Coalition programme released by incoming Luxembourg Government

05/12/18

In brief

On 3 December 2018, leaders of the three political parties that are to form Luxembourg’s new government signed a 246-page coalition agreement setting out policies for the next five years. The three parties in coalition (Liberal, Labour, and Greens) are unchanged from those that formed the 2013-2018 governing coalition, and Xavier Bettel is to continue as Prime Minister. The policies agreed mainly aim at continuity and evolution, rather than radical change, but have a clear and strong theme of sustainability and ecological protection.

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.

  • A reform of the tax levied on real estate ("impôt foncier"), targeting land speculation.

Public Finances

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:

  • Increasing the tranche of taxable profits that benefits from the lower rate of corporate income tax (currently 15%, the standard rate being 18%) from EUR 25,000 to EUR 175,000.
  • All government financial support to be tax exempt.
  • Modernisation of the tax regime for charities and not-for-profits.
  • Replacement of the current regime for tax incentives for zero/low emissions vehicles.
  • A recognition that energy taxes need to increase, with the additional tax receipts being used to fund ecological gains and socially-equitable cuts in personal income taxes.
  • An "adjustment", in 2019, to the taxation of petroleum products, aimed at meeting commitments given by Luxembourg at the 2015 COP21 Paris conference.
  • A longer-term review of how fuel for goods vehicles is sold, again with climate change concerns as a key factor.

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:

  • A general simplification of the personal tax regime.
  • Encouraging taxpayers to file returns electronically, and the further development of e-filing systems.
  • More lump-sum exemptions for benefits in kind, and modernisation of the meal voucher tax rules.
  • Negotiations with France and Germany to make it easier for frontaliers to tele-work, modelled on the outcome of the recent discussions with Belgium.
  • Clarification, harmonisation and simplification of the tax reliefs for giving to charity, and to sports and cultural organisations.
  • An analysis of possible tax measures to encourage individuals to invest in innovation-led businesses, as well as possible tax incentives (proportionate to risk undertaken) for investment in sustainable development and climate change projects.
  • A review of the current regime for taxing the "carried interest" of individuals working in the alternative investment fund sector, to assess whether improvements might be needed in order to attract more "front office" high-value adding individuals to Luxembourg.
  • Changes to the withholding tax regime applicable to artistic performances by non-residents.
  • A review of the inheritance and gift tax regime, focused on transfers other than in the direct line of succession, recognising the effect of house price increases.

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.

Housing

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.

PwC Luxembourg (www.pwc.lu) is the largest professional services firm in Luxembourg with 2,850 people employed from 77 different countries. PwC Luxembourg provides audit, tax and advisory services including management consulting, transaction, financing and regulatory advice. The firm provides advice to a wide variety of clients from local and middle market entrepreneurs to large multinational companies operating from Luxembourg and the Greater Region. The firm helps its clients create the value they are looking for by contributing to the smooth operation of capital markets and providing advice through an industry-focused approach.


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