New draft law brings several tax measures for individuals and companies

      I.  Individual tax: New measures

1. New adjustment of the tax scale to counter indexation

To mitigate the impact of inflation, the personal income tax scale will be modified by adding 2.5 index brackets starting from 2025. This change builds on the previous neutralisation of 4 index brackets that occurs in 2024 resulting in a substantial reduction of the tax burden for all households, particularly for those with lower income.

2. More advantageous calculation formula for single parents, widows, and citizens over 64 years old

The coalition agreement of 2023-2028 provided a revision of the tax treatment of taxpayers benefiting from tax class 1A to reduce their tax burden.

The draft law provides that taxpayers with tax class 1A will see a reduction in tax progression with a more advantageous calculation formula. The tax burden of tax class 1A will approach that of tax class 2 while keeping the exempt income identical to that of tax class 2.

Through this specific adjustment, taking into account the adaptation of the tax scale, for taxable adjusted incomes exceeding EUR 50,000 per year, the tax burden can, in some cases, decrease by between EUR 2,250 and EUR 2,600 annually for incomes exceeding EUR 50,000 per year. Furthermore, the adjustment of the tax rate means that the exempt amount in tax class 1a increases from EUR 24,876 to EUR 26,460.

3. Higher single parent tax credit

The single-parent tax credit (CIM) will be increased to EUR 3,504 (currently set at EUR 2,505) for single parent earning below EUR 60,000 with also a gradual decrease of the credit for taxpayers with an income between EUR 60,000 and EUR 105,000.

4. Higher Minimum Social Wage Tax credit

The minimum social wage tax credit (CISSM) will be raised to EUR 81 per month (currently set at a maximum of EUR 70 per month).

5. Higher deduction for extraordinary expenses for dependents outside the household

The extraordinary expenses allowance for children not part of the taxpayer household will increase from EUR 4,322 to EUR 5,424 per year and per child starting in 2025.

6. Unskilled minimum social wage exempt from tax in all tax classes

The draft law intends to completely eliminate the tax burden for individuals earning the unqualified minimum wage through the Minimum Social Wage Tax Credit (CISSM). Adjustments to CISSM will ensure that as of 1 January, 2025, workers in tax class 1 earning this wage receive overcompensation. This initiative ensures zero tax liability for these workers, extending the current exemption enjoyed by tax classes 1a and 2 employees to tax class 1 from 2025.

7. Profit sharing scheme

Companies will be able to distribute profit sharing premiums for up to 7.5% of the company’s previous year after-tax net result to employees (instead of 5% currently), with the maximum amount increased from 25% to 30% of the employee’s annual gross fixed salary.

8. Impatriate tax regime

The current regime will be completely reshaped to allow highly skilled employees relocating to Luxembourg to benefit from an income tax exemption of 50% of their total gross annual remuneration. The amount of annual gross remuneration that can benefit from this exemption is capped at EUR  400,000.

A new requirement is also introduced to qualify for the impatriate tax regime: The impatriate must engage in the professional activity for which he benefits from the regime for at least 75% of their working time.

Impatriates who currently benefit from the impatriate tax regime will remain under the former regime unless the application of the new regime is requested. The request is to be communicated to the Luxembourg tax authorities and is irrevocable from the tax year in which it is made.

9. Partial tax exemption for bonuses paid to employees under 30 years old

A new incentive targeting employees under 30 years old with their first permanent contract in Luxembourg will be introduced, in the form of a partial tax exemption for bonuses paid to qualifying employees. This incentive intends to support young employees at the beginning of their career.

Up to 75% of the bonus that may be paid by the employer will be tax-exempt, with a limit ranging from EUR 2,500 to EUR 5,000 depending on the employee’s remuneration.

As from an annual gross remuneration of EUR 100,000, no exemption will be applicable.

10. Tax credit for overtime hours of cross-border workers

The draft bill also introduces an overtime tax credit (CIHS) for employees, who are not civil servants nor state employees.

Employees who reside in a country with which Luxembourg has a double tax treaty in force and who receive gross remuneration from overtime worked in Luxembourg which is fully tax exempted in Luxembourg may still be subject to taxation in their country of residence. This may occur notably when the residence country eliminates double taxation through the tax credit method or if the double tax treaty stipulates that the country of residence will tax remuneration which has not been effectively taxed in Luxembourg.

Within this context, a tax credit for Income Loss from Overtime Hours (CIHS) introduction is proposed under conditions, with the aim to offset income loss due to potential taxation in the employee’s country of residence.

The CIHS will be proportional to the overtime salary, up to a maximum of EUR 700 per year. This credit will not apply to gross overtime earnings below EUR 1,200 per year.

   II. Corporate tax new measures

1. Reduction of the CIT rate from 17% to 16%

As announced by the Luxembourg Government earlier this year and with the aim of reinforcing the competitiveness of Luxembourg companies and encouraging investments and innovation, the maximum CIT rate currently set at 17% will be decreased to 16%.

The aggregate corporate tax rate (including the solidarity surcharge and the municipal business tax) for a company established in Luxembourg City will therefore decrease from 24.94% to 23.87%.

2. Amendments to the SPF regime

The draft Law intends to amend the Law of 11 May, 2007, in relation to the creation of a private wealth management company (Société de gestion de patrimoine familial - “SPF”). The modifications notably aim at (i) increasing the minimum annual amount of subscription tax from EUR 100 to EUR 1,000, (ii) introducing the possibility of imposing administrative fines in the event of specific violations of the Law of 11 May, 2007, and (iii) adjusting the existing procedure for withdrawing the SPF’s tax status.

3. Exemption from subscription tax for OPCVM ETF

Also, in view of improving the competitiveness of the Luxembourg financial market and considering the significant development of OPCVM ETF (Organismes de placement collectif en valeurs mobilières cotées) in Europe but also internationally, the draft Law will introduce an exemption from subscription tax for OPCVM ETF.