Luxembourg Budget Law | 2018 New Tax Measures

On December 15^th 2017, the Law concerning the budget of State revenue and expenditure for the financial year 2018 (the “Budget Law”) was passed. Listed below are the main measures of the Budget Law, which took effect on January 1^st 2018, in relation to (i) natural persons and (ii) companies.

For natural persons:

• Non-resident married taxpayers realising taxable professional income in Luxembourg are now classified in tax class 1 (i.e. instead of 1a). On the other hand, the criteria to opt for tax class 2 have been made more flexible. Thus, to opt for tax class 2, either at least 90% of the worldwide income of one spouse is taxable in Luxembourg (by way of exception, the threshold with regards to Belgian residents is 50%), or the sum of the net income not subject to tax in Luxembourg is lower than EUR 13,000.
• Resident married taxpayers have been granted the option of being taxed individually. This application cannot be revoked.
• Incentives have also been put in place to encourage the purchase of clean vehicles. Thus, a lump sum deduction of EUR 2,500 for the purchase of a hybrid vehicle has been added to the already existing list of incentives.
• Finally, the period for which the reduction of the overall tax rate on capital gain realised by natural persons on real estate to one-quarter (when it is not their principal residence), originally scheduled to end on December 31^st 2017, has been extended until December 31^st 2018.
• The inheritance tax exemption between spouses or registered partners will, going forward, also be available in the absence of common descendants.

For companies:

• Although the corporate income tax rate is not changed by the 2018 Budget Law, the 2017 Budget Law introduced a transitional corporate income tax rate of 19% for 2017, which has been reduced to 18% as of the 2018 fiscal year. Therefore the aggregate income tax rate for companies (i.e. including the municipal business tax and the unemployment fund contribution) is currently 26.01% for Luxembourg-City.
• A tax credit of 8% has been introduced for the acquisition of software up to an acquisition price of EUR 150,000. If the acquisition price exceeds EUR 150,000, a 2% tax credit shall be applied to the remaining acquisition price.
• As for natural persons, incentives have also been put in place to encourage investment in clean vehicles.