Luxembourg income tax 2020

Guide for individuals

Table of content:

1. Basic principles
2. Employment income
3. Director’s fee
4. Dividend and interest income
5. Capital gains
6. Real estate income
7. Deductible items
8. Social security
9. Taxation of cross border workers

1- Basic principles:

Resident vs non-resident

Resident taxpayer

An individual taxpayer qualifies as a Luxembourg resident when they have their tax domicile or usual abode in Luxembourg.

Nationality is irrelevant when determining tax residence.

The tax domicile is the permanent place of residence that the individual actually uses and intends to maintain.

Individual taxpayers with no tax domicile in Luxembourg will qualify as residents is their usual abode is located in Luxembourg.

To qualify for “usual abode” status, a person needs to be continually present in Luxembourg for six months (short absences are disregarded).

This six-month presence can overlap two calendar years.

The residence applies as from the first day of presence.

Luxembourg residents are taxable on their worldwide income.

 Non-resident taxpayer

An individual taxpayer qualifies as a non-resident of Luxembourg if neither their tax domicile nor their usual abode is located in Luxembourg.

Luxembourg non-residents are taxable only on their Luxembourg source income.

Non-resident taxpayers are in principle not entitled to the same range of deductions available to Luxembourg resident taxpayers. Non-residents who are taxable in Luxembourg on more than

90% of their worldwide income or, alternatively, whose income taxable outside Luxembourg does not exceed EUR 13,000, can opt to be treated as if they were Luxembourg residents. For Belgian residents, the option regime can be applied if 50% of their household’s professional income is

taxable in Luxembourg. The option regime allows non-resident individuals to deduct expenses via their Luxembourg income tax return that they would not otherwise be entitled to deduct. The option

regime is not mandatory and must be requested by a taxpayer by filing an income tax return. The tax benefit of the option regime has to be considered on a case-by-case basis.

Tax year

In Luxembourg, the tax year corresponds to the calendar year – 1 January to 31 December.

What if my family remains in my home country?

If your family remains in your home country, the tax authority should refer to the relevant double tax treaty, if any, to determine your tax residence.

Income subject to taxation

The categories of income, after deduction of related expenses, are aggregated to determine the “net” total income. The categories of income are:

• Employment income;
• Self-employment income;
• Dividend and interest income;
• Capital gains;
• Pension and annuity income;
• Rental and royalty income;
• Business income;
• Agriculture and forestry income;
• Miscellaneous income.

The “net income” is then reduced by various deductions in order to determine the taxable income.

Tax rates

Income tax rates are progressive. They vary from 0% up to 42%. A 7% surcharge for the employment Fund applies on the income tax due. This surcharge amounts to 9% for taxpayers in tax classes 1 and 1a whose taxable income exceeds EUR 150,000 (EUR 300,000 for taxpayers in

tax class 2).

Tax classes

The calculation of Luxembourg income tax also depends on the applicable tax class, which is established according to the individual’s personal situation. There are three tax classes: 1, 1a and 2.

Yearly net taxable income

Tax treatment for married non-resident taxpayers

Married non-resident taxpayers will be regarded as being in tax class 1 by default, and can no longer be in tax class 1a or 2, even if they have dependent children.

As an exception to this, married non-resident taxpayers may request joint taxation under tax class 2 (i.e. as for married resident taxpayers), provided that at least one of the following conditions is met:

• 90% of the worldwide income of one spouse is taxable in Luxembourg. When assessing whether this is the case, the first 50 days that are not taxable in Luxembourg according to a double tax treaty are treated as income taxable in Luxembourg;
• The income of one taxpayer taxable outside Luxembourg does not exceed EUR 13,000;
• For Belgian residents, the rules are less restrictive: only 50% of the household’s professional income needs to be taxable in Luxembourg.

This option can be requested via either payroll or the individual tax return. Non-resident married taxpayers will have to report their non-Luxembourg sourced income (for example, the spouse’s

professional income). Such non-Luxembourg sourced income will be exempt for Luxembourg tax purposes but will be taken into account when determining the applicable tax rate for the Luxembourg

sourced income (“exemption with progression”).

In practice, married non-resident taxpayers where one spouse works outside of Luxembourg and/or where the individual has extensive income outside of their Luxembourg employment income, will be adversely affected by this provision, as it will increase their effective tax rate.

Option to file jointly or individually

Resident jointly taxable taxpayers and married non-residents fulfilling the conditions stated above can either file a joint tax return or opt for separate individual taxation. The application of the selected

regime can be anticipated through payroll.

Under this regime, married couples opting for separate taxation will be allocated tax class 1. They will be able to apply for one of the following regimes:

• Full individualization (“individualization pure”), where each item of income is allocated individually to each partner based on the applicable matrimonial regime, and where deductions (e.g. for insurance premiums, interest payments, dependent children) and the potential increase in limits for married couples with dependent children are split equally between the spouses.
• Individualization with reallocation of income (“individualisation avec réallocation des revenues”), where the total adjusted taxable household income (determined based on the aggregate net income and applicable tax deductions) will by default be allocated equally between spouses,

irrespective of the level of their individual income. The spouses can also request a different allocation of the total adjusted taxable income.

Payroll withholding tax

Depending on the tax regime chosen, income tax will be withheld through payroll as follows:

• Full individualization: each taxpayer is taxed under tax class 1.
• Individualization with reallocation of income: taxation at a fixed rate (corresponding to the estimated overall tax rate based on each spouse’s reallocated worldwide income).
• Married non-residents opting for taxation through tax class 2 rates: taxation at a fixed rate (corresponding to the estimated overall tax rate based on the household’s worldwide income).
• Married non-residents who do not opt for a specific regime: taxation under tax class 1.

Tax return

• The application of a fixed rate through payroll (e.g. in the case of individualization with reallocation of income or the application of tax class 2 for non-residents) will trigger an automatic obligation to file a tax return in Luxembourg. Any discrepancy between the estimated

payroll tax rate and the tax rate calculated via the final income tax return may result in additional tax liability or a tax refund, depending on the individual situation.

Should I file jointly with my spouse?

Yes, in principle. Married taxpayers normally file jointly (with specific conditions to be met for non-residents). Civil partners whose partnership agreement is recognized in Luxembourg and who

have been living together for the entire tax year can elect to file jointly (certain conditions apply for non-residents).

However, married taxpayers have the possibility to opt for individual taxation.

What else do I need to know about filing obligations?

In Luxembourg, not all taxpayers have to file an income tax return; but those who do must file it by 31 March of the year following the income tax year (this deadline is usually extended on request).

If the taxpayer is not subject to a filing obligation, a simplified request for a refund of excess withholding tax may be filed under certain conditions. The purpose of such a request is to obtain a refund of excess payroll tax (if any). This request must be filed by 31 December of the

year following the income tax year.

The elements taken into consideration to determine whether a taxpayer has to file an income tax return or request for a yearly calculation are:

• His/her residency status;
• His/her tax class;
• His/her level of income;
• The nature of income;
• The number of days worked in Luxembourg;
• Whether a fixed tax rate has been applied through payroll.

2- Employment income:

Taxable employment income generally includes all benefits in cash or in kind earned from an employment activity. The taxable value of benefits in kind is assessed at the fair market value (i.e. the cost that the employee would have paid if paying for the benefit directly).

However, the Luxembourg Income Tax Law provides for a lump-sum valuation method and exemptions for certain benefits in kind:

Luncheon vouchers

The taxable benefit per voucher is equal to EUR 2.80 for a voucher value of up to EUR 10.80. The taxable basis is reduced to the extent that the employee contributes to the related cost.

Company car

The taxable fringe benefit generated by the private use of a company car is equal to the private mileage multiplied by the kilometer cost of the car. The employee must maintain a logbook recording private mileage. Alternatively, a lump-sum valuation method is available, according to which the monthly taxable fringe benefit corresponds to a rate ranging from 0.5% to 1.8% (depending on the vehicle’s CO2 emissions and fuel type) applied to the price of the new vehicle, reduced by any

discount granted (options and VAT included).

Free accommodation

The taxable fringe benefit amounts to the monthly rent and other rental charges paid by the employer. A reduction of 25% is applied to the rent, subject to certain conditions (the reduction does not apply to other rental charges), and a reduction of 17.5% is applied if the accommodation provided is furnished.

Interest subsidy by the employer

A loan granted by the employer at an interest rate lower than 1.5% generates a taxable fringe benefit. The taxable benefit corresponds to the difference between the 1.5% rate and the discounted interest rate.

Interest subsidies paid by the employer apply where the employer provides financial support in connection with loan interest that the employee has with a third party. The interest subsidy by the

employer generates a taxable fringe benefit in the hands of the employee.

The above benefits are tax-exempt up to EUR 3,000 for mortgage loans related to the acquisition of a main residence and up to EUR 500 for other personal loans. These tax-exempt amounts are doubled for taxpayers filing jointly and single taxpayers with dependent children.

Occupational pension schemes

The employer’s contributions to a qualifying occupational pension scheme are subject to a flat tax rate of 20% to be borne by the employer. Benefits received are tax-exempt in Luxembourg.

Specific income tax exemptions

• Gifts by the employer based on the employee’s seniority with the company. The exemption varies between EUR 1,120 and EUR 4,500.
• Overtime pay and extra pay for working nights, Sundays or public holidays.
• Severance pay (conditions apply).

Employment-related expenses

Professional expenses related to employment income are tax-deductible. A yearly lump-sum deduction of EUR 540 is allocated to all employees. This deduction can be replaced by real expenses incurred (evidence should be provided). In addition, commuting expenses are deductible

based on the distance between the employee’s home and workplace. The maximum deduction for commuting expenses is EUR 2,574 per year.

3- Directors’ fees:

Gross directors’ fees, whether they are paid to a resident or non-resident director, are subject to withholding tax at a rate of 20%. The 20% tax is used as a tax credit against final income tax liability assessed on the basis of an income tax return.

The 20% tax withheld is fully discharged for non-resident directors if (i) their gross directors’ fees do not exceed EUR 100,000 and (ii) they have no other Luxembourg-source professional income.

Directors may opt to file an income tax return. In such circumstances, tax is assessed pursuant to progressive income tax rates. Whether a director should file an annual income tax return should be considered on a case-by-case basis.

Please note that VAT applies to the payment of director’s fees.

Individuals deriving more than EUR 100,000 gross Director’s fees per year must carry out a double-entry bookkeeping (on an accrual basis).

4- Dividend and interest income:

Withholding tax of 15% applies to Luxembourg domestic dividends (this withholding tax is not a final discharge of tax).

For final taxation, dividend income is subject to progressive income tax rates. A 50% tax exemption of the gross dividend can be obtained on dividend income paid by a fully taxable company resident in a European Union Member State or a State that has concluded a tax treaty with

Luxembourg.

Interest paid or attributed to a Luxembourg-resident individual by a paying agent located in Luxembourg is subject to 20% withholding tax, which represents a full discharge of the tax.

Resident taxpayers receiving cross-border interest income can also apply for 20% flat rate taxation to the extent that the paying agent is located in another EU Member State or EEA State, provided that they submit a specific request to the tax authority by 31 March 2021 for the 2020 tax year.

Interest payments that do not fall within the scope of the 20% taxation (e.g. income received from a UCITS, interest paid by certain foreign paying agents, etc.) continue to be subject to taxation according to progressive income tax rates via an income tax return. A lump-sum deduction of EUR1,500 (doubled for taxpayers taxable jointly) applies to total dividend and interest income (subject to progressive taxation) received during the tax year.

5- Capital gains

Capital gains on immovable property

Capital gains on the sale of the taxpayer’s main residence are tax-exempt. Capital gains on other real estate property:

• are subject to progressive income tax rates if the disposal takes place within two years of acquisition; and
• are subject to a reduced tax rate if the disposal takes place more than two years after acquisition. The reduced rate is effectively half of the marginal tax rate. A tax deduction of up to EUR 50,000 (doubled for married taxpayers and civil partners filing jointly) valid every

ten years may be claimed on the capital gain. In addition, a deduction up to EUR 75,000 for inherited property (through the direct line of descendance) may apply.

• Under specific conditions, taxation of capital gains from the disposal of property can be deferred if it is used to fund the acquisition of a new property located in Luxembourg that the owner intends to rent out.

Capital gains on movable property

Income tax regime

6- Real estate income:

Residence occupied by the owner (main residence)

A principal private residence is deemed to have no rental value.

Mortgage interest linked to the property (ceilings applicable) are tax-deductible, as long as the property is the taxpayer’s main residence.

Thresholds applicable to mortgage interest:

• EUR 2,000 for the 1st year of occupation and the following 5 years;
• EUR 1,500 for the following 5 years;
• EUR 1,000 for the following years.

These limits are multiplied by the number of individuals forming part of the taxpayer’s household.

Residence rented out

The net rental income is determined by deducting rental expenses from the gross rental income.

The gross rental income is determined by aggregating any payment made by the tenant to the owner of the property.

Expenses related to rental income:

• Debit interest on a mortgage loan;
• Insurance (fire, civil liability, etc.);
• Property tax;
• Repair and maintenance costs, etc.;
• Depreciation of construction (amortization rate varies from 2% to 6% depending on the year of construction of the building) and further investments – except land (lump-sum calculation of 20% of the acquisition price if price of land at acquisition is unknown).

Alternatively, if the taxpayer does not have any actual expenses, a lump-sum deduction may be applied.

No deductions apply to a secondary residence located in Luxembourg or abroad.

7- Deductible items:

Special expenses

Mandatory state social security contributions

Mandatory state social security contributions paid to the Luxembourg social security system and contributions paid to a foreign state scheme in accordance with a social security treaty are tax-deductible.

Gifts

Gifts granted to a Luxembourg or EU qualifying institution are tax-deductible if the individual’s qualifying donations exceed EUR 120 p.a. Tax deductibility is limited to EUR 1,000,000 and 20% of total net income.

Employee contributions to an occupational pension scheme

The employee’s contributions to a qualifying occupational pension scheme set up by the employer are tax-deductible up to EUR 1,200 (yearly cap).

Lump sum

A yearly lump-sum deduction of EUR 480 is available for employees (doubled for taxpayers filing jointly, as long as they both earn employment income – see also questions & answers on p.17).

Extraordinary charges

Extraordinary charges are tax-deductible only if they exceed the “normal charge” of the household as determined by Luxembourg tax law. The costs incurred should be unpredictable, unforeseeable and reduce the ability to pay income tax during the year (e.g. medical expenses not reimbursed by the CNS or a mutual fund, legal fees, etc.).

In addition, the costs of child care, household employees and home assistance for disabled individuals are deductible.

Two methods of calculation:

• normal charge method (the deduction will depend on your family situation and your level of taxable income); or
• lump-sum deduction with a cap of EUR 5,400 on a yearly basis (only applicable for child care, household employees and home assistance for disabled individuals).

Environmentally sustainable transport

A tax deduction is available for environmentally friendly means of transport if purchased after 1 January 2017. It amounts to EUR 5,000 for the purchase of an electric or hydrogen car, and EUR300 for the purchase of an electric or regular bicycle for adults.

Tax credit for employees

Employees are entitled to a tax credit on a yearly basis ranging from EUR 0 to EUR 600 depending on their level of income (applicable to each married spouse and civil partner earning a taxable salaried income).

What type of private expenses can I claim?

The lump sum of EUR 480 for employees can be replaced by actual expenses:

1. Increased by EUR 672 for jointly taxable taxpayers and each dependent child.
2. Up to the age of 40, it is EUR 1,344. Increased for jointly taxable taxpayers and each dependent child.
3. Amount per taxpayer subscribing to a private old-age pension scheme.
4. The deduction can be increased based on the individual’s personal situation (age, number of dependent children, etc.).

Are there any extra deductions for married taxpayers?

Yes. Married taxpayers and civil partners are entitled to a EUR 4,500 tax deduction on a yearly basis if they file jointly 1 and both earn professional income taxable in Luxembourg.

What about deductions for children?

Single parents with dependent children may claim a yearly tax credit ranging from EUR 750 to EUR 1,500 depending on their level of income. Moreover, education and maintenance costs for children who do not qualify as dependent can be deducted by up to EUR 4,020 per child per year.

1. If the spouses opt for separate taxation (please refer to the section on the tax treatment of married taxpayers), they will each be entitled to a EUR 2,250 tax deduction (married taxpayers only).

8- Social security:

Regular social security contributions

Regular Luxembourg social security contributions consist of an employer and an employee portion.

Both are computed on gross remuneration capped at EUR 10,709.97 per month on 1 January 2020 (EUR 128,519.64 cap per year).1 The following rates are applicable.

1. Please note that this limit is subject to change depending on developments in the consumer index, which may change in 2020.
2. Rates applicable for the year 2020.
3. Depends on the absenteeism rate in the company.
4. This rate depends on the factor bonus-penalty system and is determined by the “Association assurance accident”.
5. Or EUR 45/year if the employer is registered with the ASTF.

Mandatory social security contributions borne by the employee are deductible for Luxembourg income tax purposes.

Dependency contribution

In addition to the above-mentioned regular social security contributions, employees are subject to a monthly contribution (“contribution dépendance”) based on the gross remuneration less EUR 6,426

per year for 2020. This contribution amounts to 1.4%. Unlike regular social security contributions, the dependency contribution’s basis is not capped and is not tax-deductible. The dependency contribution is also payable by Luxembourg residents on their patrimonial income if they benefit from Luxembourg health insurance.

Social security benefits

9- Taxation of cross border workers:

As previously indicated, Luxembourg tax residents are taxable in Luxembourg on their worldwide income whereas non tax resident individuals are taxable locally on their Luxembourg source income only. One such source of income would be remuneration paid in connection with a Luxembourg employment contract, on the basis that the individual physically performs the duties of the employment in the territory of Luxembourg.

However, specific rules apply to the taxation of Luxembourg employment remuneration in the hands of non-Luxembourg resident employees if the employee works outside of Luxembourg.

Therefore, if an employee has business trips and trainings outside of Luxembourg, or does home based working, there may be an impact on the taxation of the Luxembourg employment income as well as tax consequences in the country of residence.

In order to establish whether Luxembourg employment remuneration is fully taxable in Luxembourg an individual should refer to the Double Tax Treaty between Luxembourg and their country of residence.

Over the past several years, the Double Tax Treaties (DTT’s) between Luxembourg and border countries (Germany and Belgium) have been amended to include certain tolerance thresholds with regards to non-Luxembourg workdays.

The most recent development is the new DTT signed between Luxembourg and France which entered into force on 1 January 2020.

A summary of the different thresholds and related countries is outlined below.

As such, if an employee exceeds the above threshold of non-Luxembourg workdays, the income related to those workdays becomes fully taxable in the country of residence – please note that there may even be withholding tax obligations for Luxembourg employers on such

income in the other country.

Correspondingly, the related income should then be exempt from tax in Luxembourg.

In addition to the above tax consequences, there may also be social security obligations arising as a result of non-Luxembourg work days – A1 certificates may need to be obtained, social security obligations may be triggered in other countries etc. Indeed, we see that it is becoming more and more important for employers and their employees to ensure compliance with their tax and social security obligations within the context of cross border working and business travel.

For more information please contact us:

Tel:  +352 2 7765000
Email:  info@ascot-management.com
9 Avenue du Blues L-4368 Sanem,
Grand Duchy of Luxembourg

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