The tax and tax-related proposals are set out in the agreement in broad and brief terms. Key measures announced include:
A prudent budgetary policy, to keep public debt below 30% of GDP.
A 1% cut in the overall corporate tax rate, effective for the 2019 tax year.
A commitment not to increase the taxe d’abonnement (subscription tax) on either UCITS or alternative investment funds.
A single tariff of personal income tax rates, replacing the current “tax class” system, linked to marital etc. status, together with other simplifications to the personal tax system.
Increasing the attractiveness of the current personal tax regime for “in-patriate” employees, as a way to bring further high-value adding economic activity to Luxembourg.
The new government aims to pursue a prudent budgetary policy, in conformity with the EU Stability and Growth Pact. It will seek to keep public debt below 30% of GDP, and to maintain the country’s AAA credit rating.
Within this context, the coalition promises an ambitious investment programme to improve infrastructure and quality of living, keeping public services and social support at a high level. Particular attention is to be paid to maintaining Luxembourg’s competitive position, without ignoring social and ecological dimensions.
Continuing growth in tax receipts is seen as imperative. This is however to be sought not by increasing tax pressure on businesses, but through attracting new taxpayers, and from the growth in activity and incomes of existing businesses. The new government aims to guarantee an internationally competitive business tax policy, while at the same time remaining firmly committed to transparency and countering tax evasion. There is recognition that efforts must be made to provide the tax administration with the necessary resources to handle increasingly complex international reporting and to accelerate digitalisation, as well as to simplify taxes.
Companies and the Financial Sector
The corporate tax regime will continue to be adapted to reflect changes in technology, as well as international developments, notably new EU Directives, and OECD BEPS measures. These factors are expected by the new government to lead to a broader tax base, fewer tax rulings, and increased demands for substance.
Having noted that the average corporate tax rate in the EU (21.9%) is already reducing as a result of these factors, the new government has made the headline commitment to cut the overall corporate tax rate (corporate income tax plus municipal business tax), currently 26.01%, by 1%, for the 2019 tax year.
Other proposals, which show a specific focus on ecological taxation, include:
International tax policy remains committed to the principle of the "level playing field". A global-level solution to the question of taxing the digital economy is seen as necessary, in the interest of Europe’s competitiveness. However the new government is not opposed to a time-limited, temporary European solution.
Participation by Luxembourg in the "enhanced co-operation" EU-level project for a financial transaction tax continues to be ruled out. Nevertheless the new government would support a global financial transaction tax that did not cause activities to move away from the EU.
The new government fully recognises the importance of the fund management industry, and the need to stay ahead of international competition. A specific focus on developing the alternative investment funds sector is foreseen, looking in particular at the legal and regulatory aspects.
An explicit commitment is made by the new government not to increase the taxe d’abonnement (subscription tax) on either UCITS or alternative investment funds. Complementing this, there are to be tax measures to support sustainable development, and socially responsible, investment funds. The new government will also seek to counteract abuses of the SIF-SICAV tax regime in the Luxembourg real estate sector.
Taxation of Individuals
Significant reform is contemplated by the new government, with the aim of making personal taxation neutral irrespective of family arrangements. In particular a single tariff of personal income tax rates is foreseen, replacing the current "tax class" system, linked to marital etc. status. Implementing this "paradigm shift" is expected to bring with it the need for transitional reliefs and other compensation for taxpayers who would otherwise be most adversely affected. The reform would also be aimed at reducing the tax burden of vulnerable individuals, and those with responsibility for children.
The new government also recognises that attracting high-value adding activities to Luxembourg is essential in order for the country to grow as a European hub. Also, businesses wishing to increase the substance of their activities in Luxembourg are needing to bring director-level functions to Luxembourg. Legislation is thus foreseen, to increase the attractiveness of the current personal tax regime for "in-patriates".
Also, in order to encourage employee participation in company profits, the new governments intends to create a new legal framework in this area. As a consequence, the current "stock options" regime will be progressively withdrawn over the term of the new government.
Other proposals include:
The new government has also committed to make legislative changes to implement an almost immediate further increase in the minimum monthly wage. The increase is to be a headline amount of EUR 100 per month, with effect from 1 January 2019. This will thus augment the 1.1% increase already anticipated, to a 2.0% increase. Changes will also be made to the rules for social benefits, to avoid the increase in the minimum wage causing benefit reductions.
A reform of the tax levied on real estate ("impôt foncier"), linked to a revision of commune-level general land management plans ("PAG"), is to be made. This will target land speculation. The new regime will exempt a tranche of value, in cases where the real estate is owner-occupied. Commune-level taxes on unoccupied property, or on unbuilt land with development value, are to be revised and simplified.
Value Added Tax
Based on a recent amendment to the relevant EU Directive, the new government intends to apply the same 3% "super-reduced" rate of VAT to electronic publications as already applies to printed publications.
This 3% rate is also to apply to essential hygiene products, such as tampons.
Other proposed amendments to the VAT regime focus on housing. The government will look into the opportunity to increase the cap applicable to the construction or renovation of the main residence. Today, the applicability of the 3% super-reduced rate is limited to a VAT amount of up to EUR 50,000. Consideration will also be given to whether improvements to existing buildings more than 10 years old should be subject to the 3% rate of VAT: currently this relief only applies when the building is more than 20 years old.
A similar review will be made to establish whether the 3% rate of VAT should also apply, to the extent permitted by EU law, to other "circular economy" repair works that reduce resource consumption.
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