On 17 July 2024, draft law No. 8414 has been submitted to the Luxembourg Parliament (Chambre des Députés) (the “Draft Law”) introducing new tax measures and enhancing certain existing tax regimes.
The Draft Law focuses on competitiveness and attractiveness for Luxembourg companies, investors and foreign talents, reducing individual’s taxation to enhance investments and consumption.
Corporate income tax rate reduction
As from fiscal year 2025, the corporate income tax (“CIT”) rate will be decreased by 1%:
- The 15% rate, applicable to companies with a taxable profit below EUR 175,000 is lowered to 14%; and
- The 17% rate, applicable to companies with a taxable profit exceeding EUR 200,000, is lowered from to 17% to 16% resulting in an aggregate tax rate of 23.87% instead of 24.94% for a company with its registered seat in Luxembourg-City (including solidarity surcharge and municipal business tax).
As announced in the governmental coalition program, the Draft Law brings the Luxembourg CIT closer to the OECD average of 23.6% and to the EU average of 21.2%.
Actively managed ETFs: subscription tax exemption
While passively managed ETFs are already exempt from subscription tax, the Draft Law extends such exemption to actively managed ETFs to take into consideration the increased interest in such funds.
The exemption will apply as from the first day of the quarter following the law’s entry into force.
Private wealth management companies (“SPF”)
The SPF which is a corporate entity dedicated to passively holding financial assets for private individuals acting in the management of their private wealth, is only subject to an annual 0.25% subscription tax levied on the amount of equity (paid-up share capital and share premium) and debt exceeding height times the total equity.
The SPF is supervised by the Administration de l’enregistrement, des domaines et de la TVA (“AEDT”), the authority in charge of indirect taxes and not by the direct tax authorities (“ACD”), in charge of direct taxation.
Technical clarification and changes to the SPF regime
- The corporate designation must contain either “ société de gestion de patrimoine familial ” or “ SPF ”.
- The minimum annual subscription tax is increased from EUR 100 to EUR 1,000.
- The amount of debt to be considered for the subscription tax is based on the debt existing on the first day of the financial year (previously on 1st January).
- The certificate of compliance with the SPF regime to be issued by a réviseur d’entreprises (external auditor), chartered accountant or the domiciliation agent confirming eligibility of the shareholders will have to be filed electronically.
Above changes will apply as from the first day of the quarter following the entry into force of the law.
Sanctions for non-compliance with the SPF regime
Under current rules, the AEDT Director can withdraw the benefits of the SPF regime in case of non-compliance with the legal and regulatory requirements with effect only as from the notification by the AEDT Director.
The Draft Law now foresees to grant the AEDT Director the power to issue fines to the non-compliant SPF depending on the breached legal obligations and clarifies the conditions, effects and procedural aspects of withdrawal of the SPF status:
- Failure to include SPF or société de gestion de patrimoine in an entity’s corporate designation, to file the subscription tax return or to provide the compliance certificate triggers a fine of up to half the annual subscription tax or EUR 10,000 in case the subscription tax cannot be determined.
- Failure to comply with the requirements pertaining to the corporate form, limitation of the corporate object and shareholders, statement of subjection to the SPF law in the by-laws, non-interference in the subsidiaries’ management, prohibition of holding real estate (directly or through a tax transparent entity) and prohibition of public offering or listing of shares triggers a fine up to EUR 250,000 and the AEDT Director can require the company to resolve non-compliant aspects within 6 months. After expiry of the delay, the AEDT Director invites the SPF to provide comments on the breaches observed, withdraws the SPF status to the company and informs the direct tax authorities. In addition, the company can no longer avail itself of the SPF status before the public or face a monthly EUR 5,000 fine.
In determining the amount of the fines, the AEDT Director must collect the SPF’s comments and take into consideration the seriousness and duration of the breach, the financial situation of the SPF, the benefit derived by the SPF from the breach, the damage suffered by third parties as a result of the breach, the degree of cooperation of the SPF and previous breaches committed by the SPF.
Date of effect of the SPF status withdrawal is set by the AEDT Director between the first day of non-compliance and 1st January of the fourth year preceding the non-compliance status. The statute of limitation for the recovery of taxes being suspended as from the non-compliance and until the withdrawal decision becomes effective (exhaustion of legal remedies).
These new sanctions will apply to breaches occurring or continuing after the entry into force of the law.
As a result, compliance with SPF’s legal obligations becomes a key point of attention as the above measures, if adopted and deemed in line with the constitutional principle of non-retroactivity, can result in the application of the ordinary tax regime, within the statute of limitation, to the former SPF.
Tax measures for individuals
Overhaul of the impatriate regime
The current Luxembourg impatriate regime provides for tax benefits mainly in the form of a total or partial tax exemption for benefits in kind listed by the law and, under certain conditions, for the impatriation bonus paid to the employee.
The Draft Law replaces, as from fiscal year 2025, the above exemptions with the exemption of 50% of the gross annual salary (excluding tax-exempt benefits in cash and benefits in kind) applicable to a gross annual salary up to EUR 400,000. The existing regime will remain in place for taxpayers already applying such regime with the option to apply the new regime.
Inspired by similar regimes applicable in other EU countries, this amendment intends to reinforce Luxembourg’s attractiveness to foreign highly skilled workers.
Specific tax-exempt bonus for first time employees below the age of 30
The Draft Law introduces a 75% exemption for the bonus paid to employees below the age of 30 at the beginning of the fiscal year having entered their first permanent employment contract with a Luxembourg employer. The exemption is available for a 5-year period and only with the first employer.
The amount of the eligible bonus amounts to (i) EUR 5,000 for a gross salary up to EUR 50,000 (on a full-time basis and excluding benefits in cash/in kind), (ii) EUR 3,750 for a gross salary exceeding EUR 50,000 and up to EUR 75,000 and (iii) EUR 2,500 for a gross salary exceeding EUR 75,000 and up to EUR 100,000.
A specific measure for young people entering the workforce has already been introduced earlier this year in the form of a partially tax exempt rent subsidy payable by employer to employees below the age of 30 (see our previous newsflash).
Enhancement of the participative bonus regime
The Draft Law eases the conditions applicable to the profit-sharing bonus tax regime (prime participative) which provides for the 50% exemption of the bonus paid to employees in connexion with the employer’s profits.
The profit-sharing bonus can now represent up to 30% of the employee’s annual gross salary (before benefits in cash and in kind) instead of 25% and the total amount paid by the employer can represent up to 7.5% of previous year’s profit instead of 5%.
Tax credit for cross border workers’ overtime hours subject to double taxation
German resident cross border workers have recently faced taxation in their country of residence of the remuneration of overtime derived from salaried work performed in Luxembourg despite the allocation to Luxembourg of the taxation right under the relevant double tax treaty (“DTT”) because of their exemption under Luxembourg domestic law.
The Draft Law intends to introduce, as from fiscal year 2024, a unilateral adjustment measure in the form a tax credit of up to EUR 700 (assuming an annual overtime remuneration of at least EUR 4,000) under the following cumulative conditions: (i) the employee’s country of residence has a DTT with Luxembourg allocating to Luxembourg the taxation rights over the employment income, (ii) the DTT provides that employee’s country of residence eliminates double taxation through a tax credit for such income or is entitled to tax such income if untaxed in Luxembourg and (iii) domestic legislation of the employee’s country of residence does not provide for an exemption (total or partial) or any form of tax relief for the remuneration of overtime. The annual gross remuneration for overtime must exceed EUR 1,200 to benefit from the tax credit.
Adjustment of the tax scale to inflation
The Draft Law further adjusts the tax scale applicable to individuals as from fiscal year 2025 with 2.5 indexation tranches effectively multiplying each bracket by approximately 1.06376 and thus eliminating the so-called “cold progression” from last year’s index tranches.
Targeted measures to alleviate the tax burden for lower income taxpayers
The following measures will apply as from fiscal year 2025:
- Class 1a which includes single-parent households, widowed persons and taxpayers aged over 64 at the beginning of the fiscal year: the tax scale is revised to reduce the tax liability and progressivity of the brackets which notably results in the increase of the tax-exempt tranche from EUR 24,876 to EUR 26,460.
- Single-parent tax credit (crédit d’impôt monoparental): the maximum amount is increased from EUR 2,505 euros to EUR 3,504 euros per year.
- Allowance for child living outside the household is increased from EUR 4,422 to EUR 5,424.
- Minimum social wage tax credit (crédit d’impôt salaire social minimum) is increased from EUR 70 to EUR 81 (on a monthly basis) ensuring taxpayers receiving the minimum social wage for non-qualified workers are not subject to tax independently from their tax class.
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