Context
The Luxembourg tax authorities have issued guidance regarding the new profit-sharing bonus model (i.e., the so-called “prime participative”) in its Circular L.I.R. n°115/12 dated 11 February 2021 ( the “Circular”). The prime participative had been introduced under the Luxembourg 2021 budget law of 19 December 2020 (the “2021 Budget Law”). The 2021 Budget Law entered into force on 1 January 2021 and the prime participative applies as from that date.
The introduction of the prime participative under Article 115 of the Luxembourg Income Tax Law of 4 December 1967 as amended (the “LITL”) follows the abolition of the stock option regime and represents a paradigm shift in the remuneration model for employees in Luxembourg.
New provisions
The prime participative allows employees to participate in corporate profits of their employers under certain conditions, treating the prime participative respectively as (i) an employment income in the hands of the employees and (ii) a corporate tax deductible operating expense from the employer’s perspective. In a nutshell, upon receipt of the prime participative from their employer, employees should be entitled to a 50% individual income tax exemption on their discretionary bonus, subject to the below requirements.
Conditions
The conditions for the application of the prime participative regime are as follows:
At the level of the employer:
- The employer must realize a profit in the relevant tax year of the bonus granting;
- The latter’s accounting must fulfil the formal and substantial requirements set out in the Luxembourg tax laws during the tax year in which the bonus is being granted but also during the previous tax year; and
- The overall amount of bonus that may be granted cannot exceed 5% of the employer’s profits (i.e., results for the financial year) for the fiscal year immediately preceding the fiscal year in which the bonus is being granted.
At the level of the employee:
- The bonus cannot exceed 25% of the employee’s gross ordinary annual remuneration (i.e., excluding any cash, and/or in-kind benefits, bonuses, premiums, etc.) in the given tax year; and
- The employee must be affiliated either with the Luxembourg social security system or a foreign social security scheme covered by a bilateral/multilateral social security agreement.
Clarifications brought under the Circular
Reporting obligations: the Circular introduces reporting obligations for the employer, which consist in the need to submit via email a detailed report as prescribed by the Luxembourg tax authorities, in the form of an excel file available in French only, to the appropriate tax office (i.e., the relevant RTS office) in charge of assessing payroll tax on the employee’s remuneration. Late filing or omission of filing of the form will result in the retroactive cancellation of the 50% individual income tax exemption. It also will result in necessary adjustments, pursuant to the procedure applicable for withholding tax adjustments on salaries and pensions. More specifically, the personal liability of an employer to withhold tax will be engaged.
Precisions vis-à-vis the 25% limit: the 25% limit is calculated based on the annual gross remuneration that the employee has already received and/or will receive during the fiscal year when the bonus will be paid. In the case where an employee leaves the employer during the year due to retirement, change of employer or end of activity, the employer should recompute the wage tax withholding, if necessary, taking into account the annual salary finally paid and taken into account for the 25% limit.
Non-deductibility of social security contributions: The Circular specifies that social contributions related to exempted salary income, such as the prime participative, are not deductible for wage withholding tax computations purposes. More particularly, the Circular outlines through illustrative examples how to calculate the non-deductible social contributions.
Executive directors/Managers and shareholders: Lastly, the Circular provides further guidance in respect to allocations of the prime participative to executive directors/managers and shareholders of limited liability companies who also derive employment income from the company. In this particular instance, the profit-sharing bonus received by an executive director/manager and shareholder, who may also be the sole beneficiary of the bonus is to be considered income derived from employment income, which is subject to both the employer-level and employee-level conditions outlined as above.
Additional supporting information provided by way of a Q&A
In addition to the publication of the Circular n°115/12, the Luxembourg tax authorities have created a Q&A section (available in French only) for further information in respect of (i) definitions used in the legal provision introducing the prime participative as well as in the Circular, notably on what “positive profits” of the employer means, (ii) how the operating profit year to be taken into account for the determination of the employer’s profits should be assessed and (iii) how the 25% limit should apply on an employee’s annual salary, type and number of eligible employees, etc.
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