the total annual gross salary (excluding tax-exempt benefits in cash and tax benefits in kind) of qualifying expatriates (capped at €400,000 per annum), which replaces the current model that is based on the exemption of certain expenses incurred and a partial exemption of a so-called "impatriation premium." The conditions that must be met to benefit from the reformed expatriate tax regime would remain largely unchanged from current legislation. However, the exemption will result in a significant reduction in administrative burden for employers.
Both the new and existing expatriate tax regimes are designed to apply for a maximum period of eight years after the expatriate begins working in Luxembourg (provided that the qualifying conditions continue to be met throughout this period). As is the case under the current regime, employers must report relevant information to the wage tax office by 31 January of the following year. For those currently benefiting from the expatriate tax regime, the regime will remain in effect for the remaining duration if conditions under the old regime continue to be met. Employees may opt into the new regime, which will then apply for the remainder of the eight-year period. This decision is final and cannot be reversed. The young employee bonus is a tax measure designed to encourage Luxembourg employers to hire young professionals entering the Luxembourg labor market. The bonus provides that 75% of the young employee bonus that employers pay to qualifying employees will be tax-exempt. The eligible bonus is capped at €5,000 for annual gross salaries (on a full-time basis) up to €50,000, €3,750 for salaries between€50,000 and €75,000, and €2,500 for salaries between €75,000 and €100,000. Young employees with an annual gross salary of more than €100,000 do not benefit from the exemption. To qualify for the young employee bonus, the following criteria must be met (when the bonus is paid by the employer):
The bonus exemption is restricted to a young employee's first employer and is valid for up to five years. If an employee changes employers, the employee is no longer eligible for the exemption. The Draft Law proposes a new tax credit, applicable as from tax year 2024, for salary for overtime paid to certain nonresident employees. Overtime salary is exempt in Luxembourg, but nonresident employees may face taxation on this overtime salary in their home countries. The overtime tax credit is designed to compensate for the potential loss in income for such employees.
The tax credit only applies if the overtime salary is expected to be taxable in the nonresident's home country, as evidenced by the following conditions:
The overtime tax credit can be claimed on the annual income tax return or in the annual adjustment and is deducted from the tax due. Any excess credit is refundable upon request. To increase the purchasing power of low- and middle-income taxpayers, the Draft Law would make an adjustment to the personal income tax scale as from tax year 2025. Income below €13,230 would not be taxable (an increase from the current €12,438 threshold), while the maximum rate of 42% would apply to incomes exceeding €234,870 (up from the current ceiling of €220,788). The Draft Law also includes changes to the tax calculation for taxpayers of class 1a (single persons with children as well as single taxpayers aged at least 65 on 1 January of the calendar year), an increase inthe maximum amount of extraordinary expense allowance for dependent children not living in the taxpayer's household and an increase in the single-parent tax credit. The Draft Law will now go through the legislative process. Specifically, the text will be analyzed by a dedicated parliamentary commission; opinions will be collected from different advisory bodies (and, most importantly, the Council of State); and the final draft will be discussed and voted on in a parliamentary session before finally being published in the Official Gazette (Memorial). The entire process may take a couple of months. Taxpayers and employers potentially affected by one or more of the different measures of the Draft Law should remain aware of its progress through Parliament and consult with their tax advisors to fully understand how it could affect them.
Document ID: 2024-1537 | ||||||