New government’s programme approved by the parliament

Today, by a majority vote of the deputies, the new government has been granted the parliament’s confidence following the New Prime Minister Luc Frieden’s statement yesterday on the new government’s coalition programme.

With the parliament’s confidence, the new government will now be in a position to implement this programme for the Grand Duchy of Luxembourg for the next five years.

The new government’s coalition agreement which was signed on 16 November 2023 includes, inter alia, several ground tax measures that generally aim at supporting household income and increasing the competitiveness of Luxembourg.

Please find outlined below the key tax measures.

Tax measures in favour of the competitiveness of the Luxembourg financial sector

The government will continue to support the development of attractive and innovating financial products within a sustainable economy and support Fintech innovation. In this respect, the subscription tax regime will be reviewed and adapted on a continuous basis, and the reduction of the subscription tax regime will be analysed, to maintain the competitiveness of the Luxembourg financial sector.

Tax measures in favour of the real estate market

In consideration of the real estate and household crisis, the government will enhance the position for main residence, increase tax benefits for rental homes and liquidity of the market.

• with respect to the main residence:
• the deductibility of interest financing the main residence will be increased;
• the tax credit on registration duty for the acquisition of new homes will be increased;
• the amount benefiting from the super VAT rebate of 3% (currently set at EUR 50,000) will be increased subject to confirmation of the EU Commission.
• with respect to rental homes:
• The rate of accelerated amortization and the duration of amortization will be increased, however with limitations;
• the tax credit for investment in rental homes will be introduced;
• the exemption on income derived from companies in social renting will be increased to 90%.
• with respect to liquidity in favour of the real estate market:
• the capital gain tax upon sale of real estate will be reduced;
• the tax reform in relation to unoccupied real estate will be continued.

Tax measures in favour of enterprises

Overall, the government’s programme includes two main lines of action:

• with respect to the taxation of enterprises
• the corporate income tax and municipal business tax aggregated rate shall be adapted in the medium term to the OECD standard average rate (which was around 23% in 2022).
• tax rebates for SMEs (small and medium enterprises) will be further examined.
• tax credit regimes will be enhanced to support the sustainability and digital transition of companies.
• taxation of business transfers will be analysed with a view to ensuring the continuity of these businesses.
• a favourable tax regime will be granted for investment in young and innovating companies active in the sustainable and digital sector.
• with respect to employees
• participation of employees in the capital of their employer company will be incentivized;
• clarification and simplification of the tax treatment of benefits in kind granted to employees as well as the tax aspects related to teleworking will be analysed;
• the development of co-working spaces will be encouraged in regions close to borders, particularly through tax incentives.
• an exemption for enterprises granting rental benefits will be further analysed for young employees;
• the profit sharing bonus (prime participative) regime and the impatriate regime will be reinforced to attract and retain talents.

Tax measures in favour of individuals

In order to support household income, some positive measures have been announced.

• regarding the income tax schedule:
• the tax rate will be adjusted to take into account 4 index bands while not increasing the maximum tax rate (and other index bands may be neutralised over the next years);
• the current three tax classes should be merged into one single tax class in order to iron out the discrepancies in tax treatments of the different classes. For this purpose, a reform plan should be proposed by 2026. Meanwhile, taxpayers who are granted tax class 1a should benefit from a tax relief.
• deductibility of special expenses will be increased and become more flexible notably in the context of pension plan.
• a tax rebate will be granted to young individuals starting their work life.
• the Government will not introduce a personal net wealth tax or inheritance tax in direct line.