The Luxembourg Parliament has adopted the Budget Bill for 2013 on 13 December 2012.

Lengthy discussions took place during the legislative process with respect to measures relating to corporations, and particularly regarding the increase of the minimum corporate income tax for financial companies and the introduction of a progressive minimum corporate income tax for other companies.

As indicated in our Tax Alert published in November1, the question of the compliance of such minimum taxes with double tax treaties concluded by Luxembourg and general principles applicable in tax matters such as the principle of fiscal capacity (capacité contributive) of taxpayers have been raised by the Luxembourg Chamber of Commerce and the State Council (Conseil d'Etat). Their conclusions have been rehearsed by the Commission of Finance and Budget of the Parliament (Commision des Finances et du Budget).

Despite of their comments on the opportunity and the legality of the announced measures, the Parliament considered that most of them should be enacted, considering the necessity to tackle current and envisioned budget constraints.

As some of these measures (such as for instance the application of the progressive minimum corporate income tax to Luxembourg companies holding real estate in a foreign jurisdiction or running a business activity through a permanent establishment situated in another jurisdiction) may be in breach with general principles applicable to tax matters, some double tax treaties concluded by Luxembourg or even some EU Directives (such as the Parent-Subsidiary Directive), we can not exclude that certain taxpayers may challenge the application of these new measures before Luxembourg courts. The comments of the State Council and the Commission of Finance and Budget of the Parliament will represent useful guidelines in this respect. One positive point to mention however is that the tax authorities published a newsletter on their website on 21 December 2012 indicating that assets generating income which are exclusively taxable in another country in application of double tax treaties concluded by Luxembourg will be ignored for the purpose of the computation of the progressive minimum corporate income tax. The tax authorities explicitly refer to real estate assets but one could also believe that it will apply to foreign permanent establishments of Luxembourg companies.

Certain amendments proposed during the legislative process have also however been adopted and will smoothen the impact of the Budget Bill for Luxembourg corporate taxpayers. All amendments proposed in relation with the taxation of individuals have been enacted. In addition, a Circular in relation with the change of the tax regime applicable to stock-options has been issued by the tax authorities on 20 December.

The main new tax measures applicable as of 1 January 2013 are described below.

I - Companies

1.   Tax rate

Increase by 2% of the solidarity surcharge, i.e. from5% to 7%. As a result, the total income tax rate for companies incorporated inLuxembourg City, including the municipal business tax, will increase from28.80% to 29.22%.

2.   Increase of the fix minimum corporate income tax

Increase of the minimum flat tax to EUR 3,210 (including the 7% solidarity surcharge). Currently, a minimum flat tax of EUR 1,575 (including the 5% solidarity surcharge) per annum is levied on non-regulated entities2 if the sum of their financial assets (including transferable securities, loans, bank deposits) exceed 90% of their total assets.

For the application of the minimum corporate income tax of EUR 3,210, the law does not differentiate anymore companies which are or not subject to the control of a supervisory authority. The criteria to apply this fix minimum corporate tax burden is only based on the composition of the balance sheet of the company at hand.

It is also worth mentioning that this fix minimum corporate income tax burden will also apply to Luxembourg companies holding real estates situated in another country through a tax transparent company (units in the later are considered rather than the property itself).

3.   Introduction of the progressive minimum corporate income tax

As previously indicated in our Tax Alert, the Budget Law for 2013 introduces a minimum corporate income tax for companies other than financing companies subject to the EUR 3,210 fix corporate income tax. This tax will be computed as follows (including solidarity surcharge):

  • EUR 535 for companies having a total balance sheet of less than EUR 350,000.
  • EUR 1,605 for companies having a total balance sheet higher than EUR 350,000 and lower or equal to EUR 2,000,000.
  • EUR 5,350 for companies having a total balance sheet higher than EUR 2,000,000 and lower or equal to EUR 10,000,000.
  • EUR 10,700 for companies having a total balance sheet higher than EUR 10,000,000 and lower or equal to EUR 15,000,000.
  • EUR 16,050 for companies having a total balance sheet higher than EUR 15,000,000 and lower or equal to EUR 20,000,000.
  • EUR 21,400 for companies having a total balance sheet higher than EUR 20,000,000.  

The “total balance” sheet is defined as the closing balance sheet of the current financial year.

Contrary to the Budget Bill, the law does not target anymore to foreign companies owning assets in Luxembourg which are not held through a permanent establishment.

4.   Limitation of the minimum corporate income tax for tax consolidated groups

In case of tax consolidated group, all the companies of the group are subject to the minimum corporate income tax. The aggregate minimum corporate income tax burden of the group tax is due by the parent company. However, in such as case, the maximum amount due by the group will be limited to EUR 20,000 (EUR 21,400 together with the solidarity surcharge).

5.   Minimum corporate income tax treated as an advance

The minimum corporate income tax burden will be treated as an advance for future corporate income tax liability. It is however not refundable (as opposed to ordinary advances).

6.   Minimum corporate income tax and tax credits

It will not be possible to reduce the minimum corporate income tax charge with available tax credits (which will be carried forward in such a case).

7.   Net wealth tax reduction

The government initially proposed that the net wealth tax reduction should be limited to the corporate income tax computed after having taken into account tax credits. The Parliament did not adopt this proposal. Tax laws remain unchanged in this respect and the net wealth tax deduction remains subject to the limit of the corporate income tax computed before application of tax credits. No net wealth tax reduction is however applicable if the company is only subject to the minimum corporate income tax.

8.   Tax credit for investment (art. 152bis LITL)

The Budget Law provides for (i) the reduction of the complementary investment (in general words, the amount of new investments exceeding the amortization of existing qualifying assets) tax credit rate from 13% to 12% and (ii) the reduction of the global investment tax credit rate from 3% to 2% (for the portion of investments above EUR 150.000).

II - Individuals

All the measures announced on 8 November 2012 regarding individuals have been enacted.

1.   Tax rate

Increase by 3% of the solidarity surcharge, i.e. from 4% to 7%. The rate will be 9% for class 1 or 1a taxpayers having a taxable income of more than EUR 150,000 and class 2 taxpayers having a taxable income of more than EUR 300,000.

Introduction of a new marginal tax rate: 40% for taxable income of more than EUR 100.000 (class 1 and 1a taxpayers) / EUR 200.000 (class 2 taxpayers).

The maximum aggregate income tax rate will thus be of:

  • 42.8% for a taxable income ranging from EUR 100,000 toEUR 150,000 for class 1 and 1a taxpayers (or 200,000 to EUR 300,000 for class 2taxpayers);
  • 43.6% for a taxable incomeexceeding EUR 150,000 for class 1 and 1a taxpayers (or EUR 300,000 for class 2taxpayers).  

In addition, taxpayers are subject to the non tax deductible dependence contribution of 1.4%. The maximum rates thus range from 44.2% to 45% in practice.

2.   Interest deduction

Reduction by 50% of the maximum deduction for interest expenses, which will be limited to EUR 336 per taxpayer.

3.   Deduction for travel expenses

Reduction by EUR 396 of the deduction for travel expenses between the taxpayer's home and his work, the first four distance units being no longer taken into account. The lump-sum deduction of EUR 396 per annum is thus abolished and the maximum deductions are reduced from EUR 2,970 per annum to EUR 2,574 per annum.

4.   Amendments to the stock options regime

The parliamentary comments on the Budget Bill for 2013 announced the amendment of the tax regime applicable to the holding of stock-options by individuals.

On 20 December 2012, a new circular has been issued in this respect by the Luxembourg tax authorities.  This new Circular 104/2 supersedes the former Circular  of 11 January 2002 and will be applicable as of 1 January 2013.

The only change in the new Circular is relating to the the determination of the market value of transferable non listed options. Such market value is determined either in accordance with a recognised valuation method (e.g. Black and Scholes) or by relying on a value equal to 17.5% (instead of 7.5% in the previous Circular) of the market value of the underlying shares linked to the options at the date of the granting of such options.