Luxembourg:
Luxembourg budget law adopted in 2021, new tax measures introduced
December 18, 2020
Arendt & Medernach
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A request for exemption from the second round of elections was submitted to the State Council. Most of the provisions will come into effect on January 1, 2021. The main tax measures (more details on the provisions can be found here_) included in the new law include:
– – A new “participation bonus” regime for employees (benefit from a 50% tax exemption under certain conditions). This replaces the current stock option system (as set out in circular no. 104/2 of November 29, 2017), which is to be abolished with effect from the 2021 financial year. Whether the tax authorities will issue a circular on this new regulation has yet to be confirmed.
– – Changing the system for highly skilled and skilled workers (Impatriates), including the option for employers to grant an “Impatriation Bonus” which benefits from a tax exemption of up to 50% (under certain conditions) for an amount not exceeding 30% of the annual remuneration of the respective impatriate. This measure includes the repeal of circular no. 95/2 of January 27, 2014 on the current tax system with effect from the 2021 financial year.Employees who benefit from the repealed circular and whose employment in Luxembourg began in the period 2016 to 2020, can continue to use the old circular (under certain conditions).
– – Reduced subscription tax for sustainable investment fundsat a rate that decreases depending on the level of investment in sustainable activities within the meaning of Article 3 of Regulation (EU) 2020/852 of June 18, 2020.
– – A flat property tax of 20% on gross income (Rents and capital gains) derived from real estate in Luxembourg by SIFs, UCIs and RAIFs. In addition, each SIF, RAIF and UCI must declare by May 31, 2022 whether they held real estate in Luxembourg (directly or through a transparent entity) in 2020 and 2021. If a fund fails to report in a timely manner, the tax administration may impose a flat-rate fine of EUR 10,000. Structures through which real estate is held outside Luxembourg and funds that are considered transparent for Luxembourg tax purposes will not be affected by this measure. In addition, the 20% tax does not apply if Luxembourg real estate is held by a fully taxable domestic or foreign company.
– – Final enactment of an expected restriction on SPFswho can no longer hold real estate through partnerships or other tax-transparent companies from July 1, 2021.
– – Increase in the property transfer tax rate Survey of contributions from Luxembourg real estate to the share capital of Luxembourg civil or commercial companies from currently 1.1% to 3.4%.
– – Change of tax consolidation system
to enable a group benefiting from “vertical consolidation” to form a new group that will be integrated through “horizontal consolidation” without any negative tax consequences for the individual members of the tax consolidation group, subject to the conditions and until the 2022 financial year.
Final remarks
The proposed measures are primarily due to the COVID-19 crisis and the resulting budget constraints, as well as the will to ensure social fairness. Contrary to some expectations, the government has made a conscious decision not to raise or introduce any new taxes that would hamper the rapid recovery of the local economy.
As a fiscal competitiveness measure, the modified impatient population system could prove to be an effective tool in practice: employers who have relocated or are considering moving to Luxembourg may find the impatient population system particularly attractive for relocating their employees.
The government had long announced that it would reform the rules for real estate in Luxembourg. However, it is important to underline the limited scope of the new measures in this regard. In particular, the new 20% levy will have no impact on pan-European real estate funds (which regularly use Luxembourg fund structures) provided they do not hold any real estate assets located in Luxembourg.
How can we help?
The tax law partners and your usual contact persons at Arendt & Medernach are at your disposal to further evaluate and advise the effects of the new measures on your tax matters.
The content of this article is intended to provide general guidance on the subject. A professional should be obtained about your particular circumstances.
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