Introduction

On 7 November 2012 the Bill of Law n° 6497 (hereafter the Bill of Law) introducing new tax measures for corporations and individual taxpayers was submitted to the Luxembourg Parliament.

On 13 December 2012 the Bill of Law was approved by the Luxembourg Parliament.

The new tax provisions will be applicable as from 1 January 2013. Please find below a summary of the main changes impacting the taxpayers.

New tax measures affecting corporations

Changes on the minimum flat tax

The current minimum flat tax for corporations amounting to EUR 1,575 (including the contribution to the Employment Fund also referred to as Solidarity Surtax) has been introduced since 1 January 2011. The corporations covered by this measure are those that are not subject to a regulatory authority (for instance the CSSF) and where more than 90% of asset items consist of financial assets, transferable securities and cash at bank.

The Bill of Law foresees an increase of the minimum flat tax amount to EUR 3,210 (including the Solidarity Surtax) and extends its scope to regulated entities.

Therefore, SICARs and regulated securitization companies will also be subject to the EUR 3,210 minimum flat tax if their total balance sheet falls above the aforementioned minimum 90% threshold. As regards to the 90% threshold, it is worth noting that interests held in tax transparent partnerships (eg Société Civile Immobilière) will also be considered for 90% threshold computation purposes.

In addition, a new minimum flat tax has been introduced to affect all corporations not falling in the scope of the above minimum flat tax EUR 3,210. It will impact corporate taxpayers whose portfolios do not meet these criteria and have their statutory seat or central administration in Luxembourg. This new minimum flat tax applicable to such companies whose portfolios do not meet the eligibility criteria above, is progressive and its amount varies depending on the balance-sheet total amount as follows:

Click here to view table.

The main characteristics of the minimum flat tax are the following:

  • the flat tax is meant to be an alternative minimum tax due in cases where the corporate taxpayers are in loss position or whose tax liabilities are lower than the above-mentioned amounts. Being treated as an advance on the Corporate Income Tax (CIT) due for the future, in those cases the minimum flat tax will be creditable against future CIT. Minimum flat tax is not refundable;
  • In case of fiscal consolidation, all companies of the tax consolidated group will be subject to the minimum flat tax. The parent company of the tax consolidated group will pay the aggregate amount of minimum flat tax. However, the total amount due by the consolidated group will be limited to EUR 21,400 (including Solidarity Surtax);
  • available tax credits (eg for hiring unemployed people or for investments) will not reduce the minimum flat tax.

Some discussion has occurred in relation to the minimum flat tax and its compatibility with European Directives and Double Tax Treaties (DTTs) concluded by Luxembourg. This discussion arises as a result of the fact, the majority of corporations likely to be subject to the EUR 3,210 minimum flat tax are those which derive mainly income from financial instrument ie dividends or capital gains on disposal of shares. Via the minimum flat tax, Luxembourg would apply taxation of income that would, in principle, be tax exempt under the conditions provided for by the EU Parent-Subsidiary Directive.

Similarly, under the new rules, a Luxembourg corporation holding real estate in a Treaty Country may be subject to a tax charge up to EUR 21,400 whereas the concerned DTT provides for an exemption from Luxembourg taxes of the rental income as well as the capital gains arising from the disposal of the real estate property. The legality of these new flat taxation measures is therefore likely to be challenged by taxpayers. In this context, and in order to take into account the concerns of the investments in real estate sector, the Luxembourg tax authorities have issued official guidelines on 21 December 2012. According to these guidelines, Luxembourg companies directly holding real estate assets in a Treaty Country will have the right to exclude the net book value of such real estate for Total Balance Sheet computation purposes.

Net Worth Tax (NWT) reduction

Currently, Luxembourg corporations are entitled to reduce their NWT liability by constituting and maintaining a reserve (corresponding to 5 times the NWT amount) during 5 years. However, the NWT liability reduced is capped to the Corporate Income Tax amount due for the related tax year (including Solidarity Surtax and before deduction of tax credits).

The Bill of Law proposes to restrict the NWT deduction. The NWT amount reduced is capped to the Corporate Income Tax amount (including Solidarity Surtax and still before deduction of tax credits). However, the minimum flat tax will be disregarded for the calculation of the maximum NWT reduction amount. Only Corporate Income Tax due in excess of the minimum flat tax will be taken into account.

Solidarity Surtax increase

The Bill of Law provides for an increase of the Solidarity Surtax from 5% to 7%. As a result, the effective Corporate Income Tax rate will amount at 29.22% for corporations based in Luxembourg-City (instead of 28.80% currently).

New tax measures affecting individuals

The main measures are:

  • introduction of a new bracket into the Income Tax schedule for taxable income exceeding EUR 100,000 (for tax classes 1 and 1a ie single taxpayers mainly) and EUR 200,000 (for tax class 2 ie jointly taxed individuals). The marginal tax rate amounts to 40%
  • increase of 3% of the Solidarity Surtax, ie:
    • from 4% to 7% for individual taxpayers with taxable income not exceeding EUR 150,000 (for tax class 1 or 1a) and not exceeding EUR 300,000 (for tax class 2);
    • from 6% to 9% for individual taxpayers with taxable exceeding EUR 150,000 (for tax class 1 or 1a) and exceeding EUR 300,000 (for tax class 2);
  • therefore, the 2013 maximum marginal income tax rates applicable to individuals should range between 42.80% and 43.60%;
  • the existing rules dealing with taxation of Stock-options plans will be amended. A Circular was issued by the Luxembourg tax authorities on 20 December 2012. The new regime is applicable as from 1 January 2013;
  • reduction of the lump sum deduction for employees' travel expenses: The maximum annual lump sum deduction for employees' travel expenses is limited to EUR 2,574;
  • cut of special expenses for debit interest by 50%: The maximum annual deduction for debit interest on consumer loans is to be limited to EUR 336 per member of the taxpayer’s household per year (vs. EUR 672 currently).