Tax measures presented in the Draft Budget Bill
On 13 October 2021, the Luxembourg Finance Minister presented its 2022 draft Budget Bill (hereinafter the “Draft Law”), which includes no major tax reform consistent with the announcement made earlier this year to postpone the tax reform.
Introduction of a tax treatment for Pan-European Personal Pension Product (PEPP)
The Draft Law proposes to introduce a tax framework for PEPP. While Regulation (EU) 2019/1238, aims at establishing a more harmonised European market for savings products, the regulation does not establish specific tax provisions. Therefore, in order to align the tax treatment between the PEPP and the pension products based on national rules, it is proposed to recognise from a tax point of view two forms of individual pension scheme in Luxembourg:
- The national pension scheme in its form known since 2002; and
- The Luxembourg sub-account of a PEPP account under the provisions of Regulation (EU) 2019/2088.
The Draft Law proposes to extend the tax treatment applicable to the national pension scheme within the meaning of Article 111bis of the Luxembourg income tax law as amended (“LITL”) to the PEPP.
In summary, the tax treatment of paybacks from a Luxembourg sub-account of a PEPP account as well as the tax deduction of incoming payments to a Luxembourg sub-account of a PEPP account within the meaning of a new article 111ter of the LITL introduced by the draft law, would follow the tax rules applicable to the national pension scheme within the meaning of article 111bis of the LITL.
As a result, the uniform deductibility limit of €3,200 applies cumulatively to both forms of contract.
Expansion of the list of tax-favoured regime for home savings scheme
The Draft Law also proposes to extend the list of tax-favoured regime for home savings scheme. Since the 1980s, Luxembourg tax law has provided, under certain conditions and within certain limits, for the deduction of contributions to home savings scheme as special expenses.
Under the current legislation, home savings scheme must have been concluded in order to finance:
- The construction or acquisition of the main residence;
- The transformation of such residence;
- The repayment of obligations entered into for the financing, the construction, acquisition or transformation of the main residence.
The Draft Law proposes to expand the list of tax-favoured regime for home savings scheme by adding the financing of maintenance and repair costs of the main residence as well as the financing of solar photovoltaic or thermal installations attached to the home.
Proposal for simplifying measures
The Draft Law proposes to introduce the following administrative simplifications:
- a flat-rate tax on remuneration paid by temporary employment agencies for an assignment contract to temporary employees whose hourly wage does not exceed the amount of twenty-five euros. The aim is to reduce the number of tax cards issued by the administration for temporary workers;
- an exemption from income tax of allowances paid by the European institutions to national experts who are in secondment; and
- an extension of the income tax allowance for the hiring of unemployed persons.
Lastly, certain tax provisions will be amended to reflect the fact that the withdrawal of the United Kingdom from the European Union had an impact from 1 January 2021 on all Luxembourg tax provisions in which the concepts of “Member State”, “Member State of the European Union” or "State party to the Agreement on the European Economic Area” are used, without the said provisions being modified so far.
Government statement on the economic, social and financial situation of the country
On 12 October 2021, the Prime Minister, Minister of State, Xavier Bettel pronounced the government's declaration on the economic, social and financial situation of the country in 2021 before the Chamber of Deputies.
Taxation rates
The government insisted that there would be no austerity policy and no tax increase for the time being. On the contrary, the government will maintain investments, promote innovation and maintain a stable tax framework.
Real estate
The government intends to tax speculation on building land and apartments. As part of a general reform of the property tax, the Minister of the Interior and the Minister of Finance, together with the Minister of Housing, are working on a model with balanced and fair ambition.
Taxation of speculation
The objective of this reform is not to target people who live in their homes, but those for whom housing is only an object of speculation. In order to be able to tax unoccupied housing more heavily in the future, the government wants to create a legal framework for the deployment of a national register listing every apartment in the country, with information whether it is occupied or not.
This register, which will be completed by the 16 municipalities, will give an overview of housing conditions in the country.
Reform of real estate tax
The government plans to table a property tax reform bill within the next 12 months. The aim of this reform will be to allow a greater mobilization of building land. At the same time, to empower the owners of unbuilt land and unoccupied apartments, in order to encourage them to support the efforts of the state in the creation of affordable housing.
Debate on fair taxation
The government had planned a second major tax reform for this period of legislature. The aim of this reform was to make the tax system fairer, by providing identical taxes for everyone in the same tax bracket. The coronavirus thwarted those plans but the government maintains that the debate around greater tax justice must be continued.
Agreement with Belgium, France & Germany on homeworking
The government has ensured through bilateral agreements with neighbouring countries that frontier workers can also work from their homes without any fiscal or social disadvantage. Agreements were notably put in place in the context of the Covid, this regulation is maintained until the end of the year. With Belgium, an agreement has been signed which increase the number of possible teleworking days from 24 to 34 on a long-term basis. As to France, the threshold should also be increased from 29 days to 34 days as from 1st January 2022. The government hopes to find similar solutions with Germany.
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