Luxembourg draft budget law 2023

17/10/22

In brief

The 2023 budget was unveiled on 12 October 2022, and the related bill, 8080, was released by the Luxembourg government (the “Budget”).  

Aside from several measures designed to reinforce purchasing power, continue efforts to dampen inflation in the property market, and to support the country’s journey to net-zero, the Budget introduced a clarification on how the reverse hybrid rules should function, as well as new official deadlines for filing of tax returns for individuals, corporate tax, municipal business tax and net wealth tax.

Budget in details

Corporations

Amendments to Article 168 quater of the Luxembourg Income Tax Law (LITL)

Based on Article 168 quater LITL, transparent Luxembourg partnerships will become liable to corporate income tax on their net income to the extent that this income is not otherwise taxed under Luxembourg tax law or the laws of any other jurisdiction. This is on the proviso that one or more associated non-resident entities, which in aggregate hold a direct or indirect interest of 50% or more of either the voting rights, capital interests or profit-sharing rights consider the partnership as a taxable person under their domestic tax law. 

The Budget proposes a clarification of the text of the existing law to ensure that only situations where it is the actual qualification of the entity itself (i.e. transparent vs. opaque) which results in non-taxation are captured by the reverse hybrid rules. The commentary to the Budget outlines this and goes on to say that the net income of a partnership which is attributable to an investor that is exempt from tax in its country of residence, or in the absence of a residence concept, incorporation, should not fall within the scope of the reverse hybrid rules. This is because the lack of taxation is not a result of the partnership being regarded as opaque by the investor. 

This is a welcome clarification, which should be helpful to taxpayers in the assessment of the impact of reverse hybrid rules, since it relates to tax exempt investors or investors resident or established in a jurisdiction with no tax system. It is also aligned with the general market interpretation of the rules since their introduction on 1 January 2022. 

Extension of the filing deadlines for certain direct tax returns

Currently, the deadline for the filing of corporate income tax and municipal business tax returns is three months after the end of the tax year in question. So for companies with a 31 December year end, the deadline is 31 March. 

The Budget contains a proposal to change the Abgabenordnung (the General Tax Law) such that corporate income tax and municipal business tax returns of a given year should be filed by 31 December of the following year. For net wealth tax, the return of a given year should be filed at the latest on 31 December of that year, since the return is based on the balance sheet as at 1 January of the tax year. 

However, the discretion granted to the tax authorities to allow extensions to the filing deadline in specific cases is to be repealed. 

In practice, the Luxembourg tax authorities typically extended the filing deadline to 31 December without imposing late filing penalties. This proposal simply puts practice onto a statutory footing that will clearly provide more legal certainty to taxpayers. 

The new filing deadlines are to be applicable to personal income tax returns, corporate income tax and municipal business tax returns related to 2022 and to net wealth tax returns for 2023. 

 

Individuals

Modification of profit-sharing scheme rules (prime participative) 

Under the profit-sharing scheme rules, Luxembourg companies can provide a premium to employees, 50% of which is exempt from tax, under certain conditions and limits. The premiums cannot exceed 5% of a company’s after-tax profit of the previous year. To provide more flexibility to Luxembourg companies in a tax unity group, the Budget contains a proposal whereby companies can opt to assess the 5% limit by adding the after-tax profit of the members of the tax unity group.

Relaxing eligibility requirements for the special tax regime for inbound employees 

Under current rules, in order to qualify for the special tax regime for inbound employees, the annual gross base salary needs to be at least EUR 100,000 per annum (excluding benefits in kind or in cash). This will be lowered to EUR 75,000 per annum under the Budget proposals.

Increasing certain tax credits and tax deductions

Single parents with dependent children are currently entitled to a yearly tax credit ranging from EUR 750 to EUR 1,500 depending on their level of income. To support these individuals, the maximum amount of the single parent tax credit will be increased to EUR 2,505. The earnings ceiling for the maximum tax credit will be increased from EUR 35,000 to EUR 60,000.

The tax credit for minimum wage earners of EUR 70 per month currently only applies to employees earning a monthly gross wage of between EUR 1,500 and EUR 2,500. Since the minimum wage is set to increase in 2023, the qualifying income range is also set to increase, to EUR 1,800 - EUR 3,000. 

The tax deduction for the contribution for child maintenance where the child is not part of the taxpayer’s household is set to increase from EUR 4,020 to EUR 4,422. 

Sustaining affordable housing

To limit speculation as well as to contain pricing pressure through excessive demand, the tax system for depreciation of construction is to be reformed. Currently, the amortisation rate varies from 2% to 4% depending on the year of construction of the building. From the 2023 tax year, any taxpayer will only be able to benefit from this favourable tax system for two buildings or parts of buildings used for rental housing.

 

Indirect tax

Temporary VAT rate decrease

A draft law has also been submitted to decrease three of the existing four VAT rates between 1 January and 31 December 2023. The standard rate, the intermediary rate and the reduced rate will be reduced to respectively 16%, 13% and 7%. Other targeted indirect tax measures have been proposed to mainly incentivise environmental-friendly investments and products (e.g. super-reduced VAT rate for solar panels, bikes and e-bikes, removal of CO2 tax for biofuels, etc).

Revamp of Luxembourg property tax

Two days before the release of the Budget, bill 8082 was released proposing a long-awaited revamp of the Luxembourg property tax. 

The bill proposes the following main changes:

  • the introduction of a new formula to value properties that will take into account, amongst other things, criteria such as building potential, geographical location, the phase of the development, the number of facilities and services available nearby, etc.;

  • property tax will remain a communal tax, the rate of which can be set by each commune within a range of 9% to 11%;

  • the introduction of a national tax to encourage the freeing-up of lands for residential development that will require the establishment of a national register of unbuilt land; and 

  • the introduction of a national tax on owners in respect of non-occupation of housing. 

Bill 8082 introduces major changes to property taxation in Luxembourg, with rules that may be complex to apply in practice. Property owners should therefore keep abreast of these changes and consider whether and how these new measures may affect them in the future.