Vote of two laws amending Luxembourg income tax legislation

I. New measures for corporate taxpayers

1. Reduction of the CIT rate from 17% to 16% (Bill 8414)

The maximum CIT rate currently set at 17% is 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% for tax year 2025.

2. Amendments to the SPF regime (Bill 8414)

The law amends the law of 11 May 2007, in relation to private wealth management company (Société de gestion de patrimoine familial - “SPF”). The modifications (i) increase the minimum annual amount of subscription tax from EUR 100 to EUR 1,000, (ii) introduce the possibility of imposing administrative fines in the event of specific violations of the law of May 11, 2007, and (iii) adjust the existing procedure for withdrawing the SPF’s tax status.

3. Exemption from subscription tax for OPCVM ETF (Bill 8414)

Considering the significant development of OPCVM ETF (Organismes de placement collectifs en valeurs mobilières cotées) in Europe but also internationally, the law introduces an exemption from subscription tax for OPCVM ETF. 

4. Clarification of the interest limitation rules (Bill 8414)

The law introduces the definition of single entity group (“groupe à entité unique”) under article 168bis 1) of the Luxembourg income tax law (“LIR”) applicable to entities which are not included in a financial consolidation as well as specific rules to apply, on demand, for a group exemption for these entities. Such new group exemption should have a positive impact on orphan securitisation vehicles not included in a financial consolidation.

5. Clarification of the scope of the partial liquidation treatment (Bill 8388) 

The law clarifies the conditions under which the redemption or withdrawal and cancellation of a class of shares is treated as a partial liquidation in line with prior practice.

6. Partial optionality of the participation exemption regime (Bill 8388)

Article 115 LIR, which provides, under certain conditions, for a 50% exemption of dividends received is amended to introduce an option for the taxpayer to renounce to the exemption. 

A similar option is offered to renounce to the benefit of the 100% exemption of dividends received as foreseen under article 166 LIR and of the capital gain exemption as foreseen under the grand-ducal regulation to the extent that said income are exempt solely due to the acquisition price representing, respectively, at least EUR 1,200,000 or EUR 6 million. In other words, no renunciations may be expressed in relation to participations representing at least 10% in the share capital of a subsidiary.

Said renunciations are to be made individually for each tax year and for each participation.

This modification is applicable as from the 2025 tax year.

7. Modification of the minimum NWT regime (Bill 8388)

As a matter of principle, Luxembourg resident companies are subject to net wealth tax (hereafter “NWT”) on their net wealth at the following scale of rates (paragraph 8 (1) of the NWT law1):

• On a taxable base of up to EUR 500 million: 0.5%;

• On a taxable base exceeding EUR 500 million: NWT of EUR 2.5 million, plus 0.05% on the portion of the NWT base above EUR 500 million, without any cap.

The NWT law further provides a minimum amount of NWT to be paid by all Luxembourg resident companies as follows (paragraph 8 (2) of the NWT law):

• Entities with aggregated fixed financial assets, transferable securities, inter-company receivables, and cash in excess of both 90% of their total gross assets AND EUR 350,000 will be subject to a minimum NWT charge of EUR 4,815 (paragraph 8 (2) a) NWT law). This second criterion linked to the EUR 350,000 threshold was deemed unjustified and unconstitutional. You may refer to our previous Flash News for further details in this respect: https://www.pwc.lu/en/newsletter/2023/luxembourg-minimum-net-wealth-tax-ruled-partly-unconstitutional.html

• All other companies are subject, based on paragraph 8 (2) b) of the NWT law, to a minimum NWT charge ranging from EUR 535 to EUR 32,100, depending on the company’s total gross assets.

The regime is simplified to only provide for the following amounts of minimum NWT:

• EUR 535 when the total balance sheet total is less than or equal to EUR 350,000;

• EUR 1,605 when the total balance sheet total is greater than EUR 350,000 and less than or equal to EUR 2 million;

• EUR 4,815 when the total balance sheet total is greater than EUR 2 million.

This modification is applicable as from tax year 2025 and implies a tax reduction for some companies whose financial assets represent less than 90% of their total balance sheet. 

II. New measures for individual taxpayers 

1. Impatriate tax regime (Bill 8414)

The current regime will be completely reshaped as from 2025 to allow highly skilled employees relocating to Luxembourg to benefit from an income tax exemption of 50% of their total annual gross remuneration. The amount of annual gross remuneration that can benefit from this exemption is capped at EUR 400,000. 

To qualify for the regime, the impatriate must carry out the professional activity for which he benefits from the regime for at least 75% of his working time. 

Impatriates who currently benefit from the existing impatriate regime can opt to continue under the former regime or opt into the new one. The request shall be communicated to the Luxembourg tax authorities and is irrevocable. 

2. Partial tax exemption for bonuses paid to employees under 30 years old (Bill 8414)

A new incentive will be introduced, in the form of a partial tax exemption for bonuses paid to qualifying employees, i.e., for employees under 30 years old for their first permanent contract in Luxembourg. 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. 

3. Profit sharing scheme (Bill 8414)

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

 4. New adjustment of the tax scale to counter indexation (Bill 8414)

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 occurred in 2024 resulting in a substantial reduction of the tax burden for all households, particularly for those with lower income.

5. More advantageous calculation formula for single parents, widows, and citizens over 64 years old (Bill 8414)

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

The 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, for taxable adjusted income exceeding EUR 50,000 per year, tax burden can, in some cases, decrease by EUR 2,250 - EUR 2,600 annually.  

6. Higher single parent tax credit (Bill 8414)

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

7. Higher Minimum Social Wage Tax credit (Bill 8414)

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

8. Higher deduction for extraordinary expenses for dependents outside the household (Bill 8414)

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

9. Unskilled minimum social wage exempt from tax in all tax classes (Bill 8414)

The law intends to eliminate tax burden for individuals earning 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 employees in tax classes 1a and 2 to tax class 1 from 2025.

10. Tax credit for overtime hours of cross-border workers (Bill 8414)

The law also introduces an overtime tax credit (CIHS) for employees, who are not civil servants nor state employees. This tax credit enters into force with retroactive effect as from the tax year 2024. 

Employees who reside in a country with which Luxembourg has a double tax treaty and who receive a gross remuneration from overtime worked and fully tax exempt 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. 

In this context, the law introduces a tax credit for Income Loss from Overtime Hours (CIHS) under conditions, which offsets the loss of income 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.

11. Digitalisation and modernisation of the tax administration (Bill 8388)

The general tax law is amended to require the electronic filing of certain withholding tax returns such as withholding tax returns for director’s fees.

The measures are part of digitalisation and modernisation of the tax administration and promotion of electronic exchanges with taxpayers, as envisaged by the coalition agreement 2023-2028.

The modifications are applicable as from 1 January 2025.

12. Introduction of a new scale tax credit (“crédit d’impôt barème”) (Bill 8388)

Following the abolition of temporary tax credit (“credit d’impôt conjoncture”) introduced in 2023, certain taxpayers ranged under tax class 1a and 2 may face negative financial consequences.

Therefore, a new article 154duedecies of the Luxembourg income tax law (“LIR”) is introduced and provides for a tax credit for the 2024 tax year for taxpayers in the same tax class 1a or 2 for 2023 and 2024, and earning professional income (as defined in article 2 LIR) for each of these tax years taxable in Luxembourg. 

The taxpayers concerned are namely: 

1. Taxpayers ranged under tax class 1a;  

2. Taxpayers who are widowed and whose marriage was dissolved by death during the three years preceding the tax year; 

3. Taxpayers who are divorced during the three years preceding the tax year, if they have not benefited from this provision or a similar previous provision for five years prior to that time; 

4. Taxpayers jointly taxed under article 3 and 3bis LIR as well as married taxpayers and partners referred to in Article 157ter and taxed jointly. 

For the purpose of this article, professional income means the following categories of income:

a) commercial profit as defined in Article 14 LIR;

b) agricultural and forestry profit as defined in Article 61 LIR;

c) profit from the practice of a liberal profession as defined in Article 91 LIR;

d) gross income from salaried employment as defined in Articles 95 or 95a LIR;

e) gross income from pensions or annuities as defined in Article 96, paragraph 1 LIR.

Conditions to benefit from the scale tax credit vary depending on the personal / marital situation of taxpayers. Please see hereafter further details:  

1) Taxpayers in tax class 1a: a tax credit of EUR 108 is granted provided that the total professional income earned during the 2023 and 2024 tax years is comprised between EUR 13,500 and EUR 28,499 for each of these tax years. 

2) Taxpayers in tax class 2 who are widowed: a tax credit of EUR 108 is granted provided that the total professional income earned during the 2023 and 2024 tax years is comprised between EUR 13,500 and EUR 64,499 for each of these tax years. 

3) Taxpayers in tax class 2 who are divorced: a tax credit of EUR 108 is granted provided that the total professional income earned during the 2023 and 2024 tax years is comprised between EUR 13,500 and EUR 64,499 for each of these tax years. 

4) Taxpayers jointly taxed under article 3 and 3bis LIR as well as married taxpayers and partners referred to in Article 157ter and taxed jointly: a tax credit of EUR 108 is granted provided that the total professional income earned during the 2023 and 2024 tax years is comprised between EUR 13,500 and EUR 64,499 for each of these tax years. For the bracket between EUR 34,500 and EUR 64,499, one of the spouses / partners should earn at least 70% of the total professional income of the household for each of the tax year 2023 and 2024.

The scale tax credit is deductible and refundable to the taxpayer upon request via the filing of an annual tax return or a withholding tax adjustment. In case the taxpayer is not subject to taxation via the filing of an annual tax return, or he/she is not entitled to submit a withholding tax adjustment, the scale tax credit will be credited after the end of the year 2024 upon request by the taxpayer using a special form provided for this purpose by the tax authorities. 

The taxpayer is required to attach to their request the relevant supporting documents attesting the total professional income including the income of their spouse/partner earned during the 2023 and 2024 tax years.