Luxembourg to decrease tax burden for corporates and individuals to attract and retain talents

Luxembourg Finance Minister Gilles Roth presented on 17 July 2024 a new draft law (n° 8414) aiming to strengthen the purchasing power of citizens, revive the economy, and promote inclusive and sustainable growth by proposing various tax reliefs in accordance with the proposed tax measures foreseen by the 2023-2028 coalition agreement and issued in November 2023 (see previous alert).

To bring the corporate income tax rate closer to the average in other OECD countries, the draft law proposes to reduce it from 17% to 16% as from the 2025 tax year for companies with taxable income over EUR 200,000, and from 15% to 14% for companies with taxable income of up to EUR 175,000. For an undertaking located in Luxembourg city whose taxable income exceeds EUR 200,000, the effective corporate income tax rate would be 23.87% as from fiscal year 2025 (instead of 24.94%), including the unemployment fund contribution and the municipal business tax.

The draft law also complements the tax measures already introduced with a view to continuing to reduce the tax burden on individuals and to adjust measures to create an environment for attracting and retaining talent. In addition, the bill introduces changes to the framework for family wealth management companies. Below is a summary of those proposed measures.

Proposals to promote the recruitment and retention of talent

• The profit-sharing bonus regime (“prime participative”) would be strengthened by increasing its key parameters: eligible companies would be able to grant a higher profit-sharing bonus to their employees (7.5% of the positive result of the previous operating year, compared to 5% currently), and the limit based on the gross annual remuneration of eligible employees (before benefits in cash and in kind) would be increased from 25% to 30%.

• The inpatriate regime scheme would be simplified and replaced by an exemption of 50% of gross annual pay, up to EUR 400,000. All other clauses (employer’s and employee’s conditions, duration of the regime) would remain largely unchanged.
  

For individuals benefiting from the current version of the inpatriate tax regime, it would remain in effect for the remaining years as long as the conditions are satisfied. Requesting the application of the new regime would also be possible; however, the decision, once made, would be final and irreversible.

• To help individuals under 30 years of age start their professional lives, the draft law introduces a new bonus that would allow a tax exemption of 75% (“prime jeune salarié”). The bonus amount would range from EUR 5,000 to EUR 3,750 and EUR 2,500, progressively decreasing as the salary increases, and would be completely phased out when the gross annual remuneration is above EUR 100,000 (excluding benefits in kind/in cash but including the bonus) and/or after 5 years.
• The exemption would apply only to first permanent employment contracts signed as from the effective date of the law. This new measure would complement the “prime locative” introduced in Draft bill 8388, both aiming at enhancing the purchasing power of young people and helping Luxembourg companies attract young talent.

Adjustments to the applicable individual tax rates and tax credits

• Since the new government took office in November 2023, some tax measures have been introduced, such as the adaptation of the tax scales for individual income tax in four brackets as from 1 January 2024. Further adjustments to the individual income tax scales by adjusting the brackets to take into account 2.5 index as from the 2025 tax year, on top of the 4 index already reflected, as follows:

• As from the 2025 tax year, a more advantageous calculation formula would apply for single parents, widowers, and citizens over the age of 64 (tax class 1a): the tax-exempt amount would increases from EUR 24,876 to EUR 26,460 due to the neutralization of inflation. For additional tax relief, additional adjustments would be made to the formula to calculate the tax rate for tax class 1a.
• The draft law also introduces a new tax credit, the “crédit d’impôt heures supplémentaires” (overtime tax credit) or CIHS. This measure would apply to nonresident employees who receive overtime payments exempt from taxation in Luxembourg under article 115-11, 1 of the Luxembourg tax law but taxable in their country of residence. This may occur either due to the application of the tax credit method for avoiding double taxation, or because the country’s legislation requires taxing overtime if it is not taxed in Luxembourg (e.g., Germany). The tax credit would have to be requested through the filing of an individual income tax return (or simplified version). The annual CIHS amount would increase progressively with the salary and be capped at EUR 700. It  would apply to gross annual remuneration above EUR 1,200, with the maximum credit amount granted for gross annual remuneration above EUR 4,000.
• The monthly “minimum salary” tax credit (CISSM) amount would be capped at EUR 81 (increased from EUR 70 currently) to align with the potential successive salary index of 2.5% that should happen in Autumn 2024 and at the beginning of 2025, as well as the tax bracket adjustments mentioned above.
• The annual single-parent tax credit amount granted for adjusted taxable income below EUR 60,000 would be increased to EUR 3,504 and progressively decrease down to EUR 750 for adjusted taxable income higher than EUR 105,000.
• The allowance for extraordinary expenses for dependent children outside the household would be higher: the deduction would increase from EUR 4,422 to EUR 5,424.

Framework for family wealth management companies

Additional measures are introduced, notably concerning the applicable framework for family wealth management companies (“société de gestion du patrimoine familial” or SPF; see Law of 11 May 2007, as amended (in French only)). The draft law would:

• Increase of the minimum subscription tax amount to EUR 1,000 (from EUR 100 currently);
• Add a requirement for the domiciliary agent (or approved statutory auditor/accountant) to transmit the SPF certification electronically, to be completed annually before 31 July; and
• Clarify control procedures:
  • Sanctions (administrative fines) would apply in case of non-compliance with any of the obligations imposed by the SPF law (for breaches observed after the entry into force of the draft law); and
  • A six-month period to remedy observed breaches would be introduced (if breaches are not remedied, SPF regime benefits could be permanently withdrawn).

What’s next?

The parliament will now review, potentially modify, and vote the draft law.

Acknowledgements:

Christelle Wack| Director, Tax