New tax measures for 2021
On 17 December 2020, the Luxembourg Parliament approved the 2021 Budget Law. Its provisions include a number of measures that amend or extend the tax legislation. No new personal taxes, or any major reform of the personal tax regime for 2021 have been voted and personal income tax rates also remain unchanged. For individuals, the legislative measures target a range of topics. These include the introduction of a new tax favoured profit sharing scheme for employees, a widening of the definition of what is considered as employment income, and the modification and extension of the special tax regime for “inbound” employees. In addition, the Circular Letter providing for a lump sum valuation method for stock options and warrants has been withdrawn on 14 December 2020, with effect as from 1 January 2021.
The Circular letter relating to ‘stock options’ and ‘warrants’ is withdrawn
The Circular n° 104/2 dated 29 November 2017 relating to the taxation of ‘stock options’ and ‘warrants’ has been abolished from 1 January 2021. Therefore, it is no longer possible to apply a lump-sum valuation method in order to calculate the taxable benefit deriving from the grant of unconditional and tradeable stock options or warrants occurring since 1 January 2021.
Introduction of a tax-efficient employee profit-sharing scheme
The Bill introduces the concept of a ‘prime participative’, of which 50% may be exempted from wages 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 which has a bi- or multi-lateral agreement for social security purposes with Luxembourg.
The premium is paid at the sole discretion of the employer. Conditions and limits 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 which 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 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).
The costs in connection with the profit-sharing scheme are deductible at corporate level.
Incorporation into the law of the special tax regime for “inbound” employees
The provisions outlined in Circular no 95/2 of 27 January 2014 will be incorporated into the law, with certain modifications.
The Bill removes certain obligations which previously were a deterrent to the implementation of the regime, such as the obligation that the employing entity in Luxembourg must have or expect to have 20 full-time employees in the medium term. Also removed are the obligations that the employee recruited into Luxembourg must put at the disposal of the employees their specialist knowledge and savoir-faire, or that the employee must be recruited into a sector which is experiencing recruitment difficulties in Luxembourg.
The main changes relate to the reference base salary, the duration of the regime and the way in which the cost of living exemption is calculated. Previously, in order to qualify for the regime, the employee had to have a gross base salary of EUR 50,000. This increases to EUR 100,000. The duration of time during which the regime can apply has been increased from 6 to 9 years (including the year of arrival). The cost of living allowance is to be calculated on a lump sum basis, and 50% of the allowance may be paid free from tax. The cost of living allowance cannot exceed 30% of the annual base remuneration (excluding benefits in kind and cash).
In addition, there are other minor changes to the wording of the provisions of this special tax regime. These may affect the level of exemptions available for certain expenses.
Introduction of electronic tax cards
During 2021 the Tax Administration will put in place a secure on-line platform which will permit employers to access employee tax cards. As from 2022, employees will no longer be obliged to provide their employer with their tax card directly. The tax cards provided via the secure platform will potentially be valid for more than one year.
An employer will be obliged to access the platform at least once a month, to verify whether there are any new tax cards provided to them.
VAT treatment of company cars
The Court of the European Justice ("CJEU") has recently ruled in the case C-288/19, on the VAT treatment of company cars made available to employees and used for professional and private purposes.
Since 2013, the German tax authorities considered a deemed consideration for the provision of a company car to an employee and assimilated this to the supply of a service, namely a long term hiring of a means of transport. Such long term hiring is taxable at the place where the consumer (i.e. the employee) resides. As a result, the German authorities asked foreign businesses to declare and pay German VAT for company cars used by employees residing in Germany.
In the judgment of 20 January 2021, the CJEU denied the existence of a consideration where the employee neither makes a payment, nor gives up part of his remuneration in exchange for the company car. More precisely, the Court indicated that the member of staff concerned does not make any payment; nor does that member of staff dedicate a part of his cash remuneration thereto. He has also not chosen between various benefits offered by the taxable person under an agreement between the parties according to which the entitlement to use the company car would be contingent on the forgoing of other benefits. In the absence of remuneration, there can be no assimilation to a long term hiring and hence no taxation at the employee's foreign place of residence. Germany (or any other EU Member State) could therefore not claim the payment of local VAT.
On the other hand, when the employee pays for his company car, or gives up part of his salary (e.g. the cost of the car is deducted from his remuneration), there may a long-term hiring and this supply may be subject to VAT where the employee is established, provided the following conditions are met:
- the employee has a permanent right to use the company car (including for private purposes) and to exclude other persons from using it;
- the car is made available to him for more than 30 days.
Consequences and open questions
The case at hand could have immediate and retroactive implications for Luxembourg employers having employees residing in Germany. The Luxembourg employer would have to register for VAT in Germany, with tax office Saarbrücken and would need to properly assess, declare and pay the VAT there.
Furthermore, this would also mean that in cases where no remuneration has been paid by employees for the use of company cars, the supply should not be subject to VAT in Germany. Therefore, foreign taxable persons could apply for a VAT refund in Germany for reporting periods which have not yet become final, if they have declared German VAT on the provision of company cars to employees established in Germany.
A case-by-case analysis of the company car policy and the terms of the employment contract is therefore needed.
There is however an important question not entirely resolved. What conclusion must be drawn for an employee with a company car allowance, which he can choose as an alternative to a cash salary, and who does not exceed his allocated budget? It does not fit exactly the scope of the judgment and seemed to be disregarded by the CJEU. However, lots of leasing agreements will fit into that category.
Another open question is how to calculate the taxable basis of that supply. In principle, it should be the effective remuneration paid. However, for instance Germany applies some other special lump sum methods.
The German referring Court still needs to decide and we expect the German fiscal authorities to revise their existing circular-letter and publish new rules in a near future. The Tax Office Saarbrücken confirmed on 9 February 2021 that they will not revise their position regarding the VAT treatment of company cars and the calculation of the taxable basis of that supply, as long as the local Court’s decision has not been made. They furthermore explained that the tax office will assess the pending administrative appeals once the decision of the local Court is available. This will need to be monitored. Taking actions before may be premature.
Also, it is important to monitor the reaction of the other neighbouring countries (especially France and Belgium) to the CJEU case law. An EU judgment has direct effect in all Member States. So far France did not take a similar position to the German one, but this is likely to evolve quickly. In Belgium, the authorities published the CJEU decision also on their website but did not further comment on this. Being prepared seems a must, but the right actions will be dictated by those future developments.
On 11 February 2021, the Luxembourg VAT authorities confirmed in the Circular n°807 (Link) the position taken by the CJEU without adding more detailed explanations. They confirmed that:
- Where a car is made available for more than 30 days to an employee who have full and exclusive use of the car, that the service is deemed to be provided by the employer to the employee is subject to VAT in the country where the employee resides.
- For employees established in Luxembourg, the Circular confirm that 17% VAT should be paid by the employer to the VAT authorities;
- Employers deemed to provide a service to their employees are allowed to fully recover the Vat incurred in related costs and;
- Where the company car is made available to an employee for no consideration and (a part) of the related input VAT was recovered, a VAT adjustment should be made for the private use of the company car in accordance with the Luxembourg VAT law.
It should be noted that the Circular does not contain any date of entry into force.
Finally, the Luxembourg position will need to be amended. Luxembourg VAT returns may also need to be adjusted. Consider, for example the following situations:
- If a Luxembourg company registers for VAT in Germany and is required to pay VAT in arrears, that company may try and recover the VAT it used to declare in Luxembourg for the same period of time;
- When that Luxembourg company was not able to fully deduct the Luxembourg input VAT, e.g. on the leasing costs (which is the case of most financial services providers or holding companies) but paid VAT in Luxembourg on the private use of the car, now it would be able to deduct the same input VAT because it is deemed to carry out a taxable supply (long-term hiring)(for which it will be liable to collect VAT);
- A Luxembourg company may also want to revise its calculation method of the payable VAT for cars used by Luxembourg residents, the qualification of the supply changing now from "private use of a company asset" to "taxable hiring".
Another side effect may be hitting Luxembourg companies registered under the simplified regime, or fully exempt taxable persons which are not yet registered for VAT. Today, those companies, who by definition do not recover input VAT, do not have to pay the tax on the private use of company cars by their employees. Tomorrow, the same companies could be deemed to perform long-term hiring of cars, a supply automatically subject to VAT. This would require a registration or a change of declaration regime, the collection of output VAT and the recovery of car related expenses.
COVID-19 specific measures
Luxembourg has concluded specific agreements with its neighbouring countries (Germany, France, and Belgium). These agreements 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 are considered as being exercised in the state where the cross-border worker would have worked in a normal situation. This measure is intended to avoid a split taxation due to COVID-19 restrictions for cross-border employees.
Similar measures have been taken from a social security perspective. In practice, the days related to home working due to COVID-19 are currently 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 are exceptional and temporary. The initial rules have been extended until at least 30 September 2021 for taxes Belgian and French residents. For Germany, the measures are automatically extended from month to month until it is denounced by one of the competent authorities.
For social security, the rules have been extended until 30 September 2021 for French resident and until 30 December 2021 for Belgian residents. For Germany, the measures are automatically extended from month to month until it is denounced by one of the competent authorities.