Luxembourg

Employment income

Income from employment includes all benefits in cash and in kind received by an individual and is subject to progressive income tax rates (0 to 45.78%).

If an employer provides a house or apartment to an employee, the monthly benefit in kind is valued at 25% of its unitary value, with a minimum of 75% of the rent effectively paid by the employer. If the employer also makes available the furniture contained in the accommodation, the value of the benefit in kind is increased by 10%. If the employer pays electricity and other charges, these must be added to the benefit at their nominal value. If the employee rents a house or an apartment and pays the rent, reimbursement of the rent by the employer is taxed entirely as a benefit.

The monthly benefit in kind arising from the private use of a company car corresponds to private mileage multiplied by the car’s kilometre cost. This evaluation can be replaced by a lump-sum evaluation method, according to which the monthly taxable fringe benefit corresponds to a fixed percentage (0.5% up to 1.8%) of the full purchase price of the new car (including options and VAT).

The Luxembourg government has introduced a reform of the determination of benefit in kind for company car. A new system for calculating the benefit in kind rate according to the type of engine and emissions of CO₂ will be introduced as of 1 January 2023 and will be adjusted as of 1 January 2025.

A number of items are exempt from tax, such as debit-interest savings on a reduced or nil-interest loan granted by the employer (within certain limits) and additional salary for overtime payments under certain conditions.

Non-residents are taxed on salaried income if their occupation is exercised in Luxembourg or if their salary is paid from Luxembourg. Tax treaties generally grant exemption if the non-resident stays for less than 183 days in the calendar year and if the remuneration is neither paid nor borne by a Luxembourg entity.

Relaxing eligibility requirements for the special tax regime for inbound employees

Under the prior rules, in order to qualify for the special tax regime for inbound employees, the annual gross base salary needed to be at least EUR 100,000 per annum (excluding benefits in kind or in cash). This threshold was lowered to EUR 75,000 per annum under the 2023 Budget Law.

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 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 2023 Budget Law provided 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.

Company cars

A new system for calculating the benefit in kind for company cars according to the type of engine and emissions of CO₂ has been introduced as of 1 January 2023 and will apply progressively from 1 January 2023 to 2025.

Capital gains

Capital gains derived from the disposal of movable properties are subject to Luxembourg progressive income tax rates (0% to 45.78%), provided the holding period is less than six months and to the extent that the total capital gains exceed EUR 500. If movable properties are disposed of more than six months following their acquisition, capital gains are not taxed unless the individual holds an important participation (material interest).

Capital gains derived from the disposal of material interest after the six-month period are taxed as extraordinary income at half the average combined tax rate (maximum 22.89%).

An interest generally qualifies as material when the individual taxpayer (together with their household) holds or has held, directly or indirectly, more than 10% of the corporate capital during the five years prior to the date on which the shares are disposed of.

Capital gains on the sale of the taxpayer’s main residence are tax-exempt. Capital gains on the other real estate property are subject to the following:

• Progressive income tax rates if the disposal takes place within two years of the acquisition.
• Reduced tax rate if the disposal takes place more than two years after acquisition. The reduced rate is effectively a quarter of the marginal tax rate if the gain is realised between 1 July 2016 and 31 December 2018. A tax deduction of up to EUR 50,000 (double for married taxpayers and civil partners filling) valid every ten years may be claimed on the capital gain. In addition, a deduction up to EUR 75,000 for inherited property (through the direct line of descendance) may apply.
• Under specific conditions, taxation of capital gains from the disposal of property can be deferred if it is used to fund the acquisition of a new property located in Luxembourg that the owner intends to rent out.

For long-term capital gains (holding period of more than six months for movable property and two years for immovable property), the acquisition price is adjusted by taking account of inflation coefficients.

Investment income

Investment income is subject to a dual tax regime.

Whereas some interest payments are subject to a 20% WHT in full discharge of PIT, other incomes (interest not qualifying for the 20% WHT, dividends) are taxed pursuant to progressive rates after a deduction of EUR 1,500.

The above-mentioned deduction is doubled in the case of collectively taxed spouses/civil partners. In addition, half of the dividend income received is tax exempt if paid by a qualifying company.

Rental income

Income from real estate located in Luxembourg is subject to progressive income tax rates (maximum 45.78%).

Income from real estate located abroad is generally not taxed in Luxembourg under double tax treaty (DTT) provisions. For residents, said income is taken into account to determine the global tax rate applying to their income taxable in Luxembourg.

For rental properties, the depreciation rate situation will depend on whether the property was purchased before or after 1 January 2021.

Rental property acquired (or completed) before 1 January 2021:

• If the completion is less than 6 years: 6%.
• If the completion is between 6 and 60 years: 2%.
• If the completion is greater than 60 years: 3%.

Rental property acquired (or completed) after 1 January 2021:

• If the completion is less than 5 years: 4% (additional tax rebate amounting to 1% of the basis considered for the calculation of the 4% depreciation is also available under certain conditions and limits).
• If the completion is 5 years or more: 2%.

In both cases, energy renovation work carried out in rental property and having given rise to financial assistance from the Ministry of the Environment will benefit from a depreciation rate of 6%.

Sustainable 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, the 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.

Exempt income

Very little income is exempt from Luxembourg tax; however, some examples of exempt income include:

• Lottery winnings.
• Gifts made by the employer based on the employee's seniority (up to certain limits).
• Redundancy payments (under conditions and limits).