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Luxembourg Tax Alert 2018-21

Luxembourg Tax Alert 2018-21



Xavier Martinez

Partner, Global Mobility and People Services

KPMG in Luxembourg


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Law of 1 August 2018 — occupational pension scheme for self-employed workers

This new law aims to extend the scope of application of the legislation in force regarding the Luxembourg occupational pension scheme (second pillar introduced by the law of 8 June 1999).
Amendments in a nutshell
The law of 1 August 2018 (hereafter ‘the new law’) has:
  • transposed Directive 2014/50/EU of the European Parliament (hereafter ‘the Directive’);
  • amended the amended law of 8 June 1999 on occupational pension schemes; and
  • amended the amended law of 4 December 1967 on Luxembourg Income Tax.

What’s new?
1. Transposition of the Directive
The main purpose of the Directive is to eliminate legal constraints on the acquisition and preservation of occupational pension rights which could prevent the free movement of employees within the European Union. Thus, the Directive foresees the acquisition of rights, at the latest, after three years and the protection of the acquired rights for a worker relocated abroad. Actually, an employee who can maintain his/her acquired rights in an occupational pension scheme may be more motivated to change his/her place of work depending on the needs of his/her employer within the European Union.
2. Extension of the scope

As the Luxembourg occupational pension schemes were initially available to employees only, a group of Luxembourg workers remained totally excluded from the second pillar of the pension scheme.
Therefore, the new law extends the regime to self-employed workers. However, the definition of ‘self-employed’ foresees a mix of social security definition and personal tax definition. Consequently, self-employed workers as well as the service providers of occupational pension scheme, i.e. insurance companies, will have to carefully analyze the taxpayer who will be eligible to benefit from such a scheme.
3. Exit conditions

Previously, when an employee was leaving the company before the retirement age, he/she was able to withdraw the acquired rights out of the occupational pension scheme, provided some conditions were met.
However, now with the new law, these conditions are limited to two, i.e. (i) the level of contributions does not exceed three times the Luxembourg minimum monthly wage for non-qualified workers below 18 years of age, and/or (ii) the beneficiary is not affiliated to the Luxembourg social security system anymore.
4. From a tax perspective
     4.1. Self-employed

The extension of the scope to self-employed workers has also required a modification of the tax framework in order to offer them tax benefits similar to employees.
Concretely, the self-employed workers’ contributions to the occupational pension scheme will be considered as special expenses up to 20% of their net professional profits. In specific cases, the salaried income may also be considered for the computation of this basis.
As for employer’s contributions made by a company, contributions paid by a self-employed worker to an occupational pension scheme are subject to a lump-sum tax of 20% (excl. 0.9% due to General Inspection of Social Security). However, the exact method for the calculation of the related taxable basis has to be clarified.
The reporting and payment of the 20% lump-sum tax are now the responsibility of the scheme manager for a self-employed worker’s contributions to an occupational pension scheme.
As for the occupational pension scheme implemented by a company for the employees’ benefits, the insurance dependence contribution of 1.4% is due on the benefits paid at retirement and the potential redemption amounts paid out of the scheme.
     4.2. Employees
Another underlying condition has been added for the companies that may deduct, as business expenses, the contributions made to a qualifying pension scheme set up for their employees. This condition foresees the employer’s contributions are tax deductible up to 20% or less of the annual ordinary remuneration of the beneficiary’s career.

The concept of ‘career’ is not defined by the new law and is consequently subject to interpretation.
5. Current observation
A significant number of uncertainties arise from the provisions of this new law. Therefore, an update of the previous tax circular n° A 03/1 of 25 March 2014 would be welcome, ideally before the entry into force of the new law on 1 January 2019. However, in the meantime, it is key that the scheme manager as well as Luxembourg employers review their occupational pension scheme rules in order to identify if they are still compliant with the new law.

Any tax advice in this communication is not intended or written by KPMG to be used, and cannot be used, by a client or any other person or entity for the purpose of (i) avoiding penalties that may be imposed on any taxpayer or (ii) promoting, marketing, or recommending to another party any matters addressed herein.The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity.

Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

© 2021 KPMG Luxembourg, Société coopérative, a Luxembourg entity and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.

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