Luxembourg: Tax measures in 2021 budget

Luxembourg: Tax measures in 2021 budget

The draft budget for 2021 presented 14 October 2020 does not include tax increases, and there are no plans for major tax reform for 2021.

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A number of tax measures were previously announced in the coalition government agreement, and are summarized below.

Individual taxation

Stock option and warrant plans replaced

The stock option and warrant plans would be repealed from 1 January 2021. To compensate, a new regime would be introduced for the 2021 tax year providing a participative premium that an employer can pay to employees. The employer will be able to deduct this premium from its taxable income and the employees would benefit from an exemption of 50%, if certain conditions are satisfied. For example, the aggregate amount of the participation premiums could not exceed 5% of the company’s profits for the previous year. Additionally, the premium could not 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

Concerning the “impatriate regime,” an impatriation premium would provide a 50% exemption. The premium could not exceed 30% of the beneficiary’s annual basic salary, and the regime would be limited in duration of nine years. Conditions that had to be met to benefit from this regime would be repealed; however, the basic salary level required to benefit from this regime would be increased to €100,000 (up from €50,000).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 would no longer be sent to employees for submission to their employer; rather, these would be filed via a dedicated platform. The tax authorities may also issue tax cards with extended validity to taxpayers if certain conditions are met. 

Taxation of real estate

A non-deductible tax at a rate 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 would be introduced.

The tax would apply to both assets that are held directly by the fund, as well as those held indirectly through tax transparent entities (FCPs). Investment funds with Luxembourg real estate assets would have to declare their taxable income for the first time by 31 May 2022, and pay any tax due to the Administration des Contributions Directes by 10 June 2022. If it becomes law, this measure would be effective 1 January 2021. 

All other income, including income from foreign real estate, would remain exempt from the 20% tax and from Luxembourg corporate income tax.

There is also a new rule proposed 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 aggregate transfer tax on the contribution of Luxembourg real estate to a company would increase from 3.4% (from 1.1%) and to 4.6% (from 1.4%) for real estate in Luxembourg City, effective 1 January 2021.

The accelerated depreciation rate on real estate investments in rental properties would be reduced to 4% (from 6%) and the period for which this would apply would be reduced to five years (from six years). The current 6% depreciation rate, however, would still be applied to rental properties acquired before 1 January 2021, if all conditions are met. This measure would apply from tax year 2021.

A super-reduced value added tax (VAT) rate of 3% would be introduced for renovations on houses of 10 years or older (down from 20 years) if the renovations are related to sustainable energy improvements.

Fiscal unity regime (applicable from tax year 2020)

As a result of the Court of Justice of the European Union (CJEU) judgment of 14 May 2020 (C-749/18), there would be an amendment to the tax fiscal unity regime to provide 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 would have to be satisfied:

  • 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 would not interrupt the five years for the existing members.

VAT-related measures

The VAT threshold for small enterprises would be increased—thereby transposing into law an authorization granted to Luxembourg by the EU Council. The authorization (found in Council decision 2019/2210 (19 December 2019)) states that taxable persons in Luxembourg with an annual turnover equal to or less than €35,000 are exempt from VAT. 

Sustainability measures

The following sustainability measures are proposed, with an effective date of 1 January 2021:

  • The introduction of a CO2 tax that would trigger an increase in fuel and diesel prices. The government announcements suggest that the increase will be approximately €0.05 per liter.
  • A reduction in the subscription tax for investment funds from the rate of 0.05% to 0.04%. This reduction would apply 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, would be 0.03%, 0.02% or 0.01% when the sustainable investments reach at least 20%, 35%, and 50% respectively.  

What’s next?

The proposals are scheduled to go through the usual legislative process, and thus may be subject to amendments as a result of various consultations in the coming weeks.


Read an October 2020 report prepared by the KPMG member firm in Luxembourg

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