Individual taxation and tax class reform: new bill of law introduced into Luxembourg Parliament

This reform is an in-depth overhaul of the personal income taxation system to provide a family-focused, child-centred framework that is designed to enhance fairness, predictability, transparency and purchasing power in order to better respond to the social changes of recent decades.

A closer look at the single tax class reform

• Creation of a single tax class and mandatory individual taxation (new Art. 118 Income Tax Law)

Under the proposed regime, individual taxation would be mandatory from 1 January 2028 for taxpayers currently falling under tax classes 1 and 1a and for couples who marry or enter into a civil partnership after the entry into force of the reform. The effect is to abolish joint taxation for newly married or civilly partnered couples and abolish joint and several liability for payment of income tax.

Overall, the reform is expected to be more favourable for taxpayers currently taxed under class 1 or 1a, and also for a large proportion of married couples and civil partners, unless there is significant income disparity within the couple. This is notably due to the increased tax-free bracket of the new income tax scale (from 0 to EUR 26,650, compared to EUR 13,230 under the current class 1), which is expected to reduce the average tax burden.

• Transitional arrangements (new Art. 118bis Income Tax Law)

Taxpayers mandatorily or voluntarily subject to joint taxation before 1 January 2028 may continue to benefit from the tariff of the former tax class 2 for a transitional period of 25 years. A new scale, broadly reflecting the current class 2 tariff, will be introduced under new Article 118bis of the Income Tax Law.

During this period, existing married couples and civil partners may opt at any time for the new individual taxation under the single tax class. Once exercised, this option is definitive and irrevocable, preventing taxpayers from alternating between regimes from one tax year to another based on their circumstances.

In the event of death or divorce during the transitional period, the benefit of the former class 2 tariff will be retained for five years (instead of three years under the current rules).

Married taxpayers or those in a civil partnership who wish to be taxed individually from 2028 with application of the new single tax class reflected on their tax card must submit a joint request by 30 November 2027 using a dedicated form provided by the tax authorities. This choice is irrevocable: once exercised, a return to joint taxation will not be permitted for 2028 or subsequent years.

Additional measures announced

• End of simplified annual tax return (décompte annuel)

As a simplification measure, the bill of law proposes to abolish the simplified annual tax return process (décompte annuel) by introducing an optional assessment-based taxation system. Resident taxpayers who are not mandatorily subject to taxation by assessment will be able to opt for this regime. Similarly, non-resident taxpayers receiving income subject to withholding tax (such as salaries or pensions) may opt for it when not mandatorily subject to taxation by assessment under existing rules.

• Increase of certain ceilings for deductible expenses and extraordinary charges

The bill of law increases the maximum deductions for interest and insurance premiums from EUR 672 to EUR 900 and for housing savings contributions (to EUR 1,500 for taxpayers aged 18–40 and EUR 900 for others). It also raises the lump-sum allowance for domestic help, care and childcare expenses from EUR 5,400 to EUR 6,000 and revises the percentage applicable for determining extraordinary charges under the normal regime.

• Revalorisation of the single-parent tax credit
• Adaptation of the progressive income tax scale following three adjustments of the wage index
• Creation of an early childhood allowance of EUR 5,400 per year for each child under the age of three

Conclusion

The proposed measures represent a significant and welcome development in the taxation of individuals in Luxembourg. They demonstrate Luxembourg’s continued commitment to modernising its tax framework in line with societal evolution, whilst seeking to ensure fairness through a lengthy transition period designed to provide equal treatment for all taxpayers.

The bill of law will now proceed through the standard parliamentary legislative process.