Introduction
Extension of deadline for filing tax returns
Clarification regarding article 168 quater of Luxembourg income tax law
Changes to so-called "Relibi law"
Amendment of profit participating premium regime

Amendment of impatriate tax regime
Next steps


Introduction

On 12 October 2022, the Luxembourg government submitted the budget bill for 2023 No. 8080 to the Chamber of Deputies for approval. As anticipated, the 2023 budget bill does not increase the tax burden on Luxembourg taxpayers, considering the current difficult economic and political context. On the contrary, certain measures intend to palliate financially businesses and individuals with focused tax breaks. The main tax measures are summarised in this article.

Extension of deadline for filing tax returns

In line with the current practice, the 2023 budget bill proposes to extend the filing deadlines from 31 March for individual taxpayers and 31 May for corporate taxpayers, respectively, to 31 December of the year following the tax year concerned. This new deadline will be applicable as from tax year 2022 for personal income tax, corporate income tax and municipal business tax and as from tax year 2023 for net wealth tax.

In practice, this would formalise the administrative tolerance granted to taxpayers to file their returns after the legal deadline.

Clarification regarding article 168 quater of Luxembourg income tax law

According to this rule, a hybrid mismatch will be characterised when a Luxembourg tax transparent entity will be viewed as a Luxembourg taxable entity by one or more of its non-residents associated enterprises holding globally, directly or indirectly, at least 50% of its voting rights or capital or which are entitled to at least 50% of its profits. The effect of this anti-hybrid mismatch rule is that the Luxembourg tax transparent entity will be considered as a Luxembourg resident entity and will become liable to corporate income tax in Luxembourg with respect to the portion of its net income that is not taxed under Luxembourg domestic law or elsewhere. The 2023 budget bill clarifies that the non-taxation of the income of the Luxembourg tax transparent entity in the investor's jurisdiction must result in a difference of characterisation of the Luxembourg entity (tax transparent versus opaque). If the absence of taxation is due to the investors' tax status (ie, tax exempt entities) or results from the fact that the investors' jurisdiction does not levy corporate tax, the reverse hybrid rule should not be triggered.

Changes to so-called "Relibi law"

According to this provision, a 20% final withholding tax is levied on certain interest income paid to Luxembourg resident individuals. The 20% withholding tax must be levied by a paying agent. The 2023 budget bill clarifies that the paying agent must act in the course of its normal economic activity.

A new exclusion of such withholding tax is foreseen for interest paid on accounts which are not maintained in certain entities – including private wealth companies, credit establishments, and financial sector professionals – and certain investment funds, Also, the new exclusion would cover interest which is paid in respect of debt security not generated in the context of a public offering in a regulated market.

The amendment aims at limiting the scope of this provision to payment made by professionals acting in the financial sector. The 2023 budget bill also extends the deadline to opt for a final tax levy, when the paying agent is located outside of Luxembourg, to 31 December (instead of 31 March).

Amendment of profit participating premium regime

The profit participating premium regime was introduced by the 2021 budget law. Under this regime, an employer can grant to an employee, on a discretionary basis, a profit participative premium connected to the financial result of the employer. At the level of the employee, such premium benefits from a 50% tax exemption and, at the level of the employer, the payment remains tax deductible, provided certain conditions are met.

The 50% exemption for such premium is limited to 25% of the beneficiary's gross annual remuneration received the same year (excluding any benefits in cash and/or in-kind). In addition, the aggregate amount of such premium that may be allocated to employees is limited to 5% of the employer's profits for the year preceding the allocation of the premium.

The 2023 budget bill also allows taking into consideration the situation of an employer integrating a fiscal unity. This choice is optional. Where the 5% threshold regarding the employer's profit is replaced by 5% of the positive algebraic sum of the profits realised by the members of the fiscal unity during the accounting period preceding the allocation of the premium, there may be a higher amount of premium. In addition, and among other conditions, all the members of the fiscal unity will need to:

  • realise income that qualifies either as commercial profit, agricultural profit or profit derived from a liberal activity; and
  • maintain regular accounts with the same accounting norm during the year in which the participative premium is paid and during the preceding tax year.

To ease the verification of the conditions, the list of employees per employer benefitting from the premium as well as the amount of the premium allocated to them will need to be communicated to the relevant tax office.

Amendment of impatriate tax regime

The impatriate tax regime was introduced by the 2021 budget law (the regime being previously based on administrative guidance – that is, Circular 95/2 dated 27 January 2014, which has been abrogated since 1 January 2021). The impatriate regime provides for some lump-sum allowances which are paid to compensate for differences in cost of living and other costs in connection with the relocation of the employee in Luxembourg. Under certain conditions, the allowances paid by the employer are fully or partially tax exempt at the level of the employee. This regime currently applies to impatriate employees earning at least €100,000 per year. To enhance the attractiveness and competitiveness of Luxembourg, the 2023 budget bill reduces the minimum annual remuneration required for this regime to apply to €75,000.

Next steps

To enter into force, the 2023 budget bill will need to be approved by the Luxembourg Chamber of Deputies. Such approval, if any, should occur mid-December 2022.

For further information on this topic please contact Frédéric Feyten, Alejandro Dominguez, Ali Ganfoud, or Delphine Danhoui at CMS Luxembourg by telephone (+352 26 27 53-1) or email ([email protected], [email protected], [email protected] or [email protected]). The CMS Luxembourg website can be accessed at www.cms.law.