Luxembourg’s newly proposed tax measures

Introduction

The Draft Budget Law proposes clarifications and certain new tax measures relating to the, among other, filing date of the tax return for individuals and corporate bodies, impatriate regime and the reverse hybrid rule. As the current period is characterized by various political and economic developments, an extensive reform is not anticipated.

The following elements pertaining to the Draft Budget Law will be further considered:

1. Clarifications on the reverse hybrid rule
2. Extension of the filing deadline for tax returns
3. Amendments to the ‘‘profit-sharing bonus’’ rules (prime participative)
4. Beneficial conditions of the impatriate regime
5. Tax credit increase
6. Clarifications to the law of 23 December 2005 (“RELIBI Law”)
7. Restriction of accelerated depreciation on rental real estate
8. VAT rate reductions

Additionally, real estate tax measures introduced by the Draft RE Law and VAT measures introduced by the Draft VAT Law will be addressed.

Draft Budget Law

Clarifications on the reverse hybrid rule

The reverse hybrid rule, enshrined in article 168quarter of the Luxembourg Income Tax Law (the ‘‘LITL‘‘), aims to eliminate situations where double non-taxation occurs further to the qualification of a Luxembourg entity as a reverse hybrid, i.e., tax transparent in Luxembourg and tax opaque in the jurisdiction of its investors.

Based on article 168quarter, such reverse hybrid entity may, under certain conditions, become subject to Luxembourg corporate income tax (“CIT”) on the net income that is not taxed neither in Luxembourg nor in any other jurisdiction.

In this regard, the Draft Budget Law seeks to make a clarification, specifying that the reverse hybrid rule would apply solely in cases where the net income of the Luxembourg transparent entity is not taxed as a result of the differences in the qualification.

On the contrary, the rule would not apply in situations where the net income is not taxed as a result of other reasons not pertaining to the qualification of the entity (e.g., subjective tax exemption of the investor in their residence state).

If adopted, this measure would be effective as of tax year 2022.

Extension of the filing deadline for tax returns

The proposed changes introduced by the Draft Budget Law consider both individual and corporate tax returns and, if adopted, would bring current administrative practice in line with the law.

Namely, the Draft Budget Law introduces an extension to the filing deadline, from 31 March to 31 December, for the:

• • personal income tax returns; and
  • CIT, municipal business tax (“MBT”) and net wealth tax (“NWT”) returns

Amendments to the ‘‘profit-sharing bonus’’ rules (prime participative)

The profit-sharing bonus regime was introduced in 2021, allowing employees to participate in the corporate profits of their employer if certain conditions are fulfilled. Under the current regime, the employee may receive a bonus of up to 5% of the employer‘s accounting profit in the year preceding the year in which the bonus was granted.

The Draft Budget Law proposes an amendment by affirming that the 5% limit could be computed by referring to the 5% of the positive sum of the results of the members of the tax unity which the employer is part of, subject to certain conditions.

Beneficial conditions of the impatriate regime

Under the Luxembourg impatriate regime, different costs borne by the employer in relation to the move of a highly qualified employee to Luxembourg constitute exempt income for the employee for up to 8 years, subject to certain conditions.

Proposed amendment to the impatriate regime aims to attract new highly skilled workers to Luxembourg by modifying the minimum remuneration threshold required to benefit from this regime. The Draft Budget Law states that this system could be applied as long as the annual gross base remuneration is at least EUR 75,000 (previously EUR 100,000).

Tax credit increase

The Draft Budget Law seeks to increase the maximum amount of tax credit for single parents with dependent children from EUR 1,500 to EUR 2,505 per year. Furthermore, the amount of income up until which a single parent could benefit from this tax credit is also proposed to be increased from EUR 35,000 to EUR 60,000.

Clarifications to the RELIBI Law

The RELIBI Law provides for a 20% withholding tax on interest payments made to or for the benefit of a Luxembourg resident who is the beneficial owner of the payment. The withholding tax is paid by the paying agent.

The proposed clarifications indicate that the paying agent, in order to be considered as such, should be making the payment as a part of his normal economic activity. It is further clarified that payments made outside of the regulated market do not fall within the scope of the law.

Restriction of accelerated depreciation on rental real estate

In order to contain pricing pressure through excessive demand, the tax system for depreciation of rental real estate is proposed to be reformed. As of 2023, the amortisation rate of 4% would only be available to taxpayers for a maximum of two buildings or parts of buildings used for rental housing, acquired or built after 31 December 2022.

VAT rate reductions

As part of the plan to alleviate the energy crisis and support circular economy, the Draft Budget Law proposes to reduce certain VAT rates. It is planned to apply the super reduced rate of 3% to the supply of solar panels, and the reduced rate of 8% to the repair of household appliances and sale, rental and repair of bycicles (including electric bicycles).

Draft RE Law

Real estate taxation

The Draft RE Law comprises several new measures and modifications related to the taxation of real estate.

As regards the property tax (impôt foncier), it is proposed to introduce a modified basis value for properties which will, where applicable, be reduced by a fixed allowance of EUR 2,000. Such basis value will then be taxed by the municipalities at a tax rate between 9% and 11%.

The Draft RE Law also proposes the creation of two new taxes: the unbuilt land tax and the unoccupied housing tax. The former aims to encourage the building of new residential areas and the latter consists of a tax levied for the reason of non-occupation of a real estate property.

Draft VAT Law

Reducation of VAT rates

The Draft VAT Law proposes a drop in the standard (17%), intermediate (14%) and reduced (8%) VAT rates by one percentage point. The reduction would be temporary, and is planned to last from 1 January until 31 December 2023. It is aimed at curbing inflation and helping households and companies face the considerable rise in energy prices.

Our observations

The draft laws as presented in this Tax News Alert are not definitive and will have to follow the usual legislative process before a final analysis of the measures can be laid out.

Should you have any inquiries, please do not hesitate to contact Grant Thornton Luxembourg.

For more information, you may contact:

• Jean-Nicolas Bourtembourg - Partner, Head of Tax & Transfer Pricing
• Jean-Michel Hamelle - Partner, International Tax
• Mélina Rondeux - Partner, Tax Compliance