Luxembourg 2021 Budget – tax rates pegged, some new targeted anti-avoidance measures announced

15/10/20

In brief

On 14 October 2020, the Luxembourg Government tabled a Bill (n°7666) before the Luxembourg Parliament, presenting the State budget for 2021. The Bill contains a number of proposed changes to the tax legislation. The major items had already been mapped out by the Prime Minister, Xavier Bettel, in his annual State of the Nation speech, delayed due to the Covid-19 pandemic from earlier in 2020, and given on 13 October 2020.

For the 2021 tax year, all corporate tax rates are to remain unchanged – the headline overall effective corporate tax rate thus remains 24.94%.

No new personal taxes, or any major reform of the personal tax regime for 2021, are now contemplated, and personal income tax rates will also remain unchanged. For individuals, the Bill targets a range of topics – modifications to the calculation of depreciation for real estate income, the introduction of a new tax efficient profit sharing scheme for employees, widening of the definition of what is considered as employment income, modification and extension of the Special Tax Regime for Inbound Employees among other topics. The Circular Letter providing for a lump sum valuation method for stock options and warrants is to be repealed as from 1 January 2021.

Tax regimes for fund vehicles will remain stable. Fund vehicles (Part I and II UCI) investing in sustainable assets will begin to benefit from rates of subscription tax reduced from the standard 0.05% rate. One long-foreseen and sharply-focused anti-avoidance measure will target non-tax transparent Luxembourg fund vehicles investing directly in Luxembourg real estate, with both gross rental income and disposal gains arising as from 1 January 2021 being subject to a new real estate levy (“prélèvement immobilier”) applying at a 20% rate. Only a very small number of fund vehicles are thought to be affected, and the levy does not apply to fully taxable corporate (i.e. non-transparent) entities owning Luxembourg real estate, even when owned by Luxembourg fund vehicles. The Bill does not impact neither Luxembourg funds holding foreign real estate assets.

In detail

Taxes for corporate bodies and funds

Corporate tax rates

For the 2021 tax year, all corporate tax rates are to remain unchanged – the standard rate of corporate income tax will remain 17%, plus the “solidarity” surcharge for employment funds of 7% of the tax. For businesses with activity in Luxembourg Ville, the overall effective corporate tax rate, including municipal business tax, thus remains 24.94%. (The Luxembourg Ville council has already confirmed, at its 6 July 2020 meeting, that its municipal business tax effective rate for 2021 will remain unchanged at 6.75%.)

The net wealth tax standard rate will remain 0.5%, and the minimum net wealth tax fixed amounts and charging bands will remain unaltered.

For funds, the rates of subscription tax (taxe d’abonnement) levied on net asset values will also generally remain unchanged. However, a graduated rate reduction will apply as from 1 January 2021 for fund vehicles covered by the law of 17 December 2010 relating to the undertakings for collective investments (Part I and Part II of the 2010 UCI regime) that invest in “sustainable” investments, tabulated as follows:

Percentage of net assets of the fund or compartment invested in “sustainable” assets

Subscription tax rate (annualised) applicable to element of net assets that are “sustainable”

 

Over 5%

0.04%

Over 20%

0.03%

Over 35%

0.02%

Over 50%

0.01%

“Sustainable” assets are those as defined in Art.3 EU Regulation 2020/852. Investment level percentages will need to be formally certified by an auditor and transmitted to the Indirect Tax authorities (i.e. Administration de l’Enregistrement, des Domaines et de la TVA) together with the subscription tax returns.

Real Estate Levy for Luxembourg funds owning Luxembourg real estate directly

The Real Estate Levy

The Bill proposes the introduction of a new tax, termed a Real Estate Levy (“prélèvement immobilier”). It will however apply only in the restricted circumstances of a Luxembourg investment fund vehicle which:

  • is regulated under the 2007 specialised investment fund (“SIF”) regime, or the 2016 reserved alternative investment fund (“RAIF”) regime, or Part II of the 2010 UCI regime; and
  • has its own legal persona, unless it has the société en commandite simple (“SCS”) legal form: the combined effect of which is to place the FCP, SCSp and SCS legal forms all outside the scope of this new levy. (This is appropriate, because investors in fund vehicles having these legal forms are likely for tax purposes to be treated as having direct ownership of any underlying real estate owned directly in the name of the fund vehicle, and thus be immediately taxable on the income and gains derived from such real estate – and so not having to be brought within the scope of anti-avoidance measures.); and
  • owns directly (or indirectly through one or more entities that are regarded as tax transparent under Luxembourg principles) real estate assets; and
  • where such assets are sited in the Grand Duchy of Luxembourg.

Luxembourg real estate owned by any Luxembourg tax-opaque corporate (i.e. fully taxable) entity, which is in turn owned by the fund vehicle concerned (i.e. whilst there is indirect ownership) falls entirely outside the scope of this provision.

Fund vehicles that are within scope will incur the Real Estate Levy, by derogation from the more general provisions that exempt the income of the various types of regulated fund vehicles noted above. The Real Estate Levy is to apply to

  • the gross (but VAT-exclusive) amount of rental income deriving (directly or through tax transparent entities) from Luxembourg real estate assets; and
  • the net amount of gains on disposal deriving from such assets (directly or through tax transparent entities, either on disposal of the real asset by a transparent entity or disposal of the interest in the tax transparent entity owning the Luxembourg real estate)

on or after 1 January 2021, and is charged at a rate of 20%.

Real Estate Levy due on income or gains arising or realised in a calendar year must be reported to the tax authorities no later than 31 May of the following calendar year, and the Levy due must be paid no later than 10 June of the following calendar year. Returns of Real Estate Levy due must be accompanied by an auditor’s certificate confirming that the amount being subject to the levy is computed in accordance with the provisions of the legislation.

The wider Real Estate Levy reporting requirement

It should however be noted that, despite the likely narrow field of the practical application of this new levy, the draft legislation provides for a far broader reporting requirement. All Luxembourg investment fund vehicles that meet the conditions noted above regarding their applicable regulatory regime and legal form (i.e. which are not FCPs, SCSs or SCSps) must, by 31 May 2022, make a special report on a prescribed form giving details of any Luxembourg real estate that they have owned at any time in 2020 or 2021, irrespective of whether or not it has yielded any gross rental income or net gains in those two years; OR alternatively confirm the absence of ownership of any Luxembourg real estate during 2020 and 2021. Timely filing of a return showing Real Estate Levy due for 2021 is to be regarded as satisfying this reporting requirement.

A similar reporting is also to be done by fund vehicles having changed their legal form, at any time in 2020 and 2021, from a tax-opaque corporate entity to a tax-transparent entity and owning at least one Luxembourg real estate at the time of said transformation.

A fine of up to EUR 10,000 can be imposed for failing to satisfy this reporting requirement in a timely manner, even if no Luxembourg real estate assets at all are owned by the fund vehicle.

This new reporting requirement thus appears to apply to a much greater number of fund vehicles than will be actually subject to the Real Estate Levy.

Contributions of real estate in exchange for shares or interest in Luxembourg commercial and civil companies

The Government considers that it is necessary to more closely align the transfer tax burden arisen on direct sales of Luxembourg-situs real estate, and on situations (termed “share deals” by the Government) where Luxembourg real estate is contributed to a company whose shares are then sold. This objective is to be pursued by increasing, with effect from 1 January 2021, the proportional transfer taxes arising on the contribution of the real estate into the capital of a Luxembourg civil or commercial company in exchange for shares or interest, from 0.5% + 2/10*0.5% to 2% + 2/10*2% and the transcription tax from 0.50% to 1%, resulting in the aggregate transfer taxes (including transcription tax) increase from 1.1% to 3.4% (and from 1.4% to 4.6% for the property located in the Luxembourg city taking into account the surtax).

The timeframe provided for by the anti-abuse measure in the event of the allocation of a Luxembourg real estate, upon dissolution, liquidation, share capital reduction of a civil or commercial company, to a shareholder/partner other than the one having contributed said property is increased from 5 to 10 years.

Tax unity

A possibility to switch from an existing vertical tax unity to a horizontal one without triggering the retroactive cancellation of the existing tax unity is provided for, upon certain conditions. This possibility follows the recent ECJ case-law C-749/18 issued on 14 May 2020 and is limited to requests introduced before the end of the 2022 tax year.

Revision of rate of depreciation applicable to real estate

The accelerated rate of deprecation in relation to property acquired or whose construction is completed after 1 January 2021 for the purposes of generating rental income is reduced from 6% to 4%. The time during which the accelerated rate of depreciation may apply is also reduced from 6 to 5 years for these buildings.

For individual taxpayers, an additional tax rebate may also apply under certain conditions.

Similar amendments to the depreciation rules will also apply to the costs of renovating of an older property on the basis that the investment costs exceed 20% of the acquisition price of the property.

Under certain conditions, specific accelerated depreciation rules will also apply to sustainable energy renovation expenses.

Personal and Employment Taxes

The Circular letter relating to ‘stock options’ and ‘warrants’ is abolished

The Circular n° 104/2 dated 29 November 2017 relating to the taxation of ‘stock options’ and ‘warrants’ is to be abolished from 1 January 2021. Therefore, it will not be possible to apply a lump-sum valuation method in order to calculate the taxable benefit deriving from the grant of unconditional and tradable stock options or warrants occurring from 1 January 2021.

Revision of rate of depreciation applicable to real estate

Please refer to the similar section in the “Taxes for corporate bodies and fundspart.

Introduction of tax efficient employee profit sharing scheme

The Bill introduces the concept of a ‘prime participative’, of which 50% may be exempted from wages tax. The Beneficiary of the scheme must be an employee and be affiliated to social security either in Luxembourg or abroad in a country which has a Bi- or Multi - Lateral agreement for social security purposes with Luxembourg.

The premium is paid at the sole discretion of the employer. Conditions and limits apply to the implementation of the Profit Sharing Scheme.

  • The employer / company must earn their revenue from the following categories of income: commercial profits, farming, forestry, or independent activities.
  • The existence of an employment contract and affiliation to a qualifying social security regime is primordial for the payment of a ‘prime participative’ to a Beneficiary enjoying a tax-favored treatment.
  • The employer must have proper accounts during the year in which the bonus is paid as well as having proper accounts relating to the prior tax year.
  • The total amount which can be allocated to employees as part of the profit-sharing scheme cannot exceed 5% of the profits of the business of the prior year. For international companies, the 5% limit applies to the employing Luxembourg company only and not to the group accounts.
  • Details of the profit-sharing scheme in a prescribed form must be provided to the withholding tax office for verification at the time of implementation of the profit-sharing scheme.

The payment cannot exceed 25% of the Beneficiary’s gross annual remuneration (excluding benefits in kind and in cash and the bonus itself).

If all the conditions are respected under the profit-sharing scheme, 50% of the bonus may be paid free from tax. The costs in connection with the profit-sharing scheme are deductible at corporate level.

Incorporation of the special tax regime for inbound employees into the law 

The provisions outlined in Circular no 95/2 of 27 January 2014 will be incorporated into the law, with certain modifications.

The Bill removes certain obligations which previously were a deterrent to the implementation of the regime such as the obligation that the employing entity in Luxembourg must have or expect to have 20 full-time employees in the medium term. Also removed are the obligations that the employee recruited into Luxembourg must put at the disposal of the employees their specialist knowledge and savoir-faire or that the employee must be recruited into a sector which experiences recruitment difficulties in Luxembourg.

The main changes relate to the reference base salary, the duration of the regime and the way in which the cost of living exemption is calculated. Previously in order to qualify for the regime the employee must have a gross base salary of EUR 50,000. This has increased to EUR 100,000. The duration of time during which the regime can apply has been increased from 6 to 9 years (including the year of arrival). The cost of living allowance is now calculated on a lump sum basis and 50% of the allowance may be paid free from tax. The cost of living allowance cannot exceed 30% of the annual base remuneration (excluding benefits in kind and cash).

In addition, there are other minor changes to the wording of the provisions of the special tax regime which may impact the level of exemptions available for certain expenses.

Introduction of electronic tax cards

During 2021 the Tax Administration will put into place a secured on-line platform which will permit employers to access employee tax cards. As from 2022, employees will no longer be obliged to provide their employer with their tax card directly. The tax cards provided via the secured platform will potentially be valid for more than one year.

An employer will be obliged to access the platform at least once a month to verify whether there are any new tax cards put at their disposal.

Tax Credits

The maximum annual tax credits for independent workers, employees and pensioners is increased from EUR 600 to EUR 696.

Personal tax and wealth management

No new personal taxes, or any major reform of the personal tax regime for 2021, are now contemplated, and personal income tax rates will also remain unchanged.

New restriction on activities of Family Wealth Management companies

As indicated in the parliamentary works on the Luxembourg law on the private wealth management company (Société de gestion de patrimoine familial (“SPF”)) dated 11 May 2007 (the “SPF Law”), SPFs may not invest directly in real estate. In order to be consistent with the new real estate levy regime applicable to Luxembourg fund vehicles (as mentioned above), article 11 of the Bill clarifies the SPF Law by indicating that, as from 1 July 2021, SPFs would no longer be allowed to hold real estate indirectly through either:

i) Luxembourg or foreign partnerships (“sociétés de personnes”);

ii) common funds (“Fonds Common de Placement” “FCP”) as defined by the law of 17 December 2010 relating to undertakings for collective investment, the law dated 13 February 2007 on specialised investment funds and by the law of 23 July 2016 on reserved alternative investment funds, or any foreign entity having legal and fiscal characteristics similar to such funds.

SPFs are however still allowed to invest in real estate through joint-stock companies.

Moreover, subscription tax returns prepared for SPF must now be electronically filed.

New measure to simplify successions exempt from inheritance tax

Article 14 of the Bill introduces an amendment to the law dated 28 January 1948 on registration and succession duties. The purpose of the measure would be to introduce for the heirs, in the context of successions exempt from inheritance tax, an efficient means of access to movable assets of a succession held by a third party (such as credit institutions), by giving a civil scope to the certificate issued by the Luxembourg Indirect Tax Authorities. It would therefore be primarily an administrative simplification measure.

The certificate issued by the Luxembourg Indirect Tax Authorities in case of a succession exempt from inheritance tax, would therefore henceforth have both fiscal and civil scope. From now on, any third-party holder of movable property that is part of a succession would be required to accept this certificate as proof of the capacity of heir of its holder.

“CO2 tax”

A new excise tax is proposed to apply from 1 January 2021 to most types of liquid or gas hydrocarbon consumed as an energy source in Luxembourg. Although the excise tax also applies to fuel used for domestic or commercial heating or cooking, its effect is likely to be most immediately observed in the price of petrol or diesel vehicle fuels, which are likely to increase by around 5 cents a litre.

In conclusion

The Government has recognised that, while the COVID-19 pandemic will weigh heavily on the State budget, it would not be desirable to reduce purchasing power by increasing taxes. Stability at this time is seen as essential, and so any major reform of the tax system, particularly of personal taxes, although already foreseen as part of the current Government’s programme, will not be undertaken for 2021.

Changes that are being proposed are thus mainly to try to tackle some very specific areas where unfairness in the existing regime is perceived to lie, and to enhance sustainability and environmental protection. Liabilities under the proposed Real Estate Levy, on Luxembourg real estate income and gains accruing directly to investment fund vehicles, will be of very limited and local application. 

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