On 14 October 2020, the Luxembourg Finance Minister presented its presented 2021 draft Budget Bill (hereinafter the “Draft Law”), which includes a number of amendments to the Luxembourg tax system affecting both companies, investment vehicles and individuals.
TAX EQUITY AND SOLIDARITY
The Draft Law introduces a number of changes to the taxation of real estate assets held by certain investment vehicles in order to counter the perceived abuses of these regimes.
Introduction of a 20% levy on income from Luxembourg real estate held (directly or indirectly) by certain investment vehicles
The Draft Law proposes to introduce a 20% levy on income derived from real estate assets located in Luxembourg held by special investment funds within the meaning of the law 13 February 2007 (generally referred to as SIFs), alternative investments funds within the meaning of article 1 of the law of 23 July 2016 (generally referred to as RAIFs) as well as collective investment vehicles within the meaning of Part II of the law of 17 December 2010 (generally referred to as Part II UCITS) (collectively the “Investment Vehicles”), unless they take the form of a limited partnership (a Société en Commandite Simple or “SCS”). The term “income” is defined as including (i) rental income (ii) capital gains on the sale of real estate and (iii) capital gains on the sale of shares for the part attributable to the value of the underlying real estate held.
The Draft Law also specifies that if the real estate income is earned by an Investment Vehicle through a tax transparent entity (e.g. a partnership or a fond commun de placement) in which an investment vehicle holds an interest, that income will be treated as derived by that investment vehicle in proportion to the interest held in the tax transparent entity.
The 20% levy will be payable by the Investment Vehicles and calculated on the gross amounts without deduction of any expenses. Furthermore, said levy will not be tax deductible and no tax credit or reimbursement is foreseen.
Finally, all Luxembourg Investment Vehicles will have to inform the Luxembourg tax authorities before 31 May 2021 whether they hold any Luxembourg real estate assets in the course of the year 2020 and 2021. Likewise, any Investment Vehicles changing their corporate form to a SCS in the course of the year 2020 and 2021 and holding Luxembourg real estate assets at the time of the change will have to inform the Luxembourg tax authorities as well.
Clarification of the prohibition to hold real estate assets for SPF
The Draft Law also proposes to amendment to the tax regime of the société de gestion de Patrimoine familiale (hereinafter “SPF”). While the SPF law already prohibits an SPF from directly holding real estate assets, the amendment extends this prohibition to real estate assets held indirectly through transparent entities or mutual funds such as sociétés civiles immobilières or a fond commun de placement. The SPF may continue to hold real estate assets indirectly through opaque companies.
Transfer tax on transfers of real estate assets
Finally, in order to align the tax treatment applicable to the purchase of shares of a company holding real estate assets (so-called “share deals”) with the tax treatment applicable to the direct purchase of real estate by an investor (so-called “asset deals”), the Draft Law proposes to increase the duties applicable to the contribution in kind of real estate to a Luxembourg company or civil company (Société Civile) against shares. The registration duties will be increased from 0,5% + 2/10th of the value of the assets to 2% +2/10th and the transfer duties will be increased from 0,50% to 1 % of asset’s value.
The Draft law also extends the period after which real estate asset may be allocate to a shareholder (other than the shareholder who initially contributed the real estate asset) after the dissolution, liquidation or capital reduction of a Luxembourg company or société civile from five to ten years.
TAX EQUITY AND COMPETITIVENESS
Abolition of the stock-option regime and introduction of a new employee participation mechanism
The Circular 104/2 dated 29 November 2017 (hereinafter the “Circular”) will be repealed at the end of the financial year 2020. As a result, the lump sum valuation of unlisted stock options and warrants will be repealed thus affecting existing stock-option plans as well.
Pursuant to the repeal of the Circular, taxpayers will have to apply general valuation principles applicable to advantages in kind.
In order to keep Luxembourg attractive for companies, align the employee’s interest to the ones of the employer and introduce a more equitable tax regime, a new employee participation mechanism is foreseen.
At the level of the employee, this regime provides for a 50% tax exemption of payments received under said scheme as long as they do not exceed 25% of the annual gross income of the employee (advantages in kind excluded) and provided that the employee is affiliated to the Luxembourg social security or to a foreign social security scheme covered by a bilateral agreement.
The partial exemption will also require that the employer fulfils certain conditions:
• The employer must realize a commercial income, agricultural income or income from a liberal activity);
• The employer must maintain an adequate bookkeeping;
• The payments under the scheme are limited to 5% of the profit generated in the previous financial year of the employer; and
• The employer must communicate to the Luxembourg tax authorities the list of employees benefiting from the payments under the scheme.
At the level of the employer, payments made under the scheme will be tax deductible notwithstanding the fact that there are being computed on the after-tax profits of the previous year.
Impatriate regime
The current impatriate regime will be replaced by a new regime expressly included in the Luxembourg tax law. The new impatriate regime will continue to distinguish between repetitive and not repetitive expenses. The main difference with the existing regime will reside in the fact that it will only apply to impatriate employees earning at least 100,000 € per year (currently 50,000 € per year), that it will apply for a period of up to 9 years (currently 5 years) and that the types of payments covered are defined in a less restrictive manner.
MEASURES RELATED TO HOUSING
Reduction of the accelerated depreciation rate applicable to rented real estate assets
Pursuant to the Draft Law, real estate assets acquired after 1 January 2021 and used for rental purposes will only benefit from a 4% accelerated depecriation rate (previously 6%) if the completion of the real estate assets took place less than 5 years (previously 6 years) before the beginning of the fiscal year. In addition to this new accelerated depreciation rate, the Draft Law provides for the introduction of a special real estate allowance for taxpayers benefiting from the 4% accelerated depreciation rate. If the total depreciable real estate asset (i.e. excluding the cost of land) does not exceed 1,000,000 €, the allowance will be 1% of the value of this asset. If the total depreciable real estate asset (i.e. excluding the cost of land) is greater than 1,000,000 €, the allowance will be capped at 10,000 €.
Introduction of an increased depreciation rate for sustainable energy renovation work
In order to encourage owners of real estate assets used for rental purposes to carry out sustainable energy renovation works, a tax deductible depreciation at a rate of 6% over 10 years will be introduced. This depreciation rate will only apply for expenditure benefiting from the "PRIMe House" financial aid scheme granted by the Administration de l’environnement.
Increased scope of the 3% VAT rate to renovation works
In order to encourage owners of real estate assets to carry out sustainable energy renovation works, the minimum age of the real estate required for the application of the super-reduced VAT rate of 3% will be reduced from 20 to 10 years.
Increase of power threshold of photovoltaic installations for the determination of taxable income
Finally, the Finance Minister announced that the power threshold upon which income earned from feeding electricity generated from private photovoltaic installations to the national grid is deemed taxable will be increased. No indication thereof can be found in the Draft Law, but since the current treshold (photovoltaic installations generating less than 4 kW are considered as not generating taxable income) originaly derived from an administrative circular (Circular N°14/2 dated 23 may 2003), it is expected that a new circular will be issued shortly.
SUSTAINABILITY
Reduction of the subscription tax for sustainable investment fund
With the aim of developing Luxembourg as a green and sustainable financial centre, this measure aims at reducing the subscription tax payable by Undertakings for Collective Investment (hereinafter “UCI”) which invest in certain activities considered as sustainable. In order to benefit from the reduced subscription tax, the UCI will have to invest at least 5% of its assets in activities, which are considered as sustainable within the meaning of the European regulation 2020/852. Depending on the percentage of assets invested in sustainable activities, the subscription tax will range from 0.03% to 0.01% on the proportion invested in sustainable activities. To benefit from the reduced rates, the UCI will require a certificate issued by an approved auditor as to the percentage invested in sustainable activities.
Implementation of a CO2 tax
A new excise duty called the "CO2 Tax" will be introduced as from the year 2021 by means of an amendment to the law of 17 December 2010 fixing the excise duties and assimilated taxes. The CO2 Tax will amount to 20 € per ton of CO2 emitted. The rate will gradually increase over the next years, to 25 € per ton of CO2 emitted for the year 2022 and to 30 € per ton of CO2 emitted for the year 2023. In concrete terms, prices at the fuel station will increase by around 5 cents per litre of petrol and diesel. The revenue from this tax will be used to fight global warming and to strengthen social equality, in particular by increasing the tax credit for employees and the self-employed from 600 € to 696 €.
ADMINISTRATIVE SIMPLIFICATION AND DIGITALISATION
Digitalisation of the tax cards
In a continuing effort of digitalisation, the Draft Law introduces an amendment to the working of the tax cards (fiche de retenue d’impôt). As of 2022, said tax cards will made available to the employers as well as to the employees electronically. The Luxembourg tax authorities plan to introduce the electronic tax cards during the course of 2021. Until 31 December 2021, a transitionary period is granted to the employers in order to adapt to the use of this new tools. As of 1 January 2022, employers will be obliged to use the new tool and to consult the tax cards made available to them in electronic form to avoid fines. This new system will replace the current cumbersome system, in which employees had to deposit their tax cards each year with the employer and where a lack thereof forced the employer to apply a higher withholding tax rate than the tax eventually due by the employee.
Increase of the VAT exemption thresholds
The actual exemption threshold of 30,000 € under which it is not necessary for enterprises to register for VAT will be increased to 35,000 €. This will allow a greater number of small enterprises to benefit from administrative simplification.
OTHER MEASURES
Tax allowance for rent discounts granted during the Covid-19 crisis
In the context of the Covid-19 crisis, lessors who have reduced rents on real estate assets lent under commercial leases during the calendar year 2020 and due to the COvid-19 crisis will be entitled to a tax rebate corresponding to twice the amount of the rent reduction granted per property or part of property and per commercial lease agreement. The rebate is limited to 15,000 € per property or part of property.
Abolition of the tax regime for venture capital investment certificates
The tax regime for venture capital investment certificates introduced by Article VI of the amended law of 22 December 1993, having as its object the stimulation of investment in the interest of economic development will be repealed due to the perceived lack of interest in the specific measure.
Confirmation of the tax exempt nature of Covid-19 related financial assistance
The Draft Law confirms that financial assistance granted by the State in the course of the Covid-19 pandemic to certain micro-companies pursuant to the modified Grand-Ducal Decree dated 25 March 2020 and to certain self-employed individuals pursuant to the Grand-Ducal Decree dated 8 April 2020 are tax exempt.
Exemption certificate issued by the AEDT
The Draft law proposes to grant to the certificate already issued by Administration de l’enregistrement des domaines et de la TVA in the case of a succession exempt from inheritance tax (on the basis of article 28 of the amended law of 28 January 1948), not only a fiscal but also a civil scope. From January 2021 onwards, heirs will thus have an efficient mean to access movable property derived from a succession. Indeed, any third party holder of property will be required to accept this certificate as proof that the certificate holder is a heir. In the case of inheritances exempt from inheritance tax, the aim is in particular to make it easier for heirs to access funds held by credit institutions within the framework of an inheritance.
Amendments to the fiscal unity regime
Last but not least, the Draft Law also provides for a much anticipated amendment to the Luxembourg fiscal unity regime. Indeed, pursuant to the B.e.a. v. Administration des contributions directes judgment of the Court of Justice of the European Union (C-749/18) dated 14 May 2020, which criticized certain aspects of the fiscal unity regime, the current fiscal unity regime will be amended in order to allow for a transformation from a vertical fiscal unity into a horizontal tax unity. This transformation is proposed to be allowed without any negative tax consequences at the level of the members of the previous fiscal unity as long as the change from a vertical to a horizontal unity takes place before the end of the tax year 2022 and leads to an growth in the members of the unity by the inclusion of new members all while maintaining the same head of the fiscal unity. Provided those conditions are fulfilled, the change would not restart the mandatory initial five year period for the existing members.
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