Tax returns and compliance
Tax rates
Residence rules
Termination of residence
Economic employer approach
Types of taxable compensation
Tax-exempt income
Expatriate concessions
Salary earned from working abroad
Taxation of investment income and capital gains
Additional capital gains tax (CGT) issues and exceptions
General deductions from income
Tax reimbursement methods
Calculation of estimates/prepayments/withholding
Relief for foreign taxes
General tax credits
Sample tax calculation

All information contained in this document is summarized by KPMG Luxembourg, Société coopérative, the Luxembourg member firm affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity, based on the Luxembourg Income Tax Law of 4th December 1967 and subsequent amendments; Luxembourg law of 29th August 2008; Grand-Duchy regulation of 5th September 2008; the Luxembourg web site of Ministry of Foreign and European affairs and the Luxembourg website Guichet.lu.

All income tax information is summarized by KPMG Tax S.à.r.l., the Luxembourg member firm of KPMG International, based on Ministère des Finances.

When are tax returns due? That is, what is the tax return due date?

31 March of the following year.

What is the tax year-end?

31 December.

What are the compliance requirements for tax returns in Luxembourg?

If the resident taxpayer’s taxable income includes only one salary subject to the Luxembourg withholding tax on wages and that does not exceed 100,000 Euro (EUR), the taxpayer does not to have to file a tax return. In respect of non-resident taxpayers, the same rule applies to taxpayers who have worked at least 9 months on a continued basis in Luxembourg during the tax year, and derived salary subject to the Luxembourg withholding tax on wages, and that does not exceed EUR100,000. Other thresholds may apply depending on the situation.

What are the current income tax rates for residents and non-residents in Luxembourg?

The tax rates applicable for 2019 are as follows.

Income tax table for 2019

The 2019 income tax table for single taxpayers (tax class 1) is as follows:

Previously a fixed monthly cash bonus of EUR76.88 was granted for each child falling within the scope of the Luxembourg family allowances regime, irrespective of the taxable income of the parents. The child bonus was deducted from the tax liability up to the amount of tax due through the tax return for taxpayers who do not receive family allowances (expatriates not subject to Luxembourg social security for instance).

The new law introduces the individualization of the family allowances, i.e. the bonus is merged with the family allowance, and a unique amount of family allowance is paid per child born as from 1 August 2016 (EUR265/month). The old amounts are grandfathered for children born before 1 August 2016.

Child tax relief is still applicable however under limited conditions.

• Family allowances – additional monthly amount/child (Aas from 1 August 2016, EUR 20 if the child is between 6 and 11, EUR 50 for children of 12 years and older)
• Supplementary special family allowances for disabled children – monthly amount/child (EUR 200 paid until the age of 25 years old)
• Back-to-school allowance – annual amount/child (as from August 2016 EUR 115 for children between 6 and 12 years, EUR 235 for children of 12 years and older)
  

Taxpayers are divided into three classes.

Class 2 - married couples who are filing jointly, including couples in a same-sex marriage:

• persons who became widowed in the 3 years preceding the tax year; and
• persons who separated or divorced in the 3 years preceding the tax year (as long as they did not apply for this provision within the last 5 years).

Taxpayers in this category apply the tax rates to one half their incomes and then multiply the liability by two (that is splitting system).

Class 1a - The following taxpayers fall under class 1a, as long as they do not fall under class 2:

• taxpayers separated or divorced and aged 65 or over
• single parents; and
• widow(er)s.

For tax class 1a the taxable amount is calculated as follows:

50 percent of the difference between net taxable income and EUR45,060, provided that the maximum rate cannot exceed 39 percent for the income bracket between EUR37,842 and EUR100,002, 40 percent for the income bracket between EUR100,002 and EUR150,000, 41 percent for the income bracket between EUR150,000 and EUR200,004 and 42 percent for the income in excess of EUR200,004.

Class 1 Taxpayers (singles) who do not belong to either Class 1a or Class 2.

Taxpayers living in a registered partnership can, upon request, be treated as a married couple through the filing of a joint annual personal tax return, as long as the partnership vs. the marriage has been valid during the whole tax year. In this case, partners will file jointly, and will be granted tax Class 2.

Starting the year 2018, married couples can opt to be taxed individually during the tax year concerned. This election has to be made at the latest by 31 March of the tax year following the tax year concerned.

Registered partners remain taxable individually during the tax year concerned and can opt to be taxed jointly after year-end of the tax year concerned. This election has to be made at the latest by 31 March of the tax year following the tax year concerned. These elections can be made every year.

For couples requesting to file separately, most tax deductions applicable to the household should then, in principle, be equally split between spouses/registered partners. The tax class applicable in these circumstances will be the tax class 1. However, couples may opt for a different allocation of the taxable income. Such different allocation of income will have no impact on the ceilings of deductions for special expenses.

The extra-professional abatement will amount to EUR 2,250 per spouse/registered partner filing separately.

A surcharge amounting to:

• 7 percent (of the computed income tax liability) for taxable income not exceeding EUR-150,000 in tax classes 1 and 1a or EUR300,000 in tax class 2
• 9 percent (of the computed income tax liability) for taxable income exceeding EUR150,000 in tax classes 1 and 1a or EUR300,000 in tax class 2

is levied as a contribution to the employment fund.

For the purposes of taxation, how is an individual defined as a resident of Luxembourg?

An individual may be considered a Luxembourg resident for tax purposes to the extent the following circumstances are met, subject to double taxation treaty provisions.

An individual is considered a resident of Luxembourg if their domicile or customary place of abode is in Luxembourg. A person's domicile is the place where they occupy a home under circumstances that indicate they will retain and use it. A customary place of abode is deemed to exist if an individual has been present in Luxembourg for a period of at least 6 months.

• This is not restricted to 6 months in the calendar year. If an individual arrives on 1 October in year N and is still staying in the country/territory on 2 April in year N + 1, the 6-month' stay will be deemed met. In such case, the individual is deemed to be a resident taxpayer in Luxembourg retrospectively to 1 October in year N.

Is there, a de minimus number of days rule when it comes to residency start and end date? For example, a taxpayer can’t come back to the host country/territory for more than 10 days after their assignment is over and they repatriate.

No, there is no de minimus number of days in Luxembourg. It is essentially based on facts and circumstances.

What if the assignee enters the country/territory before their assignment begins?

The assignee is considered as a Luxembourg tax resident as of the first day they arrive in Luxembourg.

Are there any tax compliance requirements when leaving Luxembourg?

Upon termination of Luxembourg residence (domicile), the taxpayer leaving Luxembourg may have to file an income tax return for income received during the tax year until the date of departure, which is confirmed by the taxpayer’s deregistration at the commune of residence. The deadline for filing such return is also 31 March of the following year. Compulsory wage tax withholding may be considered as final tax depending on the circumstances. This should be assessed on a case-by-case basis.

What if the assignee comes back for a trip after residency has terminated?

The assignee will not be considered as a Luxembourg tax resident.

Do the immigration authorities in Luxembourg provide information to the local taxation authorities regarding when a person enters or leaves Luxembourg?

Indeed the civil file of a taxpayer is accessible at all levels of the public authorities..

Will an assignee have a filing requirement in the host country/territory after they leave the country/territory and repatriate?

If the assignee receives, after repatriation, an income which relates to a professional activity performed in Luxembourg (such as cash bonus), this income is taxable in Luxembourg. Compulsory wage tax withholding may be considered as final tax depending on the circumstances. This should be assessed on a case-by-case basis.

Do the taxation authorities in Luxembourg adopt the economic employer approach to interpreting Article 15 of the Organisation for Economic Co-operation and Development (OECD) treaty? If no, are the taxation authorities in Luxembourg considering the adoption of this interpretation of economic employer in the future?¹

The Luxembourg tax authorities adopt the economic employer approach. When determining the economic employer, the Luxembourg tax authorities look at, among other criteria, the integration into the Luxembourg organization. Also, for whose risk and benefit the activities are performed play an important role in the determination of economic employer. The recharge of salary costs can play a role in this determination, but is not a decisive factor on its own. Even without a recharge of salary costs to Luxembourg, the Luxembourg company might be regarded as the economic employer based on other elements.

Are there a de minimus number of days before the local taxation authorities will apply the economic employer approach? If yes, what is the de minimus number of days? 

There is no de minimus number of days in Luxembourg.

What categories are subject to income tax in general situations?

As a rule, all types of remuneration and benefits received by an employee for services rendered constitute taxable income regardless of where paid, directly or indirectly. Typical items of an expatriate compensation package are fully taxable unless otherwise indicated below:

• Base salary
• Reimbursements of foreign and/or home country/territory taxes
• School tuition reimbursements
• Cost-of-living allowances
• Expatriation premiums for working in Luxembourg
• Housing allowances are fully taxable.
  • However, where an employer puts accommodation at the disposal of an employee (whether owned or rented by the employer), the taxable value of the accommodation to the employee may be assessed on a flat-rate basis.
• Benefits-in-kind generally form part of taxable compensation.
  • Where a company car is provided, the deemed taxable value of the employee’s private use of the vehicle may be assessed on a flat-rate basis, dependent on the CO2 emission of the vehicle.
• Granting cash interests subsidies, or a loan to an employee interest-free or at a reduced interest rate, are considered earned income from employment, and are taxable either at nominal cash value, or at the difference between the interest rate charged and 1.5 percent in 2019.
  
  • Exemptions apply on this taxable deemed income of EUR 3,000 per year for a single person, or EUR 6,000 (for couples filing jointly and single parents’ households) where the loan is in connection with the employee’s household’s principal private residence, or EUR 500 per year (single), EUR 1,000 (for couples filing jointly and single parents) if the loan was made for other purposes.

A deferred compensation scheme may result in reduced Luxembourg tax if the deferred payment is paid in a year after departure from Luxembourg. As the bonus is likely to constitute the only income from Luxembourg source during that year, it may be subject to individual income tax at the lower progressive income tax rates.

Intra-group statutory directors

Will a non-resident of Luxembourg who, as part of their employment within a group company, is also appointed as a statutory director (i.e. member of the Board of Directors in a group company situated in Luxembourg) trigger a personal tax liability in Luxembourg, even though no separate director's fee/remuneration is paid for their duties as a board member?

If no separate director's fee/remuneration is paid to the individual, the non-remunerated directorship will not trigger a personal tax liability. The individual’s tax liability would come from the employment activity performed in Luxembourg (if any).

a) Will the taxation be triggered irrespective of whether or not the board member is physically present at the board meetings in Luxembourg?

Director's fee/remuneration paid from a Luxembourg entity in relation to directorship is taxable in Luxembourg, irrelevant of the presence of the individual in Luxembourg.

b) Will the answer be different if the cost directly or indirectly is charged to/allocated to the company situated in Luxembourg (i.e., as a general management fee where the duties rendered as a board member is included)?
In that case the income might be qualified either as service fee or director’s fees. A specific analyze would be required.

c) In the case that a tax liability is triggered, how will the taxable income be determined?

The income to be taxed in Luxembourg will be the director's fee paid in relation to non-executive directorship (attendance to board meetings) in Luxembourg. Actual expenses covered by the director (or a lump sum deduction) may be claimed to reduce the taxable income.

Are there any areas of income that are exempt from taxation in Luxembourg? If so, please provide a general definition of these areas.

The following categories of income are exempt from Luxembourg tax:

• A 50 percent exemption is available for dividends paid by a company qualifying for the EU Parent-Subsidiary Directive, or a company resident in a country/territory with which Luxembourg has concluded a tax treaty, provided that the company is subject to a tax comparable to the Luxembourg corporate income tax
• A 50 percent exemption may apply on certain annuity payments (subject to conditions).
• Capital paid out in respect of a life insurance contract (subject to conditions).
• The first EUR 1,500 of investment income.
  • The exemption covers all income from investments such as dividends, interests not been subject to the 20 percent final withholding tax on credit interests paid by resident paying agents to Luxembourg resident individuals. The amount is doubled for couples filing jointly.
• Interests paid out from home savings and loan contracts (building societies) approved in Luxembourg or another EU Member State, or in another EEA State situated outside the EU (subject to further conditions).
• State birth allowances and child benefits.
• Net rental income derived from approved bodies (covered by the modified law of 25 February 1979 concerning the housing support) can benefit from a 50 percent exemption.
• Income from qualifying pension plans.
  

In addition, social security benefits may not be taxable in Luxembourg to the extent that they are granted by a public social security institution, and are not considered income from a salaried occupation in the form of cash remuneration. However, the following benefits are tax exempted:

• healthcare in-kind benefits in case of sickness or maternity
• accidents at work, or professional diseases.

Gift and inheritances are not subject to individual income tax in the hands of the beneficiaries, but are subject to the inheritance and gift tax provisions.

Dividends received from an EU resident company or company resident in a State with which Luxembourg has concluded a double taxation treaty provided that the company is subject to a tax comparable to the Luxembourg corporate income tax are 50 percent exempted.

Life annuities from a lifelong usufruct may be 50 percent exempted (under conditions).

See section discussing special expenses.

Dividends and interest income are taxable in Luxembourg.

Luxembourg legislation provides child benefits (limited based on children's age) to taxpayers who contribute intothe Luxembourg social security system.

The sickness indemnity aims to compensate the loss of income due to the fact that the insured person is temporarily not able to work.

The insured person is entitled to the sickness indemnity as of the first day of non-exercise of the professional activity subject to insurance.

The remuneration is paid by the employer as of the first day of work disability until the end of the month during which the 77th day of incapacity for work is located. At the end of this period, the sickness indemnity is paid by the health fund with a maximum of 78 weeks over a reference period of 104 weeks.

Maternity leave

Maternity leave starts 8 weeks before the anticipated date of birth and ends 12 weeks after the effective date of birth. The father is entitled to up to 10 days of paternity leave.

Parental leave

All employees who are legally and continuously occupied at a workplace in Luxembourg, and who have been affiliated to the Luxembourg social security for at least 12 months at the birth can be entitled to a parental leave.

If the two parents are entitled to the parental leave, the first parent has to take the parental leave immediately after the maternity leave, and the second parent can take the parental leave any time until the sixth birthday of the child (12th birthday for adopted children). If only one parent is entitled to parental leave, they can take the leave any time until the sixth birthday of the child.

The parental leave can be either full time for 6 months, or part time for a year (the latter being subject to employer’s approval).

A work accident is defined as an accident which occurs by reason of, or on the occasion of work.

At the time of the accident, a link must exist between the employment and the activity having caused the injury. The activity must have been performed in the interest of the company by which the insured person is employed, and the latter must have been placed under subordination of their employer at the moment of the accident.

An accident while travelling to works is defined as an accident which occurs on the normal and direct way to go from home to the place of work and back.

Are there any concessions made for expatriates in Luxembourg?

The scope of the circular on the tax regime applicable to impatriate workers applies to impatriate workers in Luxembourg, who were either hired abroad by a Luxembourg company, or by a foreign company situated in the European Economic Area.

The aim of the circular is to attract foreign workers to Luxembourg to respond to a need for skill and labor.

• Employees usually working abroad, assigned by a company located outside of Luxembourg to perform an employment activity in a Luxembourg company, member of the same international group (i.e. companies financially linked and incorporated in at least two other countries/territories).
• Employees hired abroad by a Luxembourg company or by a company located in the European Economic Area to work in Luxembourg for the company.

Tax regime

• This specific tax regime grants tax exemption of the part of relocation expenses (recurring and non-recurring) that exceed those that would have applied had the employee remained in their home country/territory.
• Non-recurring expenses: removal and repatriation expenses, housing (furniture), special travel costs (e.g. birth, wedding, death of a family member).
• Recurring expenses: housing costs (e.g. rent, utilities, heating, etc.), yearly home travel, tax equalization are tax exempt up to the lower of EUR50,000 (EUR80,000 when the employee shares a house with their spouse or partner) per year, or 30 percent of the impatriate worker's total annual fix remuneration.
• School fees are tax exempt without any cap.
• Tax free lump sum indemnity for other recurring expenses (e.g. cost of living adjustment): fixed at 8 percent of the employee’s fixed monthly remuneration, capped at EUR1,500 per month. Lump sum can be doubled (i.e. 16 percent capped at EUR3,000 per month) where the employee shares housing with their spouse or partner who does not perform any professional activity.

Specific tax regime applies to impatriate workers relocating to Luxembourg if different conditions related to the employee, the Luxembourg employer and the salaried employment in Luxembourg are fulfilled.

At the beginning of each year (by 31 January at the latest), the employer is required to provide the Tax Authorities with a nominative list of employees covered by this measure.

If the non-resident employer does not have any legal requirements to withhold taxes and to grant tax credits on salary and does not do it on a voluntary basis, the employee will have to file a Luxembourg individual income tax return to the Luxembourg tax authorities in order to benefit from this regime.

The benefit of the specific tax provisions for impatriate workers may be applied until the end of the 5th tax year following the impatriate’s starting date in Luxembourg.

Is salary earned from working abroad taxed in Luxembourg? If so, how?

Residents of Luxembourg are subject to Luxembourg tax on their worldwide income, including salary earned from working abroad. The taxable salary of residents cannot be reduced by allocating income to foreign business trips, except where exclusions are available under double taxation treaties. In such instances there is a tax relief to avoid double taxation.

The principle of a split salary structure consists of diversifying the geographical income sources and location of professional activities in order to apportion the right of taxation of the global income between several countries/territories.

Two possibilities regarding a split salary should be considered.

• There is no double taxation treaty between Luxembourg and the country/territory concerned so that the foreign income will be subject to Luxembourg taxes with a potential tax credit for foreign taxes suffered. As a result, the individual is not likely to benefit from any tax saving, as the total tax burden suffered amounts to at least the Luxembourg taxes on their worldwide income.
• A double taxation treaty is in force between Luxembourg and the country/territory concerned, which provides for an exemption (with progression) of the employment income from Luxembourg taxes. However, the income is taken into consideration for the determination of the global tax rate applicable to the household’s total taxable income in Luxembourg.

Are investment income and capital gains taxed in Luxembourg? If so, how?

A 20 percent final withholding tax is levied on qualifying (under the ‘Relibi’-law) interest paid by resident paying agents to resident individuals in Luxembourg, including interest on bank deposits, government bonds, and profit-sharing bonds. The withholding tax constitutes the final tax and is not reported in the individual’s annual tax return (if part of their private wealth).

For interest, as long as they fall in the Relibi law, paid or credited by foreign paying agents located inside the EU (or another covered State situated outside the EU), the Luxembourg resident taxpayer may opt for the 20 percent withholding tax via a specific tax form, and simultaneously pay the 20 percent withholding tax. Deadline is 31 March of the following tax year for both the filing of the tax return and the payment of the 20 percent tax. This tax is final and the interest is not reported in the individual’s annual tax return. If the option is not exercised, the individual has to report the interest income in their annual tax return, and the interest will be subject to the upper progressive income tax rates.

Interests paid by a Luxembourg paying agent to a Luxembourg resident are exempt from the 20 percent withholding tax if the amount (paid once a year) does not exceed EUR250. The exemption applies to each individual bank account holder.

Capital gains on the sale of private assets held for 6 months or less (speculative gain) are taxed as ordinary income at the normal tax rates.

Capital gains held for more than 6 months are exempt from income tax.

However, capital gains on the sale of significant shareholdings held more than 6 months are taxed at half the global rate. A once-off allowance of EUR50,000 (doubled for couples filing jointly) is granted to each taxpayer per 11-year period. A shareholding is significant when the transferor has owned, directly or indirectly, alone or together with their spouse/declared domestic partner and minor children, a shareholding of more than 10 percent, at any point of time during the 5 years period preceding the sale or redemption.

The capital gain is equal to the difference between the sale price and the revalued acquisition cost, including related expenses. 

The capital gains on the sale of immovable property within 2 years or less are taxed as ordinary income at the normal income tax rates. Until the end of 2018 a temporary measure applied regarding the capital gains on the sale of immovable property held during more than 2 years. These capital gains were taxed at a quarter of the global tax rate. This provision was subject to the condition that the immovable property was held in the context of the taxpayer’s private wealth.

In addition, a dependency contribution of 1.4 percent is due for individuals subject to the Luxembourg social security system on the taxable part of the gains.

A single allowance of EUR50,000 (doubled for couples filing jointly) is granted to each taxpayer per 11-year period. An additional allowance of EUR75,000 is granted for a capital gain on sale of a property inherited in the direct line, which was the parents’ main residence. Each spouse is entitled to this additional allowance in respect of their own parents’ property.

Any capital gain on the sale of a taxpayer’s principal residence is exempt. 

Capital losses may be set off against capital gains incurred during the same year.

Step-up system for individuals

Latent capital gains on shares/convertible loans prior to an individual’s transfer of residence to Luxembourg are not taxable in Luxembourg. This applies to taxpayers who hold a significant participation (>10 percent), and applies retroactively to 2015.

Rental income in Luxembourg is taxed at the progressive tax rates as regular income. Rental income is taxed in the country/territory where the property is located. In case the property is located in a double taxation treaty country/territory, Luxembourg provides for a tax exemption. For Luxembourg residents, the foreign rental income is however taken into account for the determination of the global tax rate applicable to the taxable Luxembourg source income. For real estate located in a non-double taxation treaty country/territory, Luxembourg would tax rental income and allow that the taxes paid in the other country/territory are credited against the Luxembourg individual income tax due.

Stock option plans are treated as follows:

• In case of transferable stock options, the employee is regarded as receiving a benefit in-kind at the date of grant of the options. The taxable benefit is equal to the difference between the market value of the stock options at the date of grant and the price paid by the employee for this option. A deemed market value may be calculated by the Black-Scholes method, or based on another equivalent financial method. Alternatively, the market value of the option can be fixed at 30 percent (up to 31 December 2017: 17.5 percent) of the value of the underlying shares, to the extent this valuation is based on reasonable conditions. A dedicated in-depth tax review is required for this valuation.
  
• In case of non-transferable stock options, the employee is regarded as receiving a benefit in-kind only at the date of exercise of the stock option. The taxable benefit is, in principle, equal to the difference between the market value of the share and the exercise price. In presence of a clause of inalienability of the share (after exercise of the option), a tax reduction equal to 5 percent per year of the share value is granted (with a maximum of 20 percent).
  

• The Circular LTIL n°104/2 dated 29 November 2017 states new strict deadlines that apply with respect to the employer’s reporting obligations towards the wage tax office:
  • for plans implemented in 2015 and before: a detailed report should be made upon the specific request of the relevant wage tax office (usually during a payroll audit)
  • for plans implemented in 2016: a detailed report must be made by the employer before 31 January 2018
  • for plans implemented in 2017: a detailed report must be made by the employer before 31 March 2018.

Not respecting the above deadlines will trigger the exclusion of the benefit of the stock option regime as provided by the circular for 2018 and beyond.

• Plans implemented from 2018 onwards.

Timing

For plans implemented from 2018 onwards: the detailed report must be made by the employer at the time the taxable event occurs (i.e. at the exercise date of the options in cases of non-transferable options / at the grant date of the options in cases of transferable options/warrants), and not at the time the scheme is implemented. Prior notification of the plan to the tax authorities does not exist anymore.

If the employer fails to make the report at the time of the taxable event, the tax authorities will:

• Tax the full purchase price of the options (in cases of transferable options/warrants); and
• Not apply any discount (from 5 to 20 percent) in cases of non-transferable options.

Benefits taxable at the same date can be put in the same report as long as they belong to the same plan.

Format

The detailed report should be made electronically to the relevant wage tax office by using a specific form provided by the tax authorities.

Content

As from 2018, the report should not only include the taxable benefits relating to the stock options, but also the salaries of the beneficiaries.

In this respect, for beneficiaries of transferable stock options/warrants, the report should also include the annual gross salary (as expected/calculated at the grant date of the options), excluding the options.
 

In principle, gains relating to goods held in the private wealth are taxable according to the conditions noted in the section Taxation of Capital Gains.

Sale proceeds relating to the sale of principal residence are in principle tax exempted.

Capital losses may only be deducted from and up to the amount of taxable capital gains in the same year, there is no carry-over to other years.

In principle, gains relating to the sale of any personal item are taxable according to the conditions noted in the section Taxation of Capital Gains.

A gift tax is levied on all assets received if the donor is a Luxembourg resident. Gifts from a non-resident are subject to gift tax only in respect of real estate located in Luxembourg. Inheritance and gift tax are based on graduated rates according to the degree of family relationship of the respective individuals.

Are there additional capital gains tax (CGT) issues in Luxembourg? If so, please discuss?

Not applicable in Luxembourg.

Are there capital gains tax exceptions in Luxembourg? If so, please discuss?

Not applicable in Luxembourg.

Not applicable in Luxembourg.

What are the general deductions from income allowed in Luxembourg?

Itemized deductions or a flat-rate deduction may be made. (See also the section on social security contributions.)

Employee’s contribution to a qualifying occupational (second pillar) pension scheme up to EUR1,200 per year is deductible.

Employment income related expenses are deductible. The minimum flat-rate amount is EUR540 for non-travel related expenses (incurred for an employment income unless the taxpayer can prove they had incurred higher professional expenses).

The following items (called special expenses), which are not related to income of a particular source, are deductible within certain conditions and limitations, from total taxable income.

• Certain premiums paid for life, sickness, accident and civil liability insurance plus interest expenses on loans and bank facilities limited to EUR672 per member of the taxpayer’s household per year (such as, spouse/partner, minor or dependent children).
• Premiums paid to voluntary individual pension scheme up to EUR3,200 per year. The allowance is granted for both spouses if each one takes out separate insurance. No additional deduction is possible for dependent children.
• Contributions to approved building societies saving schemes in Luxembourg or EU companies, limited to EUR1,344 per member of the taxpayer’s household, per year, if the taxpayer is between 18 and 40 years old. The maximum deduction in other instances amounts to EUR672 per year. The corresponding credit interests are fully tax exempt (under conditions).
• Periodic payments contractually due, such as alimony. Alimony of up to EUR24,000 paid to a former spouse is tax deductible (under certain conditions).
• If the individual has no itemized special expenses, a standard minimum deduction of EUR480 per year is allowed, which is doubled if the taxpayer is married, or lives in a legal partnership, and both individuals received salaried income.

• A lump-sum annual deduction of EUR5,400 for a household help or for child care is granted on request (supporting documents are needed/subject to conditions).
• An abatement of EUR4,020 (per child) for children attending primary or secondary school and who are not part of the taxpayer’s household is granted on request (supporting documents are needed).
• An extra-professional abatement of EUR4,500 is granted to couples, who are jointly taxed, where they both receive income from a salaried/independent occupation. As of 2018, the extra-professional abatement will amount to EUR2,250 per spouse/registered partner filing separately.
• A sustainable mobility allowance (so far granted for zero emission vehicles and cycles) has been extended to individual plug-in hybrid electric cars with emissions not exceeding 50g CO2/km. This tax deduction amounts to EUR2,500 (whereas it amounts to EUR5,000 for zero-emission vehicles and to EUR300 for cycles).
  

Children benefiting from a child bonus before 1 August 2016 in the form of a monthly cash payment of EUR76.88 per child, irrespective of the taxable income of the parents, that is granted to taxpayers if the children are entitled to child benefits in Luxembourg, will still benefit from this payment. Otherwise, the bonus is merged with the family allowance, and a unique amount of family allowance is paid per child born as from 1 August 2016 (EUR265/month).
Refundable tax credits:

• tax credit for single parents: between EUR1,500 and EUR750 per year, dependent on the income
• tax credit for employees, pensioners and self-employed workers: maximum of EUR600 per year, nil where the adjusted taxable income exceeds EUR80,000.

Luxembourg has a broad network of income tax treaties (double taxation treaties), some of which cover wealth taxes. Beneficiaries of income tax treaties may in general be exempt from Luxembourg individual income tax on certain income, but such exempt income must nevertheless be reported on the individual income tax return and it is used to increase the rate of tax applied to other taxable income (that is, exemption with progression). Income exempt under Luxembourg double taxation treaties may include salaries paid abroad for services rendered there to foreign companies, income from the rental of foreign real estate, and foreign business income when the taxation right goes to the other contracting state. Foreign tax credits are often available under a double taxation treaty for taxes paid at the source on foreign dividends, interest, and royalties.

When a Luxembourg resident receives income from a country/territory where no double taxation treaty exists, the domestic law grants either a tax credit or a tax deduction for the effective foreign taxes paid on the foreign-sourced income derived from that non-double taxation treaty country/territory.

What are the tax reimbursement methods generally used by employers in Luxembourg?

The current-year gross-up method is most commonly used in Luxembourg.

How are estimates/prepayments/withholding of tax handled in Luxembourg? For example, Pay-As-You-Earn (PAYE), Pay-As-You-Go (PAYG), and so on.

The tax prepayments and the tax withheld at the source are provisional and can be credited against the final income tax due at the individual’s level. In principle, an overpayment of tax may be refunded. If an expatriate establishes their residence in Luxembourg during the course of the year, they will generally be required to provide the Luxembourg tax authorities with evidence of their salary earned during the part of the year they are not resident in Luxembourg. The computation of their whole salary allows the determination of a possible refund of tax withheld in excess.

The amounts of the tax prepayments are based upon the amount of individual income tax due for the previous year. The income tax withheld monthly on employment income and pension income is computed according to tax tables set forth by the government. Dividends and interest on profit-sharing bonds paid by a resident company (exception for Luxembourg investment funds among others) to its shareholders or creditors are subject to a withholding tax of 15 percent. The amounts withheld may be creditable against the final individual income tax liability.

The employer has the legal obligation to make the correct withholding tax on the salaries paid to employees.

Second pillar pensions schemes are subject to 20 percent withholding tax and to 0.9 percent special tax, fully borne by the employer.

Royalties (Luxembourg-sourced) paid to a non-Luxembourg resident are subject to a 10 percent withholding tax.

Director’s fees are subject to a 20 percent withholding tax calculated on the gross amount (or 25 percent of the net amount).

First pillar pension is taxable in Luxembourg if paid by Luxembourg State. 

Second pillar pension: installments are not taxable upon retirement in Luxembourg if 20 percent tax has been paid upfront (upon payment of the qualifying employer’s contributions), in Luxembourg.

When are estimates/prepayments/withholding of tax due in Luxembourg? For example: monthly, annually, both, and so on.

Tax prepayments calculated by the Luxembourg tax authorities are due four times per year: 10 March, 10 June, 10 September, and 10 December.

The monthly tax on salaried income is withheld by the employer and is due before the 10th of the following month.

Is there any Relief for Foreign Taxes in Luxembourg? For example, a foreign tax credit (FTC) system, double taxation treaties, and so on?

In the absence of a treaty, a Luxembourg resident is also subject to tax on all their income from foreign sources. The foreign individual income taxes paid on that income may, however, be credited against the Luxembourg tax liability. In principle, the foreign tax credit must be determined separately for the income and tax paid in each foreign country/territory (per country/territory method), and cannot exceed the Luxembourg tax on that income. A global method of imputation is also permitted within limits, upon request of the taxpayer. In order to be creditable, the foreign tax must be an individual income tax similar to the Luxembourg tax.

Luxembourg has concluded double taxation treaties with various countries/territories. Beneficiaries of income tax treaties may be exempted from Luxembourg income tax on certain income, but Luxembourg generally retains the right to include this income for purposes of determining the applicable tax rate on the income taxable in Luxembourg (exemption with progression).

What are the general tax credits that may be claimed in Luxembourg? Please list below.

Not applicable.

This calculation assumes a married taxpayer resident in Luxembourg with two children whose 3-year assignment begins 1 January 2017 and ends 31 December 2019. The taxpayer’s base salary is 100,000 US dollars (USD) and the calculation covers 3 years. The calculation does not take into account the specific tax regime for impatriates.

Average exchange rate for the year 2016 used for calculation: USD1.00 = EUR0.9490

• All earned income is attributable to local sources.
• Bonuses are paid at the end of each tax year, and accrue evenly throughout the year.
• Interest income is not remitted to Luxembourg.
• The company car is used for business and private purposes and originally cost USD 50,000 (all options/taxes included), is a Diesel car with a CO2 emission of 140 g/km.
• The employee is deemed resident throughout the assignment.
• The impatriate tax regime is not taken into account.
• For all years joint taxation is assumed.
• Tax treaties and totalization agreements are ignored for the purpose of this calculation.
  

Calculation of taxable income

Calculation of tax liability

KPMG in Luxembourg has assumed that the social security contributions were due in Luxembourg and the child bonus was paid by the family fund. The 1.4 percent dependence insurance has not been taken into account for these calculations.

¹Certain tax authorities adopt an "economic employer" approach to interpreting Article 15 of the OECD model treaty which deals with the Dependent Services Article. In summary, this means that if an employee is assigned to work for an entity in the host country/territory for a period of less than 183 days in the fiscal year (or, a calendar year of a 12-month period), the employee remains employed by the home country/territory employer but the employee’s salary and costs are recharged to the host entity, then the host country/territory tax authority could treat the host entity as being the "economic employer" and therefore the employer for the purposes of interpreting Article 15. In this case, Article 15 relief would be denied and the employee would be subject to individual income tax in the host country/territory.

Sample calculation generated by KPMG in Luxembourg, Société coopérative, the Luxembourg member firm affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity, based on KPMG Luxembourg Tax Calculator.