Executive summary

On 6 January 2026, the Luxembourg government transmitted to Parliament a draft law (Draft Law) that aims to implement the long-awaited income tax reform, which includes a major overhaul of individual income taxation by creating a single tax class, replacing the current system of multiple tax classes and joint taxation for married couples and registered partners. Under the new regime, all taxpayers would be taxed on an individual basis, regardless of marital status. The introduction of a single tax class would eliminate joint tax liability for married and partnered couples, meaning spouses or partners would be individually liable for their own income tax. A transitional period of 25 years would be provided for married or partnered couples before the reform takes effect, allowing them to continue joint taxation temporarily.

The reform would also enhance child-related tax benefits by introducing an allowance for young children, improving the single-parent tax credit and increasing deductibility limits for certain expenses.

The new single tax class would apply from the 2028 tax year, with the transitional regime for existing couples ending in 2052.

Detailed discussion

Individual taxation

The current individual income tax system divides taxpayers into three tax classes based on their personal situation and family status (i.e., single, separated or divorced, with or without children). This classification determines each taxpayer's income tax liability, resulting in sometimes significant differences in the amounts owed across the different tax classes. Married couples are generally taxed jointly, i.e., the income of the married taxpayers and their minor children is aggregated, unless they opt for individualized taxation. Registered partners are entitled to joint taxation if certain conditions are met. Joint taxation is based on an income-splitting system, which assumes that household income is shared equally between the couple. The aggregated income of the couple is divided by two, the tax rate is applied to this tax base, and the couple's tax liability is calculated by doubling the amount resulting from the previous step. This allows couples to reduce the tax burden that would otherwise apply to the spouse or partner with the higher income.

To make the tax system neutral with respect to family status and provide greater predictability when personal circumstances change, the Draft Law would mandate that, from 1 January 2028, all individuals — including married couples and registered partners — be taxed individually. Each taxpayer would be subject to tax on the aggregated taxable income they earned themselves, reduced by the amount of deductible expenses they incurred. The previous tax scales would be replaced by a new structure (Tarif U) featuring fewer tax brackets and a higher tax-free threshold. The maximum tax rate of 45.78% (42% increased by the contribution to the employment fund) would remain unchanged and apply to taxable income exceeding €234,800.

To protect couples who used the advantages of joint taxation, particularly single-income or low-secondary-income households, the Draft Law provides for a transitional period that allows them time to adjust to individualized taxation without abrupt financial disruption. Under certain circumstances, couples married or registered before 1 January 2028 (existing couples) would, therefore, continue to benefit from joint taxation during a transitional period ending with tax year 2052. In that case, the income tax liability would be determined according to a specific transitional tax scale (Tarif T), mirroring the splitting mechanism of the tax class that currently applies to married couples and providing for the maximum tax rate of 45.78% to apply to taxable income exceeding €469,740.

The transitional regime would apply to existing married couples automatically, unless they opted for the new individualized system through a form that would need to be filed by 30 November of the relevant tax year. This choice is irreversible for all future tax years.

Existing registered partners must request joint taxation by 31 December following each relevant tax year. In the absence of such request, or if they formally opt for the individualized system by the same deadline as for existing married couples, existing registered partners would be taxed individually with no possibility of returning to joint taxation.

Individual liability for tax debts

Under the current regime, tax authorities may recover the full amount of a couple's tax liability from either spouse or partner, without taking into account the income earned by each person. The move to a single tax class would fundamentally alter this approach, as the joint and several liability would be abolished, and spouses and registered partners would each be liable for their own individual tax debt.

Increased deductions

The Draft Law would increase the annual deductibility limits for certain expenses, including debt interest and insurance premiums (from the current €672 limit to €900), and housing saving schemes (from €1,344 to €1,500 for subscribers aged between 18 and 40 years and from €672 to €900 all others).

Couples should be encouraged to continue contributing to pension insurance, including on a voluntary basis, even if one spouse temporarily stops working, for example to care for children. To this effect, the Draft Law introduces the possibility for couples taxed under the Tarif U to deduct the voluntary pension contributions paid by one spouse or partner for the benefit of the other.

Moreover, it is proposed to allow for a higher amount of extraordinary expenses to be deductible. An expense is deemed extraordinary if it is not incurred by the majority of taxpayers who are in similar circumstances in terms of family situation and the amount of income and assets. Extraordinary expenses are deductible if they exceed a certain percentage of taxable income. The Draft Law would adjust the table of percentages used by broadening the taxable income brackets, which would result in more extraordinary expenses becoming deductible.

It is also proposed to increase, by way of Grand-Ducal regulation, the flat-rate allowance for household expenses, assistance and care costs related to dependency, as well as childcare expenses, from €5,400 to €6,000.

Family- and child-related measures

Under the Draft Law, child-related tax benefits would be restructured to align with the new individualized tax system.

Tax advantages linked to children would no longer be tied to joint taxation or attributed to one spouse by default. Instead, child-related tax benefits (such as tax credits for dependent children) would generally be allocated on an individual basis, typically by being split equally between the parents, irrespective of their marital status.

The Draft Law would also introduce targeted enhancements, including:

• A new allowance for young children (abattement petite enfance) of €5,400 per child under the age of three
• An increased single-parent tax credit with a maximum amount of €4,008

Simplification of tax refund procedure

Taxpayers who are not required to file a tax return because their income does not exceed the thresholds set by law may, under specific circumstances, request a refund of excess tax withheld from their wages, salaries or pensions via the annual adjustment procedure (décompte annuel) — typically when deductible expenses or tax reliefs were not considered at the time the tax was withheld.

The Draft Law proposes to abolish this procedure and introduce an optional assessment-based taxation, thus streamlining procedures. This new approach would be open for resident taxpayers who are not otherwise required to file a tax return. Similarly, nonresident taxpayers receiving income subject to withholding tax (such as salaries or pensions) may opt for taxation by assessment when they are not otherwise required to file a tax return.

Implications

The Draft Law will now go through the legislative process, which involves analysis of the text by a dedicated parliamentary commission, collection of opinions from different advisory bodies (most importantly, the Council of State), discussion of and vote on the text in a parliamentary session and finally its publication in the Official Gazette (Memorial).

If enacted into law, the proposed provisions would apply as from tax year 2028. The government aims for the Draft Law to be debated and adopted by the Parliament before the end of 2026, which would give the tax authorities a full year to prepare for the implementation of the reform.