The Luxembourg tax landscape has seen significant developments this summer with the introduction of new measures and proposals that could have substantial implications for businesses operating in grand duchy. Summarised by Hadrien Bremon, counsel, Aurelie Clementz, partner, and Muriel Jarosz, associate at Ogier in Luxembourg, the changes include the presentation of draft law 8414, new administrative tax circulars, a revised subscription tax procedure and updated grand ducal regulations. Below is a detailed analysis of these developments and their potential impact on the business environment in Luxembourg, to the trio of law experts at Ogier.

Draft law 8414

On 17 July 2024, the Luxembourg government presented draft law 8414 to parliament, proposing amendments to several key tax laws. These include the amended law of 17 April 1964 on the reorganisation of the direct tax administration, the Luxembourg income tax law (Litl) dated 4 December 1967, the law of 11 May 2007 on family wealth management companies (SPF) and the amended law of 17 December 2010 concerning collective investment undertakings. The proposed modifications aim to modernise the tax framework and reinforce Luxembourg’s status as a global financial hub.

Personal income tax

Impatriate regime adjustments

The current impatriate regime, which provides tax exemptions for actual expenses borne by the employer and partial exemptions for impatriation premiums, would be replaced with a flat-rate system. Under this new model, there would be a 50% tax exemption on the gross annual remuneration, capped at €400,000.

Personal income tax rate adjustments

The government proposed adjustments to the personal income tax scale to counteract the effects of inflation, with a 2.5 index tranche adjustment starting from the 2025 tax year. For individuals in tax class 1A, the tax-exempt amount would increase from €24,876 to €26,460, providing tax relief for those earning over €50,000 annually. This change aims to reduce the tax burden on single-parent households, supported further by a €1,000 increase in the single-parent tax credit and a higher maximum deduction for child support payments.

The minimum social wage tax credit would also be increased from the 2025 tax year. This ensures that employees in tax classes 1A, 2, and now class 1 would not pay taxes on the non-qualified minimum social wage.

Incentives for young employees

To encourage young workers at the start of their careers, a new incentive would offer tax benefits to those under 30 years old with a first permanent employment contract in Luxembourg. The bonus, subject to a 75% exemption, would range from a maximum of €5,000 for annual gross salaries of up to €50,000, to €2,500 for salaries between €75,000 and €100,000.

Participative bonus regime modifications

The participative bonus regime would be enhanced by increasing the maximum tax-exempt bonus amount from 25% to 30% of the gross annual remuneration. Additionally, the total tax-exempt participative bonus that a company can grant would rise from 5% to 7.5% of the previous year’s positive business results.

Tax credit on overtime for cross-border workers

A new tax credit would be introduced for cross-border workers’ overtime hours, addressing the discrepancy where overtime wages are taxed in their state of residence but exempt in Luxembourg. The credit would cap at €700 annually for gross overtime salaries of €4,000 and above, and would not apply to overtime wages below €1,200 per year.

Corporate tax adjustments

Corporate income tax rate reduction

To enhance Luxembourg’s attractiveness as a business location and stimulate investment, the corporate income tax (CIT) rate would be reduced by 1% from the 2025 tax year. For taxable income below €175,000, the rate would decrease from 15% to 14%. For income between €175,000 and €200,000, the tax would be set at €24,500 plus 30%, and for income above €200,000, the rate would drop from 17% to 16%. This adjustment would lower the overall statutory rate for companies based in Luxembourg City from 24.94% to 23.87%.

Deductibility of borrowing costs

Article 168bis of the Litl regarding the deductibility of borrowing costs would be reviewed for entities not part of a consolidated group for financial accounting purposes, but not considered stand-alone entities.

Subscription tax exemption for ETFs (exchange-traded funds)

To encourage investment in actively managed Ucits ETFs, these funds would be exempt from the subscription tax.

Modernisation of SPF law 

Several changes aimed at updating the regulatory framework for family wealth management companies (SPF) would be introduced. These include requiring that the corporate name includes ‘société de gestion de patrimoine familial’ or ‘SPF’, increasing the annual minimum subscription tax from €100 to €1,000, mandating electronic filing for compliance certificates and changing the subscription tax calculation to consider debt on the first day of the financial year. Additionally, new administrative fines would be introduced for non-compliance, and the procedure for withdrawing SPF tax status would be streamlined.

Additional tax measures

New administrative tax circulars

On 19 July 2024, the Luxembourg Tax Authorities (LTA) issued a circular clarifying the tax treatment of simplified liquidations or dissolutions without liquidation under article 1865bis of the civil code. The circular provided guidance on corporate income tax, municipal business tax, and net wealth tax, indicating that a dissolution without liquidation could be treated as a merger under certain conditions, potentially confirming the tax-neutrality of such dissolutions.

New subscription tax procedure

A new online declaration system for subscription taxes applicable to undertakings for collective investments (UCIs), specialised investment funds (SIFs), and reserved alternative investment funds (Raifs) was introduced. This system, which will operate alongside the existing one for a transitional period ending in August 2026, aims to improve guidance for declarants and streamline the management and verification of subscription tax declarations.

New grand ducal regulations

Tax credits and qualified holdings under the minimum taxation law

On 24 July 2024, the council of ministers approved a grand-ducal regulation providing guidelines for handling tax credits and qualified holdings under the Minimum Taxation Law (MTL), enacted on 22 December 2023. The MTL targets multinational and large domestic businesses with annual revenues exceeding €750m in two of the past four years.

Functional currency for minimum tax calculations 

Another grand-ducal regulation approved on 24 July 2024 detailed how multinational and large domestic companies should determine their functional currency for MTL calculations, focusing on those with annual revenues above €750m in two of the last four fiscal years.