Tax and social security changes for individuals in 2013 - 03/01/2013
Further to the entry into force of the law of 21 December 2012 amending the Income Tax Law and of other legal and statutory provisions, we summarise hereafter the main changes in the area of taxation and social security that affect individuals as from 1st January 2013.
Increase of the upper tax rate
Until 31 December 2012, the upper tax rate was 39% for individuals (excluding the employment fund surcharge) and applied to income above EUR 41,793 for single taxpayers (class 1 and 1a) and above EUR 83,586 for couples taxed jointly (class 2). As from 1st January 2013, an upper tax rate of 40% is added to the income tax schedule, and applies to income above EUR 100,000 for single taxpayers (class 1 and 1a) and above EUR 200,000 for couples taxed jointly (class 2).
As from 1st January 2013, the law abolishes the current mechanism foreseeing the adaptation of the income tax schedule in case the consumer price index registers an annual variation of 3.5% or more.
Increase of the employment fund surcharge
As from 1st January 2013, the employment fund surcharge for individuals increases from 4% to 7% (for income not exceeding EUR 150,000 or EUR 300,000 for couples taxed jointly) and from 6% to 9% (for the portion of income exceeding the aforementioned ceilings). The upper marginal tax rate therefore increases from 41.34% (39% increased by 6%) to 43.60% (40% increased by 9%).
The Luxembourg tax law distinguishes between transferable stock options that are taxable upon grant to the employee, and non-transferable or individual options that are taxable at exercice.
The taxable basis of transferable options is the difference between the stock exchange or market value of the options at the time of grant and the price paid by the employee for the option (if any). The market value of transferable unquoted options may be determined either in accordance with a recognised valuation method or based on a lump sum valuation.
Until 31 December 2012, the lump sum valuation was achieved by applying a fixed 7.5% coefficient to the market value of the underlying share at the time of grant. As from 1st January 2013, the coefficient is raised to 17.5%.
Reduction of the deduction for debit interest
Debt interest (except interest directly linked to an income, such as for example mortgage interest) was deductible until 31 December 2012 as special expense up to an annual ceiling of EUR 672 per member of the taxpayer’s household. As from 1st January 2013 this ceiling is lowered to EUR 336 per member of the taxpayer’s household.
Abolition of the minimum lump sum deduction for travel expenses
Employees benefit from a lump sum deduction amounting to EUR 99 per kilometre and per year for travel expenses, calculated on the distance between the domicile and the working place. Until 31 December 2012, employees for which the distance between domicile and working place did not exceed 4 kilometres benefited from a deduction of EUR 396; the deduction was furthermore limited to EUR 2,970(corresponding to a distance of 30 kilometres). As from 1st January 2013, the law abolishes the lump sum deduction corresponding to the first 4 kilometres. The lump sum deduction is hence abolished for taxpayers living less than 5 kilometres from their working place and is limited to EUR 2,574 per year.
Low interest or interest-free loans
The law provides a standard valuation formula to assess the benefit resulting from below-market rate or interest-free loans granted by employers to their employees. The benefit is calculated based on a reference interest rate that is reviewed on a regular basis. The rate fixed for the years 2013 and onwards is 2% (same as for the year 2012).
Lump sum wage tax rates
When a taxpayer or a married couple derives more than one employment remunerations, the remunerations that come in addition to the main one are subject to a lump sum wage tax rate that amounted in 2012 to 12% in tax class 2, 18% in tax class 1a and 30% in tax class 1. As from 1st January 2013, these rates are increased by 3%. For married couples where both spouses derive employment income, the additional remuneration will therefore be subject to a lump sum wage withholding tax of 15%.
For the purposes of administrative simplification, as from 1st January 2013 the law repeals the process of the annual fiscal census. This census (as at 15 October) was organised by the municipalities, and was aimed at the distribution of tax cards. Hence, tax cards are now issued directly by the tax authorities (as already the case for non-residents and for citizens of Luxembourg-City).
With the exception of the 1.4% dependence contribution, social security contributions are capped to an income basis that amounts to five times the minimum wage. The annual cap applicable as from 1st January 2013 amounts to EUR 112,451.28.
In addition, blue collars are released as from 1st January 2013 from the 1% contribution to the Mutual insurance. Only employers are liable to contribute to this fund as from that date. The rates of contribution range from 0.42% to 2.64%and depend on the average rate of absenteism of the employer.
Finally, the rate of contribution to the accident insurance due by employers is lowered as of 1st January 2013 from 1.15% to 1.10%.