After-tax.net volume 8, issue 1
Luxembourg expatriate tax regime : starting 2011 with a bang!
The Luxembourg authorities have introduced some rules specific to expatriates qualifying as highly skilled workers – the result is the potential for significant tax savings for both expatriates and their employers.
Circular LIR n°95/2 issued on 31 December 2010 provides details of an expatriate tax regime which will come into effect on 1 January 2011. There are a number of conditions attached for the employer and the employee.
A summary of the conditions1
The legislation applies to new expatriates coming to Luxembourg from 1 January 2011. The new rules will not apply to existing expatriates or contract workers, but will apply to individuals already working within a group or individuals directly recruited from abroad, although slightly different conditions are applied to each scenario.
General conditions for all expatriates:
- Provide a significant economic contribution to Luxembourg
- Be tax resident in Luxembourg (based on domestic tax law)
- Not have been Luxembourg tax resident / subject to Luxembourg income tax on professional income for the 5 years before arrival
- Have a degree of higher education / have acquired professional experience of at least 5 years in the sector concerned
- Undertake the local employment as their primary employment and pass on knowledge to local personnel
- Meet minimum salary requirements and must not replace another non-expatriate employee.
Additional conditions in case of an intra-group secondment:
- Have at least 5 years of seniority in the international group / sector concerned
- 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:
- 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
- If the entity has been established In Luxembourg for at least 10 years, they can only have a maximum of 10% expatriate employees who benefit from this regime.
An application to benefit from the regime must be filed within 2 months of each starting assignment and an annual review must be submitted by the employer.
1 The conditions and definitions in the circular are detailed and we have listed brief highlights here - to determine if the regime could be applicable to your organisation, please contact us to discuss the detail.
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 – The tax exempt amount 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 expatriate can benefit from the regime for up to five calendar years following the year of arrival, provided the conditions continue to be met.
This new legislation is an important development in the area of expatriate taxation and 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 €200,000 with a typical expatriate package can save taxes in the region of €50,000 per annum.
By moving swiftly to implement the benefits from the changes, companies will maximise tax savings for all new expatriates. 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 - Consulting services to review/design an expatriate package and contractual arrangement to maximise savings available through the regime.
- Formal request - Preparation of formal request to benefit from the regime including collation of data from company and expatriate.
- Annual report - Preparation and submission of annual report including confirmation that conditions continue to be met.
- Tax return services - To ensure correct reporting of income and claim for reliefs under the regime.
If you would like to know more or assess whether this legislation will apply to your organisation and expatriate employees then please contact us to discuss.