On 27 September 2024, the Luxembourg tax authorities issued Circular n° 115/14 clarifying certain aspects of the partially tax-exempt rent subsidy which has been introduced by the law of 22 May 2024 and applicable since 1st June 2024 (see our previous newsflash).
Background
The rent subsidy mechanism grants a 25% exemption at the level of the employee on amounts paid by the employer in relation to rental cost borne by his employees.
Circular n° 115/14 (the “Circular”) recalls the three main conditions to benefit from the 25% tax exemption of a rent subsidy: (i) the employee is less than 30 years old on 1st January, (ii) the eligible subsidy cannot exceed the rent (excluding expenses) nor EUR 1,000 (for a full time employee) and (iii) the employee’s annual gross remuneration including benefits but excluding the subsidy should not exceed 30 times the monthly social minimum wage for skilled workers.
The exemption has been introduced in Article 115, 13c of the Luxembourg income tax law (“LITL”) and a Grand-Ducal Decree has been issued on 22 May 2024.
Clarifications by the Circular
The Circular clarifies the following points:
- Presence of income from employment: There needs to be a work contract between the employee and the employer, and the remuneration paid needs to be considered as employment income as defined under Article 95 LITL. An employee which is also a shareholder is eligible for the exemption even when it is the sole employee of the company.
- Change of employer does not affect employee’s eligibility if the relevant conditions are met.
- The ceiling to compute the tax-exempt subsidy (higher of EUR 1,000 or the effective rent) should be adjusted where the employee works an incomplete month, on a part-time basis or his employment income is partially tax exempt in Luxembourg due to a double treaty.
- Rent to be considered for the eligible subsidy cap only considers the rent paid excluding other costs such as housing expenses. Where the subsidy paid exceeds the ceiling, the 25% will only apply up to the relevant cap.
- Employees in flat sharing are eligible for the regime. The amount of the rent to be considered is the amount payable by the employee under the rental agreement and in the absence of allocation under the rental agreement, the total rent is split among parties to the rental agreement.
- Rent must be paid in relation to the employee’s main residence located in Luxembourg or abroad. Rents for a secondary residence are excluded, as are situations where the employee owns his main residence or does not pay a rent.
- To assess the applicable salary cap in case of part-time work or where employees start during the year, the salary must be converted to a full-time basis or annualized to ensure the maximum of 30 times the monthly social minimum wage for skilled workers is not reached.
- Annual revision and adjustment by the employer of the tax-exempt subsidy must take place at the latest upon the year end salary payment.
- The subsidy must be paid monthly and cannot be paid more than a month after the rent due date. Annual or quarterly payments are excluded from the exemption mechanism.
- The Circular recalls that the tax-exemption of the rent subsidy triggers the non-deductibility of social contributions in relation to the exempt amount and provides for a simplified calculation rule of the non-deductible portion of social contributions to be considered when computing withholding tax on salary.
- Procedure and documentation for employers: No preapproval from the LTA nor year end notification to the LTA are required for the application of the rent subsidy. In the salary certificate (form 160), the employer must separate the amount of the subsidy from the gross salary and the exempt part must be clearly designated (“exempt rent subsidy” or “exemption under Article. 115, 13c LITL”). The employer must clearly identify the subsidy amounts in its payroll book. The Circular recalls that employers are responsible for the correct application of withholding tax on wages and the subsidy exemption.
- Documentation to be provided by employees to employers to support the amount of their rent can consist, in principle, in any relevant documentation. According to the Circular, a rental agreement should be preferred to unequivocally designate the employee and amount of the rent.
- First eligible payments can take place for the payroll period ending in June 2024.
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