- Taxation of income realised by specialised investment funds on Luxembourg-based real estate
- Luxembourg transfer tax regarding indirect disposal of Luxembourg real estate property
- The Luxembourg private wealth management company (société de gestion de patrimoine familial, SPF)
- Reduced rate for UCI investing in sustainable finance assets
- Fiscal unity
- Employee bonus scheme and highly skilled and qualified workers regime
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On 14 October 2020, the Luxembourg Government presented the 2021 Budget bill (n°7666) (Bill) which includes some tax modifications.
Whilst the Bill may still be subject to change as it goes through the parliamentary approval process, we would like to share with you our insights on certain selected aspects thereof.
1. Taxation of income realised by specialised investment funds on Luxembourg-based real estate
As from 1 January 2021, Specialised Investment Funds (SIF) established under a corporate form, Reserved Alternative Investment Funds (RAIF) subject to the SIF regime and established under a corporate form or an Undertaking for Collective Investment (UCI) established under a corporate form and governed by part II of the law of 17 December 2010 (collectively, Real Estate Funds) should be subject to a 20% withholding real estate tax on income arising from real estate located in Luxembourg.
The Bill defines income from real estate located in Luxembourg as (i) rental income realised on Luxembourg real estate, either directly or indirectly through tax transparent entities as defined in article 175 of the income tax law and/or common funds (all together, Partnership); (ii) capital gains realised from the sale of Luxembourg real estate, either directly or indirectly through a Partnership; and (iii) income arising from the sale of interests or assimilated sale of interests in Partnership holding real estate in Luxembourg. Please note that the real estate income is calculated and attributed on pro rata basis if realised through a Partnership.
The Real Estate Funds are required to declare the income to the Luxembourg tax authorities, no later than 31 May of the calendar year following the calendar year of the realisation of the real estate income (i.e. real estate income realised in 2021 should be declared by 31 May 2022) and to submit a report issued by the statutory auditor confirming that the conditions laid down in the Bill have been properly fulfilled.
The withholding real estate tax will not qualify as a deductible expense and will not be creditable.
All Real Estate Funds must inform the Luxembourg tax authorities, at the latest by 31 May 2022 about whether or not they have held a property located in Luxembourg, either directly or through Partnership(s), at any time during the calendar years 2020 and 2021. Any failure to comply with the above may lead to a fine of up to EUR 10,000.
 Article 45 of the RAIF law.
2. Luxembourg transfer tax regarding indirect disposal of Luxembourg real estate property
The Bill increases the transfer tax due upon the contribution of Luxembourg real estate into the equity of a company (both resident and non-resident of Luxembourg) from 0.60% to 2.40% and the additional registration duty from 0.50% to 1% as from fiscal year 2021.
The transfer of Luxembourg real estate asset within an asset deal continues to be subject to transfer tax at a rate of 6% and additional registration duty of 1%.
Please note that a municipal surcharge of 50% applies if the Luxembourg real estate asset consists of an office or a commercial property located in the city of Luxembourg.
The anti-abuse period applicable to cases of allocation of a real estate, upon dissolution, liquidation or reduction of capital of a civil or commercial company, to a partner other than the one who initially contributed the real estate property will be extended from 5 to 10 years.
3. The Luxembourg private wealth management company (société de gestion de patrimoine familial, SPF).
The current text of the SPF law does not allow SPFs to acquire and hold real estate properties. The report of the Luxembourg Parliament Finance and Budget Committee, dated 20 April 2007 and with regard to the SPF law, concludes that an SPF is not allowed to acquire real estate property through a tax transparent entity.
In line with such conclusion, the Bill includes that the SPF is indeed not authorised to hold real estate (either located in Luxembourg or abroad) through entities qualifying as transparent from a Luxembourg tax point of view (e.g. limited partnerships, common funds or similar vehicles).
The Bill furthermore include that subscription tax returns for the SPF should be filed electronically as from 1 July 2021.
4. Reduced rate for UCI investing in sustainable finance assets
UCI established in accordance with the law dated 17 December 2010 should benefit from a newly introduced reduced subscription tax rates, to the extent that they comply with certain requirements linked to sustainable investments, the so-called “Taxonomy Regulation”.
The reduced subscription tax rate would apply depending on the percentage of net assets invested in sustainable finance assets, and briefly summarised as follows:
- <5% of the total net assets of the UCI or individual compartments of an UCI with multiple compartments: 0.04%;
- <20% of the total net assets of the UCI or individual compartments of an UCI with multiple compartments: 0,03%;
- >35% and <50% of the total net assets of the UCI or individual compartments of an UCI with multiple compartments: 0.02%; and
- >50% of the total net assets of the UCI or individual compartments of an UCI with multiple compartments: 0.01%.
The approved statutory auditor should issue a certificate to be provided to the Registration Duties, Estates and VAT Authority (administration de l’enregistrement, des domaines et de la TVA – AED) and such certificate should provide the percentage of the UCI’s net assets which correspond to sustainable finance assets.
It is envisaged that the new reduced subscription tax rates shall be effective as from 1 January 2021.
 Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment and amending Regulation (EU) 2019/2088.
5. Fiscal unity
The Luxembourg fiscal unity regime which currently separates so-called ‘vertical’- and ‘horizontal’ fiscal unities will be amended in accordance with the ECJ Case ruling of 14 May 2020 (C-749/18) as from fiscal year 2020.
As a result, taxpayers should be able to combine a vertical and a horizontal fiscal unity, for instance by including to an existing vertical fiscal unity a sister company of the integrating company which is held through a non-Luxembourg EU resident company.
6. Employee bonus scheme and highly skilled and qualified workers regime
The circular L.I.R. n°104/2 dated 29 November 2017 on stock options and warrants should be repealed by the end of the year.
A new tax regime should be introduced, whereby an employee should be entitled to a tax benefit on his/her participation in the profits of the company (Bonus) that is employing him/her.
Such Bonus will be 50% tax-exempt, provided that the following requirements are cumulatively fulfilled:
- The Bonus paid to the employees by the company should not exceed 5% of the accounting profit reported in the previous fiscal year; and
- The Bonus may not exceed 25% of the employee’s annual salary (i.e. salary excluding the Bonus).
In addition, the regime for highly skilled and qualified workers (so-called “impatriate” regime) is now included in the Bill, albeit with some favourable changes.
- A tax allowance equivalent to two times the amount of waived rent (capped at EUR 15,000) is granted to any taxpayer to the extent that such rent has been waived in 2020 and the tenant is subject to a commercial lease within the meaning of article 1762-3 of the Luxembourg Civil Code.
- The indemnities granted pursuant to state of emergency (Grand-Ducal Regulation of 25 March 2020 and Grand-Ducal Regulation of 8 April 2020) are tax-exempt.
- The VAT exemption scheme (régime de franchise) threshold of EUR 30,000 should be increased to EUR 35,000.
- The certificate issued by the AED for inheritance to be exempt from inheritance taxes should be valid for both fiscal and civil law purposes. From now on, any third party should accept this certificate as proof of the certificate holder’s status as an heir.
- Luxembourg accelerated real estate depreciation rate should be decreased from 6% to 4% and the depreciation period should be reduced from 6 to 5 years. This applies to new real estate which is purchased after 1 January 2021 and subject to a residential lease.
We trust you find this publication useful and welcome the opportunity to answer any questions or comments you may have. We will keep you updated on any additional tax measures.