On
this Page:
- LUXEMBOURG
RESIDENCE AND LIABILITY FOR TAXATION
- LUXEMBOURG INCOME
TAX
- LUXEMBOURG 'MUNICIPAL'
BUSINESS TAX ON PROFITS
- LUXEMBOURG THE
FORTUNE TAX
Luxembourg
is a highly-taxed country and there are no special
regimes for the foreign employees of 'offshore'
companies. The main taxes are Income Tax, the Municipal
Business Tax on Profits, and a wealth tax, the Fortune
Tax, which was however repealed as respects individuals
in 2005. VAT applies to most goods and services.
A
final withholding tax of 10% on residents' interest
income from Luxembourg paying agents (something
quite separate from the Savings Tax Directive)
introduced in 2005 was struck down by the EU;
as of 2007, the 10% final tax applies to all interest
income received by Luxembourg residents from EU
paying agents.
In
April 2010, Luxembourg’s Finance Minister
Luc Frieden unveiled details of the government’s
ambitious proposals to reduce spending and to
increase tax revenue, in a bid to achieve a balanced
budget by 2014, and to maintain public debt at
a manageable level.
Eager
to generate additional tax revenue of around EUR200m,
the government outlined the following proposals:
- To
increase the maximum tax rate from 38% to 39%;
-
To introduce a special tax rate of 42% for annual
income in excess of EUR250,000;
-
To fix a ceiling on tax deductions for businesses
electing to issue bonus payments or “golden
handshakes”;
-
To increase the solidarity tax from 2.5% to
4% for households and from 4% to 5% for businesses
- To
introduce a 'crisis tax' of 0.8% on all salary
and investment income; and
-
To introduce a tax on financial activities (following
an agreement at European level).
Additionally,
Luxembourg’s government does not intend
to raise tax thresholds with inflation.
The
government has confirmed that a review will take
place in 2012 to evaluate the measures taken in
light of the general development of the country’s
economic and financial situation.
Luxembourg
Residence and Liability for Taxation
For taxation purposes, an individual
is either resident or non-resident, and nationality
is not a factor in determining tax status. An
individual is considered resident in Luxembourg
if he maintains a residence there with the intention
of remaining on other than a temporary basis.
A stay of more than 6 months amounts to residence.
In legal terms, an individual is resident if either
his tax domicile (domicile fiscale or Wohnsitz)
or his usual abode (lieu de sejour habituel or
gewohnlicher Aufenhalt) is in Luxembourg.
Double
Taxation Treaties (of which Luxembourg
has entered more than 50 at the time of writing)
may affect the residence and tax status of individuals.
The
tax treatment of non-resident individuals is described
under Offshore Legal
and Tax Regimes.
Residents
are liable to tax on their world-wide income.
Luxembourg
Income Tax
Income tax (Impot sur le Revenu or IR) is charged
on nine types of income:
- Income
from trade or business - business income
- Professional
income
- Agricultural
and forestry income
- Self-employment
income
- Employment
income
- Pensions
and annuities
- Investment
income
- Income
from letting and leasing
- Other
income (including capital gains)
There
are many allowances, deductions and exemptions
in the Luxembourg income tax regime, including
child relief, child tax credit, extra-ordinary
childrens abatement, mono-parental abatement,
deductions for employment-related expenses,
deductions for interest payments, deductions
related to share purchase, exemptions for pay
for unsocial hours worked, part exemptions on
dividend income, etc etc. These are described
in great detail in the legislation.
Income
tax bands and rates depend on family status,
and are progressive to 38% (plus a 2.5% unemployment
fund surcharge).
In
May 2008, indexation of all existing tax brackets
by 6% was announced, to take effect from 2009,
although later that year, in October 2008, the
government announced its intention to adjust
the rate of tax on personal income linearly at
a rate of 9% instead of 6%.
Dividends
are normally taxed at source (via a withholding
tax of 15%) and are added to total income, with
an appropriate tax credit.
Employment
income (number 5 above) is taxed at source through
a monthly withholding tax applied by the employer,
which additionally deals with social security
contributions. All other types of income are declared
on an annual tax return which is to be filed by
31st March of the year following the year being
dealt with. Quarterly advance payments of tax
are made on 10th of March, June, September and
December, on the basis of one quarter of last
year's actual tax bill.
See
Double Taxation Treaties
for details of the impact of treaties on the tax
position of those foreign nationals covered by
treaties.
in
2010 , social security charges were:
-
Sickness
insurance, 2.95% each from employee and employer;
- Health
insurance for office workers, 2.95% from the
employer
-
Pension
insurance, 8% each from employee and employer
-
Accident
insurance, between 0.43% and 5.92% for the
employer.
-
Health
at work insurance, 0.11% from the employer
-
Unemployment
insurance, 1.4% from the employee.
Additionally,
from 2009, employers must pay between 0.4% and
2.22% to finance the newly created mutual insurance
institution.
Luxembourg
Municipal Business Tax on Profits
See Direct Corporate Taxation
for a description of how the Municipal Business
Tax is calculated. The same principles are applied
to individuals when they undertake business activity
that would be caught by the tax, for example through
sole proprietorships or partnerships. However,
there is a minimum level of business income below
which the tax does not apply, so that individuals
in a small way of business will not pay it.
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Luxembourg
The Fortune Tax
The Luxembourg Net Worth (Fortune) Tax was abolished
for individuals in 2005.
It
used to be levied on all individuals who are liable
to pay income tax. The tax distinguished between
resident and non-resident individuals on the same
basis as does income tax.
Resident
individuals paid net worth tax on their world-wide
assets under the following headings:
- Agricultural
and forestry net worth; the values are based
on those current when the Germans introduced
the tax in 1940;
- Real
estate net worth; the values are likewise
those obtaining in 1940, even for more recent
and foreign constructions;
- Net
worth of a business; the calculation is basically
assets less liabilities, and is similar to
the calculation of net worth as applied in
calculating corporate income tax liability
(see Direct Corporate
Taxation), with some adjustments;
- Other
element; this category includes cash, valuables,
shareholdings, insurances, etc.
Liabilities
and debts were deducted from the asset figure,
and there were various other deductions and allowances.
The values were agreed once every three years
unless there was a major change. The rate of net
worth tax was 0.5% of the final net asset value,
and it was payable in four equal instalments during
the year.
Non-resident
individuals paid net worth tax on their Luxembourg
assets under the same headings as for residents,
however they were not entitled to deductions and
allowances.
Double
Taxation Treaties may affect the liability
of foreign nationals to the net worth tax.
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