Aaron Grunwald: For freshly arrived expats, can you give an overview of what you can deduct off your personal taxes here?

Laura Foulds: In Luxembourg, the main deductions that you can reclaim are mortgage interest, if you own the house that you live in here. Obviously, when you’re newly arriving in Luxembourg, not everybody’s planning to buy a house immediately. So newcomers may not easily take advantage of that deduction. But once they’ve been here a couple of years and if you do buy a house, then you get a deduction for mortgage interest that you’re paying. The other main deductions are private loan interest. Student loans are the normal one or something like a car loan. So are insurances, for life, death, disability, third party liability, medical insurance.

It doesn’t have to be from a Luxembourg bank or Luxembourg insurer, does it?

No, it doesn’t. There are some criteria. If it’s from a European life insurer, for example, normally, it’s okay. Sometimes if it’s from a third country, there can be limitations, but for most of it, you will get a deduction.

Does that include the UK now?

The UK is normally okay for insurances, life insurance and things like that. Sometimes, if you have countries where there’s no tax treaty, maybe like Australia, sometimes they [the tax office] look to limit their deductions. Every deduction in Luxembourg has a limit. For mortgage interest, the maximum you will get is €2,000 per person in your household, which is you, your husband or wife, or your children. And the same for the deductions for the insurances and the loan interest is limited to €672 per member of the household. A lot of people in Luxembourg take a medical insurance, and they have home and car insurance, they’re already at the limit without even looking at insurance they have elsewhere.

So it’s €672 for all insurance, not by type?

It’s not per type. This is one combined deduction. So, if somebody has a car loan and medical, maybe they’re already at the limit.

Then they have private pension. This one is €3,200 per year; both spouses can deduct this. To date, it’s only been a Luxembourg private pension. There’s some talk that this will be extended to a European private pension. So it may not have to just be in Luxembourg in the future.

There is a home saving scheme. So, for the home savings scheme, there’s three specific banks in Luxembourg who operate it, and here again, it’s €672 per person. You put the money in the savings scheme, the interest is tax free, and then you get a tax deduction for the contribution.

But there’s a minimum contract period, right?

Yes, you have to contribute for 10 years. And if you close it early, then you have to pay back the tax relief.

Unless you buy or renovate a home?

You have to use it for your main residence. [The amount of the deduction] is doubled if the person taking the contract is under 40.

In addition to that, you have charitable donations--it’s pretty standard to deduct charitable donations in most countries--and the cost of childcare and or [a home] cleaner in Luxembourg is also deductible.

Is that also capped?

At €450 a month.

I know it’s hard to generalise because people have come here from everywhere, but are there some things that people are surprised to learn are not deductible?

We do a lot of US and UK tax as well, so those are the easiest ones for me to compare with. In the UK, you get almost no deductions, so Luxembourg is great. In the US, you get a lot of deductions: a specific sort of education contract and the deduction for retirement contributions is higher, deductions for state taxes and real estate taxes. But it’s a different regime, those deductions don’t really exist here in the same way.

You know, there’s more deductions, I would say, here than in a lot of other places.

Does everyone need to file a tax declaration?

No. If your taxable income is over €100,000, then you will have to file a tax return.

But there’s many more criteria where people have to file a tax return. For example, if you’re married and both spouses are working, you have to file if you jointly earned €36,000. You have to file if you have self-employed income, because it hasn’t had tax taken from it. You have to file if you have investment income of €1,525, double if filing jointly, or if you have directors fees.

What is really, really important in Luxembourg is you have to declare your worldwide income. So if you have a rental property in Greece, or you have investment income in Spain, you have to declare it in Luxembourg. And this is what a lot of people forget to do. And having foreign income means you have to file a tax return.

That doesn’t mean that you’re going to be taxed here on your rental income in Greece?

No.

Is that just to calculate what tax band you go into?

You have to look at the different types of income. Normally something like interest will be taxable here in Luxembourg, because it’s the country of residence, whereas the rental income is taxed where the property is situated. And then Luxembourg is just using that information to work out the tax rate to apply to your income. But you have to be very careful, you have to look at the different types of income and the tax treaty that exists between the countries you’re looking at, because some of them have different terms.

Because you might get a tax deduction in the other country?

Yes. For example, bank interest is normally taxable in your country of residence. However, the treaty with Poland says Poland can tax it, but only up to 10% and Luxembourg must give a credit for the 10%.

So it can be very specific?

It can be very specific... but in the majority of treaties: interest, country of residence; rental, country where the property is situated; dividends, generally split, actually.

The filing date is the end of March. Does that apply to everyone?

The official deadline is the 31st of March. However, in practice, the tax office allow a concession of six months. So you have six months after the deadline to really get the tax return in. And again, in practice, if you’ve filed before the end of December, you will not get a penalty. This isn’t written down, it’s not in the law, it’s just a concession given by the tax office. And they do send reminders in September, October, November time. The last reminder really says, if you don’t file by December 31st, we’re going to issue a penalty. And this is the one that you really have to take notice of.

Have there been any recent changes implemented by the tax office?

Recently, they issued some more guidance on what would constitute home office expenses, which I imagine is due to the covid period, when more people were working from home. They issued a bit more guidance on what qualifies as a home office.

And how are they defining that?

They indicate that it has to be a separate room, it has to have a door. Somebody who lives in an open plan house, where the desk is in the corner of a bigger room, is going to struggle to claim a home office. And they say that it can’t be spaces you go through to have access to another part of the house. It has to be really a separate place.

What can you claim?

I always tell people that you have to really apply a kind of hand on heart test, is this expense truly in relation to your working from home? And if it is, then yes, you should be able to deduct it. So if you buy a new chair for the office. It’s a percentage of your electricity bill, of your charges when you’re in a rented apartment. Normally, it’s calculated on the square meters of the office compared with the whole apartment.

So if your home office is 10 square meters, and your flat is 100 square meters, you could write off 10% of your electricity bill?

Exactly. I think it’s an area that will generate more focus, post-covid, when there is more working from home; you can see it being challenged or questioned. And you do have to remember that every employee has a standard deduction already built into the tax calculation of €540. So if 10% of your electricity, etc, is only €400, there’s no benefit to it anyway.

What other advice would you give to expats about the tax system? Are there any common misconceptions?

Where we get a lot of questions is tax class and what tax class applies to them. And why when, if they’re both working and they have tax taken from salary, why do they still owe at the end of the year? So understanding the system is really key for expats.

You’re talking about married couples? Is it not always beneficial to have a joint filing if you’re both working?

I would say that in 98% of cases, the joint filing is still beneficial. There are situations when an individual filing can be better, but you have to work a little to find those situations. Joint filing is normally still the most beneficial solution. What people have to understand is that what they pay through payroll [contributions] is not the final tax.

So if you’re married, maybe the withholding is a little bit lower?

It’s just not enough. This is how the system is designed, that withholding is not enough. And therefore you owe at the end of the year, and when you’re new to Luxembourg, and if you’ve come from a country like the UK, for example, where the withholding is accurate almost to the penny, it’s really a surprise to have this huge bill at the end of the year.

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