On 14 October, the government announced its draft budget for 2021. Given the current economic environment, the Finance Minister Pierre Gramegna announced that major tax reform is not planned for 2021. As such, there are no tax increases or rebates included in the Bill.

However, the Bill does include a number of the tax measures that were announced in the coalition agreement. In this alert, you’ll find a summary of the main measures to help you plan for 2021.

Stock option and warrant plans replaced

The Bill includes a complete abolishment of stock option and warrant plans from 1 January 2021.

To compensate, and maintain Luxembourg’s attractivity, the Bill introduces a new regime for the 2021 tax year: a participative premium that the employer can pay to their employees. The employer will be able to deduct this premium from their taxable income and the employee benefits from an exemption of 50%. This benefit is only granted if certain conditions are met. For example, the aggregate amount of the participation premiums cannot exceed 5% of the company’s profits for the previous year. Additionally, the premium cannot exceed 25% of the beneficiary’s annual remuneration (excluding bonus). The tax authorities will require a detailed communication of all the employers who decide to pay such a premium.

Changes to the impatriate regime

The Bill also gives a legal basis to the impatriate regime and introduces an impatriation premium with a 50% exemption. The premium cannot exceed 30% of the beneficiary’s annual basic salary, and the regime is limited in duration to 9 years. A number of the conditions that had to be met to benefit from this regime have been abolished. However, the basic salary level required to benefit from this regime increased to €100,000 (up from €50,000). These new rules will apply from the 2021 tax year onwards.

Changes to tax card process

From the 2022 tax year, tax cards will no longer be sent to employees for submission to their employer: they will be filed via a dedicated platform. The tax authorities may also issue tax cards with extended validity to taxpayers if certain conditions are met. 

The Bill introduces a non-deductible tax of 20% on all rental and capital gains income from Luxembourg real estate held by specialized investment funds (SIFs), reserved alternative investment funds (RAIFs) and UCI part II funds. The tax applies to both assets that are held directly by the fund, as well as those held indirectly through tax transparent entities or FCPs. Investment funds with Luxembourg real estate assets are to declare their taxable income for the first time by 31 May 2022, at the latest, and pay any tax due to the Administration des Contributions Directes by 10 June 2022. If it becomes law, this measure will be effective from 1 January 2021.  All other income, including income from foreign real estate, remains exempt from the 20% tax and from Luxembourg corporate income tax.

The Bill also includes a new rule under which Luxembourg SPFs (sociétés de patrimoine familial) would no longer be allowed to acquire or hold real estate through partnerships or FCPs. However, it would still be possible to hold real estate though capital companies. This measure would apply from 1 July 2021.

In order to reduce the tax gap between “asset deals” and “share deals”, the Bill increases the aggregate transfer tax on the contribution of Luxembourg real estate to a company. The tax is set to increase from 1.1% to 3.4%, and to increase from 1.4% to 4.6% for real estate in Luxembourg City, and this would apply from 1 January 2021.

The Bill would also reduce the accelerated depreciation rate on real estate investments in rental properties from 6% to 4%. It also reduces the period for which this is applicable from 6 to 5 years. The current 6% depreciation rate, however, would still be applied to rental properties acquired before 1 January 2021, if all the conditions are met. This measure would apply from tax year 2021.

Last but not least, the government has also announced a super-reduced VAT rate of 3% for renovations on houses of 10 years or older (down from 20 years). The rate only applies if renovations are related to sustainable energy improvements.

As a result of the CJEU’s decision dated 14 May 2020 (C-749/18), the Bill introduces an amendment to the tax fiscal unity regime to ensure that a group forming a vertical fiscal unity can form a new horizontal fiscal unity without a prior dissolution of the existing fiscal unity. A dissolution of the fiscal unity’s existence must be avoided in the first five years as this would result in the retroactive stand-alone taxation of the members of the group. For the new changes to apply, the following conditions must be met:

• The integrating parent of the existing group becomes the integrating subsidiary of the new group
• The change must apply for tax year 2022 at the latest
• The new group must be broader in scope than the existing group

The new regime is binding for five years, however, entry into the new group does not interrupt the five years for the existing members.

The Bill also increases the VAT threshold for small enterprises, and in doing so transposes the authorization granted to Luxembourg by the EU Council in national law.

The authorization – found in Council decision 2019/2210 (19 December 2019) – states that taxable persons in Luxembourg with an annual turnover of €35,000 or under are exempt from VAT. 

The Bill includes the following sustainability measures, set to be applied from 1 January 2021:

• The introduction of a CO2 tax that will trigger an increase in fuel and diesel prices. Government announcements suggest that the increase will be around €0.05 per liter.
• A reduction in the subscription tax for investment funds from 0.05% to 0.04%. This reduction applies to funds investing at least 5% of their assets under management in sustainable projects that meet EU criteria. The reduced rate, which only applies to the qualifying net assets, falls to 0.03%, 0.02% or 0.01% when the sustainable investments reach at least 20%, 35% and 50% respectively.  

The Bill will now go through the usual legislative process. It may be subject to further amendments as a result of various consultations in the coming weeks. We will keep you informed of any developments.