Abolishment of the temporary tax for the budget balance

Introduced in 2015, the 0.5% non-limited and non-deductible temporary budget balancing tax, applicable to individual resident and non-resident taxpayers on all their income (with some minor exemptions) where Luxembourg has the taxation right, is abolished as from 1 January 2017.

Review of the income tax rate scales

With an objective of social fairness, the Luxembourg progressive tax scale applicable to individuals will be amended. Additional tranches as well as two new marginal rates have been added, and generally the tax rates have been adjusted. The two new rates will apply as follows: 41% for an annual taxable income above EUR 150,000 (EUR 300,000 in case of joint taxation) and 42% for an annual taxable income above EUR 200,004 (EUR 400,008 in case of joint taxation).

These measures will result in a reduction of the tax charge for households in the lowest income group and in a respective increase of such charge for the group with the highest income.

Increase of the final withholding tax on income from savings

The final withholding tax of currently 10%, applied by paying agents to qualifying interest income derived by individual Luxembourg resident taxpayers in accordance with the Luxembourg law of 23 December 2005, as amended (the so-called 'RELIBI law'), will be increased to 20% as from 1st January 2017, applicable on the annual amount of such interest exceeding EUR 250.

Increase of the housing access aid measures

Several incentives regarding easier access to own housing will be introduced, such as:

  • a higher deductibility threshold (i.e., EUR 1,344 instead of EUR 672) for payments made under a home loan and savings contract, under certain conditions (i.e. contract subscribed before the age of 40, and with the aim to finance the construction, acquisition or transformation of the person's main residence);
  • increase of the mortgage interest deduction, which will be EUR 2,000 (instead of EUR 1,500) in the first year of occupation and following five years, EUR 1,500 (instead of EUR 1,125) for the next five years, and EUR 1,000 (instead of EUR 750) thereafter;
  • a 50% exemption of the rental income for the letting to licensed bodies engaged in the social rental management with the aim to provide housing support; and
  • the deemed rental income with respect to the main residence will be abandoned.

New sustainable mobility measures

A new form of tax credit of EUR 5,000 will, inter alia, be made available for the acquisition of certain vehicles with no harmful emissions. Such tax credit would amount to EUR 300 for cycle and cycles with pedal assistance. Such tax credit would not be available for company vehicles.

In our opinion, the view of the Chamber of Trade (Chambre des métiers) seems very pertinent. Indeed, it was pointed out that a direct incentive (e.g. an aid in the context of the purchase) would have been more appropriate than a tax incentive under the form of a tax credit, as such direct incentive would have facilitated the acquisition of these vehicles and thus target a wider population. During the Parliament debates on the Tax Reform, an amendment and a motion were rejected.

The tax treatment of the advantage in kind of company cars will be amended by introducing, compared to the current lump sum rate of 1.5% (of the car's value plus VAT), a variable tax rate, amounting between 0.5% and 1.8% depending on the ecological impact of the car. The advantage in kind of a cycle or a cycle with pedal assistance will be tax exempt.

New accounting obligations for liberal professions

There will be a new obligation for liberal professionals to keep regular accounting statements using a double-entry bookkeeping system, as it is currently the case for commercial and agricultural operators. This obligation is applicable for a turnover exceeding, as from 1 January 2017, EUR 100,000 (previously EUR 50,000).

In principle, liberal professionals were already concerned by this obligation but were generally exempted by virtue of the §161 (2) of the general tax law and the administrative circular n°30 of 15 May 1970. With the abolition of the §161 (2) as of 1 January 2017, the exemption will no longer be applicable.

Considering the large number of liberal professionals in Luxembourg, it seems surprising that no major concerns have been raised by this business community during the preparatory work of the Tax Reform considering the new obligation, and related consequences those professionals will be subject to.

Other tax measures

Some other tax measures have been adopted to offer tax relieves for individual taxpayers, increase flexibility or provide equal treatment within certain categories of taxpayers. These measures are broadly:

  • Increase of the tax credits for employees, pensioners, and independent professionals, subject to a social selectivity process based on income (i.e. the tax credit for an annual taxable income between EUR 11,266 and EUR 40,000 will increase from EUR 300 to EUR 600, with a subsequent progressive decrease up to EUR 0 after an annual taxable income of EUR 80,000).
  • Increase of the tax credit for single parents, which will be doubled from EUR 750 to EUR 1,500 for an annual net taxable income up to EUR 35,000, with a subsequent progressive decrease up to EUR 750 as from an annual net taxable income equal to EUR 105,000.
  • Increase from EUR 3,480 to EUR 4,020 of the deductible education allowance amount for children not part of the household.
  • Increase from EUR 3,600 to EUR 5,400 of the maximum amount for combined childcare costs, housekeeping costs and home assistance for disabled.
  • Increase of the limit for the deductibility of payments made under a retirement pension plan (prévoyance vieillesse), which will henceforth be EUR 3,200 per annum for each subscriber, irrespective of her/his age, as well as the implementation of a flexible possibility regarding the reimbursement of such pension plans (i.e. either payment in capital or life annuity, or a combination of both).
  • Merger into a single category of the debt interest deduction (currently EUR 336 per household member) and the insurance premium deduction (currently EUR 672 per household member), whereby the annual combined maximum deduction amount will be limited to EUR 672 per household member.
  • Introduction of the option to file an individual tax return instead of the collective tax returns for spouses or partners under a civil union. This option is available as of 1 January 2018 for both resident and non-resident taxpayers.
  • Certain alignment of the tax treatment of resident and non-resident married taxpayers, subject to the delivery of supporting evidence of their financial and wealth situation.