Developments in personal taxation and social security - 23/05/2013
Luxembourg tax regime for highly skilled workers: attractive changes!
The Luxembourg tax authorities introduced at the end of 2010 a special tax regime for highly skilled workers applicable from 1 January 2011 (circular LIR n°95/2 of 31 December 2010).
This circular has now been amended (circular LIR n°95/2 of 21 May 2013). The changes mainly focus on relaxing the conditions to benefit from the favorable tax treatment. Here is an overview of the main changes:
- The criteria of significant contribution of the employee’s activity to the Luxembourg economy is removed;
- The threshold of annual base remuneration has come down from EUR 112.000 (social security ceiling) to EUR 50.000;
- The criteria of having a diploma of higher education is removed;
- For entities established in Luxembourg for at least 10 years, the maximum percentage of employees who can use the regime has increased from 10% to 30%.
These changes are very attractive as they significantly expand the scope of the regime.
No changes were brought to the benefits of this special tax regime. However, the procedure to obtain it underwent a radical change since the regime now applies without prior agreement of the Luxembourg tax authorities.
The new regime applies to employees arrived in Luxembourg as from to January 1, 2013.
We have summarised below the conditions and benefits of the scheme.
A summary of the conditions
General conditions for all employees:
- Qualify as “impatriate”; impatriates mean employees who are part of an international group and who are seconded to a Luxembourg company of the group, and employees directly recruited abroad by a Luxembourg company
- Become tax resident in Luxembourg
- Not have been Luxembourg tax resident, not have lived at a distance lower than 150 km from the Luxembourg border and not have been subject to Luxembourg income tax on professional income for the 5 years before start of the activity in Luxembourg
- Undertake the local employment as primary employment and pass on knowledge to local personnel
- Earn a base salary of minimum EUR 50.000 and must not replace another non-impatriate employee.
Additional conditions in case of an intra-group secondment:
- Have at least 5 years of seniority in the international group or 5 years of experience in the economic sector
- An employment relationship exists between the sending company and the employee
- The secondee must be granted a right to return to the home company
- A contractual arrangement exists between the home and host companies with respect to the secondment.
Additional conditions in case of a recruitment abroad:
- Have acquired a depth specialisation in a sector or profession characterized by difficulties of recruitment in Luxembourg.
Conditions relating to the employer:
- The Luxembourg entity must employ or commit to employ at least 20 full time employees in Luxembourg in the mid-term
- If the entity has been established In Luxembourg for at least 10 years, they can have a maximum of 30% impatriate employees who benefit from the regime.
At the latest by January 31 of each year, the employer is required to provide a report of the employees benefiting from the special regime.
Benefits of the regime
If the conditions are met, it is possible to obtain a tax relief for certain expenses which fall under the following categories:
- Relocation - Tax exempt amounts include costs of moving to Luxembourg and similar repatriation costs at the end of the secondment. Costs to make the Luxembourg home suitable to live in (defined in the circular) and costs for emergency travel can also be exempt from taxation.
- School fees - A deduction is available for school fees associated with primary and secondary education.
- Lump sum for recurring expenses - To cover cost of living allowances and miscellaneous expenses associated with the expatriation, a capped lump sum deduction is available.
The following combined costs are also eligible to a tax relief, subject to an overall cap:
- Rent/Utilities - Qualifying costs depends on whether a home is maintained in the home country or not.
- Home Leave - One trip per year per family member can be exempt from taxation.
- Tax Equalisation - Costs associated with the difference in taxes between Luxembourg and the home country can be exempt from tax.
The impatriate can benefit from the regime for up to five calendar years following the year of arrival, provided the conditions continue to be met.
These changes in the Circular are great news since they significantly expand the scope of the favourable tax regime.
The removal of the prior agreement of the tax authorities however requires that employers ensure that all the conditions laid down by the circular are met before applying the regime.
Indeed, employers now retain the full responsibility as to the correct application of the tax circular. It is therefore recommended that they keep necessary information and documents to sustain their position, in order to prevent any question further to the annual reporting or a wage tax audit. At this stage, the consequences of the annual audit performed by the tax authorities are however not known.
As a reminder, please note that this special regime can significantly reduce the costs of what is widely known to be an expensive way to bring a necessary workforce to Luxembourg. To illustrate the level of savings involved, an expatriate who is married with 2 children, earns a base salary of EUR 200.000 with a typical expatriate package can save taxes in the region of EUR 50.000 per annum.
By moving swiftly to implement the benefits from the changes, companies will maximise tax savings for impatriates. Deloitte has developed a range of services to assist companies:
- Assessment of eligibility - An initial assessment to establish whether or not the regime will be applicable for a particular expatriate.
- Package design - Design/Review of expatriate packages and contractual arrangements to maximise tax savings available through the regime.
- Assistance with payroll and annual reporting - Assistance with the payroll to ensure a correct reporting of the impatriate’s package and applicable tax reliefs, and preparation of the annual reporting including confirmation that conditions continue to be met.
- Tax return services - To ensure correct reporting of income of impatriates.