New Bill of Law Introducing Major Tax Reliefs

On 17 July 2024, the Luxembourg Minister of Finance presented to Parliament a bill of law (the “Bill”) providing a certain number of measures aiming at strengthening the purchasing power of households and consolidating the competitiveness of businesses so as to emerge from the current polycrisis.

What measures for companies and funds?

Corporate income tax rate reduction

In order to strengthen the competitiveness of businesses in light of the developments in the European and international tax environment and to encourage them to invest, innovate and create jobs, as from 2025, the corporate income tax rate would be reduced with the maximum corporate income tax rate being lowered to 16%. This will lead to a maximum aggregate income tax rate going from 24.94% to 23.87% (for Luxembourg city).

More details on the adaptation of the rate below:

• from 17% to 16% for businesses with taxable income in excess of EUR 200,001 – decreasing the overall tax rate from 24.94% in Luxembourg City (including the solidarity surtax of 7% on the CIT rate and 6.75% municipal business tax rate) to 23.87%; 
• from 15% to 14% for businesses with taxable income lower than EUR 175,000;
• for businesses with taxable income between EUR 175,000 and EUR 200,001, the CIT would be EUR 24,500 (instead of 26,250) plus 30% (instead of 31%) of the tax base above EUR 175,000. For instance, a business with a taxable income of EUR 190,000, the CIT rate would be 15,26% (instead of 16,26%).

Subscription tax exemption for actively managed UCITS ETFs 

The Bill proposes to amend Articles 175 and 176 of the UCI Law of 17 December 2010 to exempt actively managed UCITS ETFs from the annual subscription tax. 

The aim of this proposed measure is to enable Luxembourg, as today’s main European centre for traditional investment funds, to position itself competitively and attractively as soon as possible on the emerging European and international ETF UCITS markets. According to the Bill, the provisions relating to the exemption of actively managed UCITS ETFs from the annual subscription tax would come into force on the first day of the quarter following the publication of the law in the Mémorial. 

Modernisation of the SPF law

The Bill proposes (inter alia) to increase the minimum annual amount of the subscription tax from EUR 100 to EUR 1,000. Furthermore, it is proposed to clarify the tax audit procedure for SPF. introducing the possibility of imposing fines and administrative measures in the event of specifically identified breaches of the SPF Law of 11 May 2007 and eventually, the final sanction being the withdrawal of the tax status of SPFs if the breaches have not been remedied within a certain timeframe.

What measures for Luxembourg talent attraction?

Increase of the exempt amount of the profit sharing bonus (prime participative)

The prime participative was introduced by the Luxembourg 2021 Budget Law of 19 December 2020 in order to keep Luxembourg attractive for talents. In this respect, Luxembourg companies can provide their employees with a prime participative, 50% of which is exempt from tax, as long as (inter alia) the prime participative does not exceed 5% of the positive result of the employer in the relevant year and 25% of the employee’s ordinary annual remuneration of the fiscal year during which the prime participative is allocated (for more insight on this topic, please refer to our previous newsletters dated 16.10.2020 and 10.07.2023).

The Bill proposes to increase the foregoing thresholds from 5% to 7.5% and from 25% to 50%, respectively.

Introduction of an overtime tax credit (OTC)

Employees (other than officials, state employees and official trainees) who have their residence in a State with which Luxembourg has entered into a treaty against double taxation and who receive a fully tax exempt remuneration for overtime work performed in Luxembourg, may be submitted where applicable in their state of residence to a tax on said gross remuneration. This could arise in particular when the taxpayer’s state of residence eliminates double taxation by means of a credit tax for remuneration or if the double tax treaty provides that the state of residence of the taxpayer imposes these when they are not actually imposed on the Grand Duchy of Luxembourg. In order to take into account the loss of income suffered by the employees concerned in such a situation, it is proposed to introduce, for 2024, an OTC to provide for a certain compensation and thus, to maintain the attractiveness of Luxembourg for the workforce needed by Luxembourg employers. For instance, for a gross remuneration above EUR 4,000, the OTC amounts to EUR 700/year.

Modernisation of the inpatriate regime

The regime currently applicable for foreign workers in Luxembourg (“inpatriates”) provides for an inpatriation allowance, for an amount not exceeding 30% of the annual remuneration of the inpatriate that would be exempt from taxation. In addition, expenses and costs related to hiring inpatriates incurred by the employer would also tax be exempt in the hands of the employee. Instead of a system currently based on the exemption of real costs borne by the employer and the 30% exemption, the Bill provides for a flat-rate system characterized by a tax exemption of 50% of the gross amount of total annual compensation (capped at EUR 400,000).

Introduction of a “young employee” premium (YEP)

The YEP aims at supporting young employees at the start of their careers. The granting of this premium is left to the discretion of the employer and is correlated with remuneration. It gradually decreases as the salary increases and is no longer granted beyond an amount of EUR 100,000 euros. To be eligible for the scheme, the worker under the age of 30 must be in possession of a first permanent employment contract in the Grand Duchy of Luxembourg and remain with the same employer for as long as the worker wishes to benefit from the premium, with a maximum of five years.

What measures for households?

Personal income tax scale adjustment

On 20 December 2023, the personal income tax brackets were already adjusted once in order to support households by adding an equivalent of 4 index tranches starting from 1 January 2024 (please refer to our previous newsletter in this respect).

This second adjustment would further strengthen the purchasing power of taxpayers, in particular, low income and the middle class in the broad sense by adding 2.5 additional index tranches as from the 2025 tax year.

In a nutshell, according to the Bill, no tax would apply to income below EUR 13,230. The lowest rate of 8% would apply to the income bracket between EUR 13,320 and EUR 15,435 (before the first adjustment applicable as of 1 January 2024, the bracket being between EUR 11,266 and EUR 13,173). The next bracket taxed at 9% would therefore start at EUR 15,435 up to EUR 17,640 (before the first adjustment applicable as of 1 January 2024, the bracket started at EUR 13,173 and so on). The maximum tax rate of 42% would apply to income of EUR 234,870 (and above) instead of EUR 200,005 before the first adjustment applicable since 1 January 2024.

Special measures for single parents and employees with minimum social wage

• In addition to the adjustment of the scale to inflation and the review of the mathematical formula applicable to tax class 1a, the single-parent tax credits (SPTC) and the minimum social wage have been significantly re-evaluated:
  -    The SPTC would be increased so that a single-parent household that has an annual gross salary of up to EUR 52,400 and benefits from the entire SPTC would no longer pay taxes for the 2025 tax year. The same household with a gross annual salary of EUR 50,000 would be a creditor of the State (negative tax of EUR 614) in 2025 instead of owing 2,888 euros in taxes in 2023, respectively 2,179 euros in 2024.
  -    Employees being paid the unqualified minimum social wage, including those belonging to tax class 1, would no longer pay taxes on 1 January 2025.
• The allowance for extraordinary expenses for children not part of the household would be increased from 4,422 euros to 5,424 euros per year and child as from 2025.

It is finally worth noting that the Minister of Finance, Gilles Roth also announced in a press release dated 17 July 2024 that all interest expenses on property loans for the acquisition of an existing home would be deductible, including in the context of bridging loans, as from the 2024 tax year.