VCL Luxembourg flash tax news - March 2021

March 2021

Luxembourg tax authorities publish guidelines on profit-sharing bonus

Topics

Introduction
Conditions to be fulfilled by the employer
Conditions to be fulfilled by the employee
Reporting obligations
Executive directors/managers and shareholders
Conclusion

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On 11 February 2021, the Luxembourg Tax Authorities (LTA) published guidance (Circular L.I.R. n° 115bis/12, Circular) on the new remuneration model, the profit-sharing bonus model (prime participative). The new regime was introduced in Luxembourg’s 2021 budget law adopted by the Luxembourg Parliament and applies as of 1 January 2021.

We would like to share with you our insights thereof.

Introduction

The introduction of the new profit-sharing bonus model was implemented under Article 115.13a of the Luxembourg income tax law (”LITL”) and follows the abolition of the stock option regime. Under this new model, employers may grant a profit-sharing bonus to some or all of their employees, based on the employer’s financial results in a tax attractive manner. Provided that all the requirements are met (as further detailed below), the profit-sharing bonus will be qualified as employment income and subject to a 50% individual income tax exemption. The profit-share premium will be tax deductible at the level of the employer as operating expenses. In addition to the Circular, the LTA published a Q&A section (available in French only) for further details on specific terms used in the Circular[1].

Conditions to be fulfilled by the employer

The employer must fulfil the following conditions in order to be able to grant a profit-sharing bonus qualifying for the new model to its employees:

the employer must realise income that qualifies either as commercial profit, agricultural profit or profit deriving from an independent activity during the relevant fiscal year of the bonus payment;
the employer must hold regular accounts (comptabilité régulière) during the fiscal year in which the profit-sharing bonus is granted as well as during the previous fiscal year; and
the overall amount of the bonus that may be granted to the employees is limited to 5% of the employer’s profit for the fiscal year immediately preceding the year in which the premium is granted[2].

The employer to be considered for the above requirement is the one registered as such with the Luxembourg tax authorities for the relevant employee (i.e. the one mentioned on the tax card) and any company group context is excluded.

Conditions to be fulfilled by the employee

The employee[3] must fulfil the following conditions in order to be able to benefit from a profit-sharing bonus:

the bonus may not exceed 25% of the employer’s ordinary annual remuneration (i.e. excluding cash, and/or in-kind benefits, bonuses, premiums, etc.) of the fiscal year during which the bonus is allocated. For the purpose of calculating the 25% limit, the employer’s worldwide annual salary will be taken into account irrespective of a change of the employer; and
the employee must be affiliated either with the Luxembourg social security system or a foreign social security system covered by a bilateral or multilateral social security agreement.

Please note that the social security contributions connected to the tax exempt profit-sharing bonus are not deductible.

Reporting obligations

The Circular introduces an obligation for the employer to submit via email a detailed report as prescribed by the Luxembourg tax authorities in the form of an excel file available in French only, to the competent wage tax office (bureau d’ imposition RTS). Late filing or omission of filing the form will result in the retroactive cancellation of the 50% individual income tax exemption and engage the personal liability of the employer to withhold taxes.

Executive directors/managers and shareholders

Lastly, the Circular further clarifies that profit-sharing bonuses received by an executive director/manager and shareholder, who may also be the sole beneficiary of the bonus, will be considered as income derived from employment income, and which is subject to both the employer-level and employee-level conditions as outlined above.

Conclusion

The clarifications provided by the circular and its underlying Q&A are very welcome and should allow companies to apply and implement the new profit-sharing bonus model without any difficulties.

The new bonus regime allows the sharing of profits among a wider population than former remuneration schemes and may help companies to attract and retain talent.

Nonetheless, as the profit-sharing bonus is limited to only 5% of the employer’s profits, it is uncertain how useful the new regime will really be in practice. As such, the new remuneration scheme seems to be more handy for larger rather than smaller companies.

Raffaele Gargiuolo