2023 Budget tax measures
On 15 December 2022, the Luxembourg Parliament voted to approve the 2023 Budget. The 2023 Budget Law provides for a number of measures aimed to maintain the country’s international attractiveness, which affect individual fiscal aspects.
Modification of profit-sharing scheme rules (prime participative)
Under the profit-sharing scheme rules (prime participative) introduced in 2021, Luxembourg companies can provide a premium to employees, 50% of which is exempt from tax. Any beneficiary of the scheme must be an employee and be affiliated to a social security scheme either in Luxembourg or abroad in a country that has a bi- or multi-lateral agreement for social security purposes with Luxembourg. The premium is paid at the sole discretion of the employer.
The following conditions and limits currently apply to the implementation of the profit-sharing scheme:
- The employer/company must earn its revenue from the following categories of income: commercial profits, farming, forestry, or independent activities.
- The employer must have proper accounts during the year in which the bonus is paid as well as for the prior tax year.
- The total amount that can be allocated to employees as part of the profit-sharing scheme cannot exceed 5% of the profits of the business of the prior year.
- Details of the profit-sharing scheme in a prescribed form must be provided to the withholding tax (WHT) office for verification at the time of implementation of the profit-sharing scheme.
- The payment cannot exceed 25% of the beneficiary’s gross annual remuneration (excluding benefits in kind and in cash and the bonus itself).
To provide more flexibility to Luxembourg companies in a tax unity group, the Budget Law provides that, under certain conditions, companies can opt to assess the above 5% limit by adding the after-tax profit of the members of the tax unity group.
Relaxing eligibility requirements for the special tax regime for inbound employees
Under the existing rules, in order to qualify for the special tax regime for inbound employees, the annual gross base salary needs to be at least 100,000 euros (EUR) per annum (excluding benefits in kind or in cash). This threshold is lowered to EUR 75,000 per annum under the Budget Law.
Increasing certain tax credits and tax deductions
Single parents with dependent children are currently entitled to a yearly tax credit ranging from EUR 750 to EUR 1,500 depending on their level of income. To support these individuals, the maximum amount of the single parent tax credit is increased to EUR 2,505. The earnings ceiling for the maximum tax credit is increased from EUR 35,000 to EUR 60,000.
The tax credit for minimum wage earners of EUR 70 per month currently only applies to employees earning a monthly gross wage of between EUR 1,500 and EUR 2,500. Since the minimum wage increases in 2023, the qualifying income range is also increased, to EUR 1,800 to EUR 3,000.
The tax deduction for the contribution for child maintenance where the child is not part of the taxpayer’s household is set to increase from EUR 4,020 to EUR 4,422.
Sustaining affordable housing
The net rental income is determined by deducting rental expenses from the gross rental income. Expenses include, for instance, interest incurred on mortgage loan, repairs/maintenance costs, insurance premium paid (fire, civil liability), and depreciation.
Currently, for depreciation of construction, amortisation rate varies from 2% to 4% depending on the year of construction of the building, except land (lump-sum calculation of 20% of the acquisition price if price of land at acquisition is unknown). Alternatively, if the taxpayer does not have any actual expenses, a lump-sum deduction may be applied.
To limit speculation as well as to contain pricing pressure through excessive demand, the tax system for depreciation of construction is to be reformed. From the 2023 tax year, any taxpayer will only be able to benefit from this favourable tax system for two buildings or parts of buildings used for rental housing.
Extension of individual income tax returns
Before the Budget Law, the deadline for the filing of individual income tax returns was three months after the end of the tax year (31 March). The filing deadline is now set to 31 December of the year following the tax year. This means that the deadline for filing income tax returns for the 2022 income tax is postponed to 31 December 2023 instead of 31 March 2023.
The deadline for partners or spouses to submit a joint application for individual taxation is extended to 31 December as well (i.e. to 31 December 2023 for 2022).
The deadline for Luxembourg residents to opt for a 20% flat and final tax over qualifying interest income, when the paying agent is located outside of Luxembourg but in the European Union (EU), is extended to 31 December (instead of 31 March).
A new system for calculating the benefit in kind according to the type of engine and emissions of CO₂ will be introduced as of 1 January 2023 and will apply progressively from 1 January 2023 to 2025.
Tripartite Agreement tax measures
During 2022, energy prices and consumer prices experienced an unprecedented surge of inflation. As a response, a Tripartite Agreement (‘Agreement‘) was released on 7 March 2023, bringing together the Luxembourg government, the Union des Entreprises Luxembourgeoises (UEL), and several trade unions.
The Agreement aims to extend existing measures and introduce a comprehensive set of anti-inflation measures to alleviate the initial adverse effects on the economy and households. Main tax measures announced for individuals are as follows:
The tax credit ceiling for registration fees (Bëllegen Akt) when purchasing real estate, including building plots and housing structures, will be raised from EUR 20,000 to EUR 30,000 per individual and from EUR 40,000 to EUR 60,000 per couple. This change will have retroactive effect from the date of the Agreement, 7 March 2023, and will apply to all notarial deeds signed thereafter.
The ceiling for mortgage loans interest deduction to finance the acquisition or the building of the main residence will be increased by 50%.
Tax exemptions for net rental income on housing under social rental management will be raised from 50% to 75% starting from the 2023 tax year.
Adjustments to personal income tax (PIT) brackets
For employees, the PIT brackets will be adjusted by an equivalent of 2.5 index tranches starting from 2024. In the meantime, for 2023, a retroactive tax credit equivalent to 2 index tranches will be introduced to compensate.
The implementation of the measures described above is an ongoing process. Recently, bill of law 8176 was presented to the Luxembourg Parliament to introduce the new ceiling for the tax credit for registration fees, as described above. Other measures adopted under the Agreement are expected to be presented to the Parliament in separate bills of law.
COVID-19 specific measures
Luxembourg concluded specific agreements with its neighbouring countries (Germany, France, and Belgium) to implement a mutual 'force majeure tolerance' for cross-border employees (i.e. employees working in one country and living in another one) in relation to COVID-19 restrictions.
In practice, the home-working days due to the COVID-19 pandemic were considered as being exercised in the state where the cross-border worker would have worked in a normal situation. This measure was intended to avoid a split taxation due to COVID-19 restrictions for cross-border employees.
Similar measures were taken from a social security perspective. In practice, the days related to home working due to COVID-19 were exceptionally disregarded in the counting of the 25% limit for individuals qualifying as multi-state workers under Article 13 of Regulation (EC) 883/2004.
The aforementioned measures were exceptional and temporary, and the tolerance ended on 30 June 2022 with respect to individual taxation. However, for social security purposes, the EU Administrative Commission issued guidance whereby it indicated that the current legal framework of the social security EU regulations should be interpreted in a flexible and more adequate way as 'telework constitutes a new reality for workers and employers'. Further, on 14 November 2022, the Commission extended the COVID-19 tolerance regime until 30 June 2023.
New framework agreement on social security position of cross-border teleworkers in the European Union
Recently, an EU framework agreement on the determination of the applicable social security scheme for certain cross-borders teleworkers within the European Union was published. This framework agreement aims to introduce a more permanent arrangement to determine the social security position of cross-border teleworkers in the European Union as of 1 July 2023. More specifically, the framework agreement provides for a system (on the basis of article 16 of Regulation (EC) no. 883/2004 on the coordination of social security systems) whereby, when adopted by the member states involved, teleworking in an employee’s residence state will, if a number of conditions are met, not be taken into account for the determination of the applicable social security scheme if it accounts for less than 50% of their working time.
The principles of the framework agreement only apply when the member states involved in a given situation have both signed the agreement.