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2012 State of the Nation - 11/05/2012


Corrective measures ? The 2012 State of the Nation address and the Luxembourg government stability programme

The public finance situation is not (yet) a tragedy, but after three years of deficit, it is far from ideal. In his State of the Nation address on 8 May 2012, the Prime Minister, Jean Claude Juncker, confirmed that the central budget was “closer to tipping into catastrophe than to balancing". We are talking about an annual deficit of over one billion euro.

It is not surprising, then, that the government wants to make a priority of correcting this situation, above all because, according to Mr Juncker, the Grand Duchy can “still” make savings without having to resort to excessively radical austerity measures.

He spoke about “corrective measures”, most of which had already been disclosed by the Minister for Finance in the „2012 – 2015 stability and growth programme‟ presented a few days earlier.

This plan sets out budgetary savings to the tune of 500 million per year, 2/3 of which from reductions in expenditure and 1/3 from additional revenue.


Despite hopes of further details of the tax measures announced in the stability programme, Mr Juncker‟s address failed to deliver on this issue.

a) Increase in the solidarity tax

A 2 percentage point increase in the solidarity tax was announced for 2013, for all liable taxpayers (corporations, individuals and now municipalities).

It should be remembered that the solidarity tax is calculated on the basis of income tax (corporate income tax respectively]), and is intended to finance the national employment fund (fonds pour l’emploi). Since it is precisely this sector that has seen public expenditure soar over the last few years, this type of measure would seem to be quite logical.

For corporations liable to CIT, the crisis tax will rise, in 2013, to 1.47% of taxable income (21% CIT rate multiplied by 0.07%).

The actual rate of taxation for a company located in Luxembourg City will, therefore, rise from 28.8% to 29.22% (21% CIT + 1.47% solidarity tax + 6.75% MBT [municipal business tax]).

Let us reiterate that the solidarity tax is levied together with CIT and so can be reduced by being offset against various deductions (tax credits, etc.) set out for the CIT.

For individuals, the solidarity surcharge rate will rise from 4% to 6% and from 6% to 8% respectively for high earners i.e. those with a taxable income in excess of €150,000 (tax class 1)/€300,000 (tax class 2). The highest tax rate will, therefore, rise to 42.12% (39% + (39 x 8%)).

Even municipalities will have to contribute to the solidarity surcharge at a rate of 2%, in the knowledge that they are currently zero rated.

In short, the increase in the solidarity surcharge is intended to bring in 112 million in additional revenue.

b) Introduction of a minimum tax on companies

In light of the fact that, according to the tax authority‟s report on its activities, approximately 80% of companies in Luxembourg do not pay taxes, the idea of collecting a minimum contribution seems to be quite a logical one, particularly during a period of crisis.

One such measure was announced in the stability programme, but with no additional information, and should bring in some €50 million. In his address, the Prime Minister failed to mention this idea. Are we to conclude that this measure has now been abandoned?

Unfortunately, we think not. Based on some rare utterances from various politicians on this issue, we are rather led to believe that the government wants to head in this direction but has not yet devised any procedures for this type of minimum tax: Minimum tax for “SOPARFIs” (financial holding companies) to be extended to all companies? Introduction of a flat tax not linked to profits?

In 2011, a minimum CIT of €1,500 was introduced for “SOPARFIs”, i.e. for any organisation with a collective character not subject to ministerial or supervisory authority approval and whose financial assets, transferable securities and cash amount to more than 90% of its balance sheet.

c) Excise duties on tobacco and petrol

Additional revenue will also be generated through a rise in excise duties on tobacco and petrol. However, neither the State of the Nation address, nor the stability programme, give any further details as to the extent of this increase or how it will be put into practice. The impact on the budget is estimated at €35 million.

d) Measures shelved

Alongside the measures which were announced, the Prime Minister also commented on several other potential ways forward which had been discussed by the ministerial council, but which have not been pursued.

Mr Juncker thus stated that there will be no rise in the standard rate of VAT (currently 15%) for this legislative period (i.e. until 2014).

The crisis tax levied on individuals, introduced in 2010 and abolished in 2011, will not be reintroduced. The marginal rate of tax for individuals will remain at 39% (not including the solidarity surcharge).

Furthermore, family allowances will neither be reduced nor taxed.

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