VCL Luxembourg Tax News

1. Inpatriate regime

The Draft Law sets to significantly modernise and simplify the favourable tax regime put in place to attract talent from abroad. Currently, the Luxembourg income tax law (LITL) only provides for a partial exemption on bonuses granted to employees (which cannot exceed 30% of the gross salary) and certain compensation for relocation expenses borne by the employee.

The Draft Law would significantly simplify and modernise the regime by providing a lamp-sum exemption from tax of 50% of the gross annual salary of inpatriate employees, with a cap of EUR 400,000. The exemption would be available for 8 years following the first year of employment. Further, the conditions to benefit from the regime would essentially remain the same.

2. Profit sharing regime – Prime participative

Luxembourg introduced a favourable tax regime for employees who are remunerated with profit-sharing schemes (prime participative) in 2021. Under this regime, a share of the profits paid by a Luxembourg company to its employees is 50% exempt from tax at the employee’s level if: (1) the total profit share paid by the employer does not exceed 5% of the company’s accounting profits of the previous financial year, and (2) the profit share for each employee does not exceed 25% of their annual gross salary.

The Draft Law now sets to slightly increase the scope of this measure by increasing the maximum total participative bonus an employer can grant from 5% to 7.5% of the accounting profits from the previous year and from 25% to 30% of the employee’s gross annual salary.

3. Young employees’ bonuses

 The Draft Law also proposes introducing a new exemption for bonuses granted to young employees, starting from fiscal year 2025. Accordingly, if granted by the employer, such bonuses will be 75% tax-exempt, with maximum amounts set by law depending on the employee’s annual salary. The measure is limited to employees under 30 who are working their first permanent employment contract in Luxembourg and with a maximum yearly gross salary of EUR 100,000.

4. 1% reduction of corporate income tax

The Draft Law also proposes to decrease CIT rates by 1% to align them more with the OECD CIT average. Thus, the 15% rate, applicable to companies with taxable profits below EUR 175,000, will be lowered to 14% and the 17% rate, applicable to companies with taxable profits above EUR 200,000, will be lowered to 16%. As a result, the maximum aggregate tax rate for companies established in Luxembourg City will drop from 24.94% to 23.87% (including the municipal business tax and the solidarity surcharge).

5. ETF exemption from subscription tax

Another important measure to reinforce Luxembourg’s global attractivity as a financial center is the newly proposed exemption from subscription tax for actively managed Exchange Traded Funds (ETFs). These will be exempt from subscription tax starting from the quarter beginning after the official publication of the Draft Law. The measure will render ETFs tax-neutral, thus efficiently promoting Luxembourg as the natural location to launch and manage such emerging and fast-growing funds.

6. SPF regime modifications

Further, the Draft Law amends the special regime applicable to family asset management companies (SPF) governed by the SPF law of 11 May 2007. Accordingly, the minimum annual subscription tax due by SPFs will be increased from EUR 100 to EUR 1,000. Moreover, the Draft Law now explicitly provides that the term SPF must be mentioned in the legal name. Finally, the Draft Law now provides more explicit procedural rules, including the levying of administrative fines and the potential withdrawal of the SPF benefits by the tax administration to those companies that are not compliant with all the legal and regulatory requirements. Also, these measures will enter into force the quarter beginning after the official publication of the Draft Law.

7. Other measures

Finally, the Draft Law encompasses several other measures in the field of personal and corporate taxation. These include the amendment of the income tax brackets for individuals, thus leading to lower effective taxation, the introduction of a new tax credit for cross-border employees working over-time, and some technical modifications for the calculation of the tax rates applicable to single parents, widowers and senior citizens (above 64 years old). In respect of corporate taxation, the introduction of a new carve-out from the scope of the interest deductibility limitation rules for small and medium-sized enterprises is particularly relevant.

8. Circular 170/1, 170bis/1 of 19 July 2024

Lastly, the LTA has issued a circular detailing the tax implications of a dissolution without liquidation. It is important to note that this option is only available for companies with a sole shareholder. In such cases, the company can be dissolved at the sole shareholder’s request without liquidation, with all assets and liabilities being transferred to the latter by operation of law and under universal title.

From a fiscal perspective, this dissolution should, in principle, be treated as a regular transfer of assets and liabilities and, accordingly, be regularly subject to tax. Nevertheless, if all relevant conditions are met, it may be assimilated into a merger carried out under the tax-neutral regime, thereby avoiding the recognition of possible latent capital gains. The circular also confirms that the tax treatment as determined under the Luxembourg income tax law will also be relevant for municipal business tax (MBT) purposes, as is usually the case. The dissolution does not affect the benefit of maintaining a net wealth tax (NWT) reserve as long as the sole shareholder retains it at its current level until the end of the 5 years.

We trust you will find this helpful publication and welcome the opportunity to answer any questions or comments you may have. We will keep you updated on any additional tax measures.