Luxembourg Corner

  • Posted 22.12.2023

1. Legislation

New government’s programme approved by the parliament

On 23 November 2023, the new government has been granted the parliament’s confidence following the presentation of the coalition programme.

Please check out our newsflash for more information in this respect.

Law adjusting the personal income tax scale voted

On 20 December 2023, the Luxembourg Parliament adopted Bill 8343, which adjusts the personal income tax brackets by an equivalent of 4 index tranches starting from 1 January 2024 (“Law”).

The Law implements one of the measures announced in the new government’s coalition agreement that aim at supporting households.

In a nutshell, according to the Law, the lowest rate of 8% will apply to the income bracket between EUR 12,438 and EUR 14,508 (the current bracket being between EUR 11,266 and EUR 13,173). The next bracket taxed at 9% will therefore start at EUR 14,508 (up to EUR 16,578) instead of EUR 13,173 today and so on. The maximum tax rate of 42% will apply to income of EUR 220,788 (and above) instead of EUR 200,005 as at present.

In a press release of 30 November 2023, Finance Minister provided a series of examples to show what this adjustment will mean in practice:

  • For a taxpayer in tax class 1 with an annual gross salary of EUR 75,000, it will result in an annual net gain of EUR 1,095 in 2024.
  • For a couple with a total gross annual income of EUR 125,000 (where the first person’s salary represents 2/3 and that of the second 1/3), the gain will amount to EUR 2,189 by applying the new brackets. Their tax burden will therefore decrease by 10.9%.
  • For a taxpayer in tax class 1a with an annual gross salary of EUR 50,000, it will result in an annual net gain of EUR 1,160. This corresponds to a reduction in the tax burden of 19.8%.

The Pillar 2 law voted!

On 20 December 2023, Bill of Law 8292, which transposes the so-called Pillar 2 Directive into Luxembourg national law, was voted by the Luxembourg Parliament.

The Law largely reproduces the content of the Pillar 2 Directive1 , which itself largely mirrors the OECD’s Pillar Two Model Rules (also referred to as the “Global Anti-Base Erosion” or “GloBE” Rules).

As a reminder, the Pillar 2 rules aim at ensuring a global minimum level of taxation of 15% for multinational enterprise (MNE) groups and large-scale domestic groups in the EU. In particular, the Law targets constituent entities located in Luxembourg that are part of a group – a multinational enterprise (MNE) group or a large-scale domestic group – with an annual revenue of EUR 750 million or more (including the revenue of the excluded entities) based on consolidated financial statements of its ultimate parent entity (“UPE”) in at least two of the four previous consecutive fiscal years.

Not all group entities are subject to the rules. Excluded entities are not subject to the IIR, UTPR or QDMTT (see below) but are however taken into account for purposes of determining the 750 million threshold. The Law took over the exclusions provided under the Pillar 2 Directive which includes inter alia investment funds, pension funds and real estate investment funds (under conditions) as well as entities that are owned directly or indirectly at least 95% by excluded entities (under conditions).

In a nutshell, the Law is structured around three rules, namely the Qualified Domestic Minimum Top-up Tax (“QDMTT”), the Income Inclusion Rule (“IIR”) and the Undertaxed Payments Rule (“UTPR”). These rules apply where the Effective Tax Rate (“ETR”) in a jurisdiction in which the group operates falls below the minimum tax rate of 15%. In such a case, the group has to pay a top-up tax to make the ETR up to the minimum rate of 15%.

The Parliament requested the exemption from the second vote to the State Council which we expect should be granted so that the Law will be applicable to fiscal years beginning on or after 31 December

2023 for the IIR and the QDMTT and generally to fiscal years beginning on or after 31 December 2024 with respect to the UTPR.

More information on this topic will follow.

The CESOP law

On 2 August 2023, the Law of 26 July 2023 implementing the Council Directive (EU) 2020/284 amending the VAT Directive (“CESOP Law”) was published in the Official Journal of the Grand Duchy of Luxembourg.

The CESOP Law introduces new obligations for payment service providers to keep records of the "cross-border" payments they process and their beneficiaries, and to report the collected data to the Luxembourg tax authorities. The data collected will then be stored and processed before being centralised in a European database called Central Electronic System Of Payment Information ("CESOP") and made available to the Member States' anti-VAT fraud agents.

For more information on this topic, please refer to our previous  newsletter.

2. Luxembourg Courts

Unconstitutionality of the minimum net wealth tax provision

On 10 November 2023, the Constitutional Court of Luxembourg held that the legal provision in the net wealth tax law which provides for a different treatment in minimum net wealth tax (i.e. a flat rate or a progressive rate) depending on the company’s balance sheet composition is unconstitutional as it gives rise to a discriminatory treatment of persons being in a comparable situation.

Therefore, pending a legislative amendment to the minimum net wealth tax article, the progressive rate must be applied to the taxpayer (instead of the flat rate) whenever this one is more favourable.

For more information on this topic, please refer to our newsflash.

1 Council Directive (EU) 2022/2523 of 14 December 2022 on ensuring a global minimum level of taxation for multinational enterprise groups and large-scale domestic groups in the Union.