On 17 July 2024, Bill of Law No. 8414 (the “Bill of Law”) was filed before the Chamber of Deputies with a view to easing certain provisions relating to corporate and household taxation. In particular, the Bill of Law aims to amend (i) the amended law of 17 April 1964 on the reorganization of the direct tax authorities (the “DTA”), (ii) the amended law of 4 December 1967 on income tax (the “ITL”), (iii) the amended law of 11 May 2007 on the creation of a family asset management company (the “LFAMC”) and (iv) the amended law of 17 December 2010 on undertakings for collective investment (the “LUCI”).
As a preliminary point, it should be noted that this newsletter deals with the main tax measures proposed.
I. Reduction of the corporate income tax rate
The Bill of Law provides for a one percentage point reduction in the rate of the corporate income tax (the “CIT”). It will reduce the CIT rate from 17% to 16% for companies with taxable income in excess of 200,000 euros. It will also reduce the rate of CIT from 15% to 14% for companies with taxable income of up to 175,000 euros. As a result, for a company established in Luxembourg City and subject to the standard CIT rate, the overall tax rate will be 23.87% rather than 24.94%.
II. Reform of the family asset management companies (sociétés de gestion de patrimoine familial or SPFs)
The Bill of Law also proposes specific adaptations to the LFAMC in order to limit the abuse of this vehicle. By way of reminder, the regime for family asset management companies (the “FAMCs” or the “FAMC”) provides full exemption from CIT, municipal business tax (the “MBT”) and net wealth tax (the “NWT”). In particular, it is contemplated to increase the minimum subscription tax from 100 euros to 1,000 euros and to strengthen the applicable control procedures. The Bill of Law also clarifies the applicable audit procedures. It also introduces the possibility of imposing administrative fines of up to 250,000 euros for serious breaches of the LFAMC. These breaches concern the provisions relating to the tax status of an FAMC. The sole object of an FAMC must be the acquisition, holding, management and realization of financial assets, without engaging in any commercial activity. It may not interfere in the management of companies in which it has a holding, nor may it hold real estate assets. The Bill of Law also specifies the eligibility criteria for investors in FAMCs. Similarly, the Bill of Law proposes to adapt the procedure for withdrawing the tax status of FAMCs.
III. Exemption from subscription tax for UCITS ETFs
The Bill of Law provides for the exemption of actively managed undertakings for collective investment in transferable securities (the “UCITS ETFs”) from the subscription tax, a necessary measure with a view to perpetuating the leading role played by the Grand Duchy in the investment fund sector. UCITS are not subject to CIT, MBT or NWT. In addition, if there are several classes of units or shares within the UCITS ETFs or one of its sub-funds, the exemption applies only to those classes of units or shares that qualify as ETFs.
IV. Modernizing the tax regime for impatriates
In a bid to attract foreign talents, the authors of the Bill of Law wish to modernize the tax regime for impatriates. Under the current system, the concerned employees benefit from a partial exemption of the impatriation bonus, provided that certain conditions are met. They can also claim exemption for benefits in kind. The new scheme is even more attractive, providing for an exemption of up to 50% of gross annual remuneration, capped at 400,000 euros. Taxpayers who benefited from the impatriate tax regime under the rules applicable until the 2024 tax year will remain subject to these rules for subsequent tax years, provided that the qualifying conditions are met. However, taxpayers may opt to apply the new regime from tax year 2025 by notifying the tax authorities. This option is irrevocable from the year in which it is exercised and remains valid for up to 8 tax years following the year in which the employee starts working in Luxembourg.
V. Reinforcement of the participative bonus regime
Under the participative bonus regime, employers can grant their employees a bonus that is 50% exempt from income tax, subject to certain conditions. The legislator also wishes to adapt the system of participative bonuses that can be granted to employees, by introducing two significant improvements:
– an increase in the bonus ceiling from 5% to 7.5% of the employer’s profit for the previous financial year;
– an increase in the exempt portion of the participative bonus: the Bill provides for this to be raised from 25% to 30% of the employee’s gross annual remuneration (excluding benefits in cash and in kind) for the year in which the bonus is paid.
VI. Introduction of an overtime tax credit
In addition, it is proposed to introduce an overtime tax credit (the “OTC”) for cross-border workers of a maximum amount of 700 euros per year for any non-resident taxpayer who is taxable in Luxembourg and who receives wages for overtime as part of their salaried activity.
The taxpayer may benefit from the OTC if the following conditions are met:
(i) the taxpayer is a resident of a State with which Luxembourg has concluded a tax treaty granting Luxembourg the right to tax the gross remuneration for work received by the taxpayer;
(ii) the domestic law of the taxpayer’s State of residence does not contain any provision which explicitly grants the taxpayer a partial or total exemption, or any other tax reduction, for overtime work;
(iii) the agreement specifies that the State of residence of the taxpayer eliminates double taxation by means of a tax credit for the remuneration mentioned in point (i) or that the State of residence of the taxpayer will tax this remuneration if it is not effectively taxed in Luxembourg.
VII. Introduction of a “young employee bonus“
In keeping with the 2023-2028 coalition agreement, the authors of the Bill of Law are proposing to introduce a “young employee bonus” for young employees under the age of 30. It should be noted that the granting of such a bonus will be at the discretion of the employer and that its amount will depend on the gross annual pay received. The bonus will no longer be available once gross annual pay exceeds 100,000 euros. It is proposed that this new bonus be 75% tax-exempt. The above-mentioned bonus will decrease over time and can no longer be granted after 5 years. It should also be noted that the granting of this bonus is subject to certain conditions:
– the employee must be under 30 ;
– they must have their first permanent employment contract with their employer; and
– they must be employed by the same employer for the entire period during which they wish to receive the bonus.
VIII. Adjustment of the personal income tax scale
Moreover, in order to strengthen the purchasing power of taxpayers in the face of inflation, it is proposed to adjust the personal income tax scale by 2.5 index brackets from the 2025 tax year. This adjustment is a continuation of the one decided at the end of 2023, i.e. 4 index brackets from the 2024 tax year.
IX. Adaptation of the social minimum wage tax credit
The Bill of Law proposes to eliminate the tax burden on people earning the non-qualified minimum social wage. To achieve this, it proposes to adapt the minimum social wage tax credit for employees in tax class 1, bringing the tax treatment of people in tax class 1 into line with that of people in tax class 1a or 2 – it being specified that the latter are already exempt from income tax on their salaries as long as they earn only the non-qualified minimum social wage.
X. Adjustment of the deduction from taxable income for children outside the taxpayer’s household
The Bill of Law also proposes to adjust the allowance for children not forming part of the household: the maximum amount will rise from 4,422 euros to 5,424 euros. The legislator’s aim here is to help the most vulnerable households.
XI. Increase in the single-parent tax credit
In the same vein, it is proposed to increase the single-parent tax credit from €2,505 to €3,504.
XII. Next steps
As the Bill of Law is currently in committee, following its review by the Council of State, the Chamber of Skilled Trades and Crafts and the Chamber of Commerce, the Bill of Law will soon be presented and discussed in public session.
Our team is available to provide advice and/or assistance you may require.
