Key changes to Luxembourg’s tax regime as multiple bills of law adopted

Part I. Entities and individuals

1. Boosting competitiveness: tax cuts for entities, employees and individuals

Bill of law 8414, which introduces significant tax changes to enhance competitiveness (“Entlaaschtungs-Pak”) and reduce the tax burden on individuals, was submitted to the Luxembourg Parliament on 17 July 2024. It has now been adopted with few amendments.

The main measures are as follows.

Entity tax measures

• Corporate income tax (CIT) rate reduction of 1% (from 17% to 16%). The aggregate rate of CIT, municipal business tax (MBT) in the city of Luxembourg (6.75%) and the contribution to the employment fund will reduce from the current 24.94% to 23.87%.
• Subscription tax exemption for actively managed UCITS ETFs.
• Introduction of single entity group concept for interest limitation rules. This measure concerns taxpayers that are not part of a consolidated group for financial accounting purposes and are not considered to be standalone entities. Upon request, the taxpayer will be able to deduct all of its exceeding borrowing costs, provided it can demonstrate that the ratio between its equity and all of its assets is equal to or greater than the equivalent ratio of the single entity group. To compute the ratio of the single entity group, the amount of equity of the single entity group must be increased by amounts likely to give rise to borrowing costs which are owed to associated enterprises. This mechanism for calculating the group ratio is thus designed to ensure that only taxpayers indebted to companies that are not associated companies are eligible to claim the benefit of this safeguard clause.
• Various measures for private wealth management companies (SPFs), including increased minimum subscription tax and audit procedures.

Employee tax measures

• Revamp of inpatriate regime. Inpatriates will now benefit from a 50% exemption on their gross annual remuneration up to a maximum of EUR 400,000. The conditions remain essentially the same.
• Boost to profit-sharing scheme. Increase of certain limits: the maximum amount of yearly profit that an employer can “share” will rise from 5% to 7.5%. Also, the maximum profit-sharing payment an employee can receive per year will increase from 25% to 30% of the employee’s gross annual remuneration.
• New bonus for young employees. Employers will be able to pay a partially tax-exempt bonus to employees under the age of 30, subject to remuneration limits. This premium will be available to individuals on their first permanent contract in Luxembourg and is limited to a duration of five years.
• New tax credit for overtime available for cross-border workers.

Individual tax measures

• Revised personal income tax brackets (additional 2.5 index brackets).
• Tax relief for individuals in tax class 1A.

The law will now be published in the Luxembourg Official Journal and will enter into force the day after its publication. The decrease of the CIT rate will apply as from the 2025 tax year. The provisions relating to the subscription tax exemption will apply from the first day of the quarter following the publication of the law. Finally, the single entity group provisions will apply to tax years starting on or after 1 January 2024.

The above measures are detailed in our previous newsflash.

2. New tax rules, clarifications and new opportunities: class of shares redemption and beyond

Bill of law 8388 introducing several important tax changes was submitted to Parliament on 23 May 2024 and has now been adopted with few amendments. The main measures are set out below.

– Share buybacks. The text codifies the tax treatment of share buybacks qualifying as a partial liquidation and validates the established practice of using alphabet or tracking shares. It also introduces mandatory reporting requirements for substantial participations held by individuals upon repurchase of a class of shares.

– Minimum net wealth tax. The minimum net wealth tax is streamlined to a simple balance sheet-based system (ranging from EUR 535 to EUR 4,815). This modification follows the decision of the Constitutional Court on 10 November 2023 (No 00185).

– Opt-out from the participation exemption regime. The new legislation introduces an opt-out from the participation exemption regime for investments qualifying solely based on acquisition price thresholds. It will also be possible to opt out of the 50% partial exemption for dividends. When the option is exercised, all shares held by the taxpayer in the relevant company must be taken into consideration.

– Electronic filing. Finally, mandatory electronic filing for directors’ fees withholding tax returns is being introduced.

The law will now be published in the Luxembourg Official Journal and will enter into force the day after its publication. The provisions relating to net wealth tax and the participation exemption opt-out will be applicable as from the 2025 tax year. The electronic filing provisions will be applicable as from 1 January 2025.

See our previous newsflash.

Part II. Tax procedures

On 18 July 2024, Parliament’s Finance Committee adopted an amendment to split bill of law 8186 into two separate bills of law (8186A and 8186B), following widespread criticism of the initial proposal.

1. Bill of law 8186A – adopted

Bill of law 8186A, which contains the less controversial provisions essential for modernising direct tax administration, has now been adopted. The main measures are summarised below.

– Inter-administration cooperation. Enhanced inter-administration cooperation between the direct tax authorities and the Commission de Surveillance du Secteur Financier (CSSF), and the direct tax authorities and the Commissariat aux Assurances (CAA).

– External service providers’ work. New framework governing external service providers’ work (including IT work) with the direct tax authorities, including confidentiality requirements and penalties for breaching tax secrecy.

– Tax debt recovery mechanisms. Taxpayers may request payment deferrals for tax liabilities before their due date. Post-due date, instalment plans are available under conditions to be specified in a future Grand Ducal regulation.

The law will now be published in the Luxembourg Official Journal and will enter into force the day after its publication.

See our previous newsflash.

2. Bill of law 8186B – under further review

Bill of law 8186B requires more in-depth consideration and the timeline for adoption is still pending.