New tax measures announced for 2023
On October 12, 2022, the 2023 draft Budget Law (the "Budget") was released by the Luxembourg Government. The Budget introduces 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 contains a proposal whereby 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 current rules, in order to qualify for the special tax regime for inbound employees, the annual gross base salary needs to be at least of EUR 100,000 per annum (excluding benefits in kind or in cash). This will be lowered to EUR 75,000 per annum under the Budget proposal.
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 will be increased to EUR 2,505. The earnings ceiling for the maximum tax credit will be 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 is set to increase in 2023, the qualifying income range is also set to increase, to EUR 1,800 - 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) but also 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
Currently, the deadline for the filing of individual income tax returns is three months after the end of the tax year (31 March). The Budget provides for an extension of the filing deadline 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 would be postponed to 31 December 2023 instead of 31 March 2023.
The deadline for partners or spouses to submit a joint application for individual taxation should be aligned and extended to 31 December as well (i.e. for 2022 to 31 December 2023).
The deadline for Luxembourg residents top opt for a 20% flat and final tax over qualifying interest income, when the paying agent is located outside of Luxembourg but in the EU, should be extended to 31 December (instead of 31 March).
Significant developments announced or implemented in 2022
Luxembourg Government has introduced a reform of the determination of the benefit deriving from the provision of a company car to employees. A new system for calculating the benefit in kind according to the type of engine and emissions of CO₂ will be introduced as from January 2023 and will be adjusted as from January 2025.
COVID-19 specific measures
Luxembourg 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 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 June 30, 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 November 14,2022, the Commission extended the COVID-19 tolerance regime until June 30, 2023.