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 (PIT) 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 In addition, the Circular Letter providing for a lump-sum valuation method for stock options and warrants has been withdrawn on 14 December 2020, with effect since 1 January 2021.
The Circular letter relating to ‘stock options’ and ‘warrants’ has been abolished
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.
Tax-efficient employee profit-sharing scheme
The 2021 Budget Law introduced 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 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 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).
The costs in connection with the profit-sharing scheme are deductible at the 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 have been incorporated into the law, with certain modifications.
Certain obligations that previously were a deterrent to the implementation of the regime have been removed, 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 that 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 50,000 euros (EUR). This increases to EUR 100,000. The duration of time during which the regime can apply has been increased from six to nine 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 have been 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
The tax administration has put in place a secure on-line platform that permits employers to access employee tax cards. As of 2022, employees will no longer be required to provide their employer with their tax card directly.
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 31 March 2022 for taxes and 30 June 2022 for social security, for Belgian, French and German residents.