Luxembourg: Personal Taxation

On this Page:

- LUXEMBOURG RESIDENCE AND LIABILITY FOR TAXATION
- LUXEMBOURG INCOME TAX
- LUXEMBOURG 'MUNICIPAL' BUSINESS TAX ON PROFITS
- LUXEMBOURG THE FORTUNE TAX

In April 2010, Luxembourg’s Finance Minister Luc Frieden unveiled details of the government’s ambitious proposals to reduce spending and to increase tax revenue, in a bid to achieve a balanced budget by 2014, and to maintain public debt at a manageable level. This aim was enforced by the 2011 budget when the following measures were announced:

• An increase by 1% to the maximum tax rate from 38% to 39%;
• A EUR300,000 ceiling on tax deductions for businesses electing to issue bonus payments or “golden handshakes”;
• An increase the solidarity tax to 4% for households and from 4% to 5% for businesses;
• Introduction of a 'crisis tax' of 0.8% on all salary and investment income.

Additionally, Luxembourg’s government does not intend to raise tax thresholds with inflation.

The government has confirmed that a review will take place in 2012 to evaluate the measures taken in light of the general development of the country’s economic and financial situation.

Luxembourg Residence and Liability for Taxation

For taxation purposes, an individual is either resident or non-resident, and nationality is not a factor in determining tax status. An individual is considered resident in Luxembourg if he maintains a residence there with the intention of remaining on other than a temporary basis. A stay of more than 6 months amounts to residence. In legal terms, an individual is resident if either his tax domicile (domicile fiscale or Wohnsitz) or his usual abode (lieu de sejour habituel or gewohnlicher Aufenhalt) is in Luxembourg.

Double Taxation Treaties (of which Luxembourg has entered more than 60 at the time of writing) may affect the residence and tax status of individuals.

The tax treatment of non-resident individuals is described under Offshore Legal and Tax Regimes.

Residents are liable to tax on their world-wide income.

An expatriate tax regime for highly skilled employees detailed in Circular LIR n°95/2 issued on 31 December 2010, came into force on January 1, 2011, and provides for significant tax savings for both employer and employee. In order to qualify a number of conditions must be met. The employee must:

• not have been resident or subject to Luxembourg income tax on professional income in the previous five years;
• be a Luxembourg tax resident during the application of the expatriate regime;
• hold a university degree or equivalent and be a technical expert, or have a professional experience of at least five years in the sector of activity which the Luxembourg company aims to expand;
• contribute to the development or creation of economic activities with high added value in Luxembourg;
• not replace any employee which is not covered by the Circular.

When the criteria have been met, the following expenses qualify for tax-exempt status:

• One-off moving costs and house fit-out expenses for the transfer of the household of the expatriate to Luxembourg and for his/her final return at the end of the assignment;
• Travel expenses for emergencies;
• Regular housing costs up to EUR50,000 per annum (increased to EUR 80,000 when shared with life partner) and 30% of the annual fixed remuneration of expatriate;
• School fees;
• Specific cost of living allowance capped at EUR1,500 per annum.
  

Luxembourg Income Tax

In May 2008, indexation of all existing tax brackets by 6% was announced, to take effect from 2009, although later that year, in October 2008, the government announced its intention to adjust the rate of tax on personal income linearly at a rate of 9% instead of 6%.

Dividends are normally taxed at source (via a withholding tax of 15%) and are added to total income, with an appropriate tax credit.

Employment income (number 5 above) is taxed at source through a monthly withholding tax applied by the employer, which additionally deals with social security contributions. All other types of income are declared on an annual tax return which is to be filed by 31st March of the year following the year being dealt with. Quarterly advance payments of tax are made on 10th of March, June, September and December, on the basis of one quarter of last year's actual tax bill.

See Double Taxation Treaties for details of the impact of treaties on the tax position of those foreign nationals covered by treaties.

In 2011, social security charges were:

• Health insurance, 3.05% each from employee and employer;
• Sickness insurance, between 0.62% and 2.38% from the employer
• Pension insurance, 8% each from employee and employer
• Accident insurance, about 1.15% from the employer.
• Family insurance, 0.11% from the employer
• Unemployment insurance, 1.4% from the employee.

Luxembourg Municipal Business Tax on Profits

See Direct Corporate Taxation for a description of how the Municipal Business Tax is calculated. The same principles are applied to individuals when they undertake business activity that would be caught by the tax, for example through sole proprietorships or partnerships. However, there is a minimum level of business income below which the tax does not apply, so that individuals in a small way of business will not pay it.

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