Luxembourg: ATOZ Insights - December 2017

Last Updated: 19 December 2018
Article by Atoz Tax Advisers
Most Read Contributor in Luxembourg, December 2018

Getting in the mood of the season's celebrations, the Luxembourg authorities, as is their custom, have put few tax reforms under the Christmas tree.

Indeed, 2017 is nearly behind us, 2018 is in the air, and coming with it is the budget law which brings along some new tax measures. The 2018 budget introduces measures on the investment tax credit, tax classes and non-resident taxpayers and the temporary reduced taxation of capital gains on sale of real estate. In addition, the Luxembourg tax regime of warrant plans has been amended by means of an administrative circular on 29 November 2017. This circular introduces an increase of the taxable basis of warrant plans, clarifies the conditions for employees to be eligible for the tax regime defined in the circular and amends the reporting obligations. We analyse below both the tax provisions of the 2018 budget law and the circular on warrant plans.

The Luxembourg authorities have also recently released a new circular on the conditions applicable to the Luxembourg undertakings for collective investment for obtaining a tax residence certificate. It confirms notably that RAIFs benefiting from the same tax regime as SIFs will be able to get a tax residence certificate and specifies under which conditions.

Luxembourg is also working to comply with its European obligations. As a result, the Luxembourg cost sharing VAT exemption regime (also referred to as "Independent Group of Persons") has been repealed by a Grand Ducal Decree published on 23 November 2017 and a Circular from the VAT authorities dated 7 December 2017. Consequently, Luxembourg is now compliant with the position of the Court of Justice of the European Union on this topic. The Luxembourg authorities are also working on various bills of law aiming to transpose the 4th anti-money laundering (AML) Directive into national law and amending, among others, the Luxembourg AML law of 2004. Finally, the European Directive on double taxation dispute resolution mechanisms, according to which European Member States will have to efficiently resolve double taxation disputes, has been approved. Luxembourg has until 30 June 2019 to implement the Directive into its laws and regulations.

Noticeably absent under the 2017 "Christmas tax tree" is the new IP regime for which a draft law was released at the beginning of August which has still not become law. However, we expect that the new regime will be adopted beginning of the New Year with effect as from New Year's Day.

2018 BUDGET: MAIN TAX MEASURES

OUR INSIGHTS AT A GLANCE

  • Measures in corporate tax include the extension of the scope of the investment tax credit to software acquisition as well as zero-emission vehicles.
  • For individual taxation, under certain conditions, non-resident and resident taxpayers will now be able to be taxed in the same manner. Married couples may also now choose to be taxed jointly or separately, and a tax credit for individuals of maximum 2,500 euros is now extended to plug-in hybrid vehicles.
  • Other measures include an extension of the scope of the VAT exemption for fund management services to the management of internal collective life insurance funds, as well as an extension of the reduced rate on capital gains realised on the sale of real estate.

On 14 December 2017, the 2018 budget law was passed by the Luxembourg Parliament. The 2018 budget law includes some important tax measures.

Corporate income tax measures

Scope of investment tax credit extended to the acquisition of software

The law extends the scope of the investment tax credit (bonification pour investissement) to the acquisition of software. However, the benefit of the investment tax credit is subject to certain conditions and limitations:

  • The investment tax credit only applies if the software is acquired from a third party. Therefore, acquisitions from related parties within the meaning of Article 56 Income Tax Law ("ITL") are excluded.
  • It is not possible to benefit both from an intellectual property regime and from the investment tax credit for the same software. Thus, if a taxpayer claims the investment tax credit benefit for the acquisition of specific software, the income generated by this software will not be able to benefit from an IP regime.
  • The global investment tax credit amounts to 8% for the first tranche of EUR 150,000 and 2% for the tranche exceeding EUR 150,000. However, the tax credit may not exceed 10% of the tax due for the tax year during which the operating year is ending, during which the acquisition was made.

Scope of investment tax credit extended to eco-friendly vehicles

The scope of the investment tax credit is extended to zero-emission cars under certain conditions.

Individual tax measures

Tax classes & non-resident taxpayers

As announced this summer by the Luxembourg Government, the law extends the scope of situations in which non-resident taxpayers will be able to be taxed in the same way as resident taxpayers (application of Article 157ter ITL).

The law provides that non-resident taxpayers who do not have at least 90% of their worldwide income taxable in Luxembourg will still be able to be taxed in the same way as Luxembourg resident taxpayers if the portion of their foreign income which is not taxable in Luxembourg amounts to less than EUR 13,000.

In addition, when determining whether the 90% requirement is met, the part of the salary income which becomes taxable in the residence State of the taxpayer in application of a double tax treaty (because the maximum amount of days spent by the taxpayer outside of Luxembourg, as provided by the tax treaty, is exceeded) is disregarded. This means that the part of the salary which is taxed in the residence State of the taxpayer is still assimilated to income taxable in Luxembourg in order to determine whether the 90% requirement is met. However, this applies only up to a maximum of 50 days spent outside of Luxembourg.

Finally, the law on the 2017 tax reform has granted married couples as of tax year 2018 the possibility to choose whether they would like to continue being taxed collectively in tax class 2 or whether they would like to be taxed separately. To complement this measure and provide married couples with more flexibility, the law provides that married couples will have until 31 March of the tax year following the tax year concerned (i.e. 31 March 2019 for tax year 2018) to make their choice.

Tax deduction for eco-friendly vehicles extended to plug-in hybrid electric vehicles

The tax deduction introduced last year for eco-friendly vehicles is extended to plug-in hybrid electric vehicles. The maximum tax credit amount applicable to these vehicles will be EUR 2,500.

Other measures of the law

Amendments to the rules on exchange of information upon request postponed

Following the decision of the Court of Justice of the European Union ("CJEU") in the Berlioz case (C-682/15), the Luxembourg rules on exchange of information upon request have to be amended in order to bring them in line with EU law.

In its initial form as released in October, the 2018 budget draft law included some amendments to the law of 25 November 2014 on the procedure of exchange of information upon request in order to take into account the conclusions of the CJEU in the Berlioz case.

However, following the opposition raised by the Luxembourg State Council on some of the amendments proposed, it has finally been decided to remove all provisions amending the law of 25 November 2014 and to deal with these changes in a separate draft law, which has very recently been adopted by the Government but not yet published at the time of the drafting of this article.

VAT changes

Some provisions of the VAT law will be amended, including the extension of the scope of the VAT exemption applicable to fund management services (article 44, § 1, d, of the VAT law) to the management of internal collective life insurance funds (fonds d'investissement internes collectifs d'assurance-vie) under certain conditions.

Extension of temporary reduced taxation of capital gains on sale of real estate

The temporary tax measure on the individual tax treatment of long term capital gains realised on the sale of real estate assets is extended until 31 December 2018.

This temporary measure was introduced in 2016 in order to improve the access to housing and provides that long term capital gains (i.e. capital gains realised after more than 2 years following the acquisition) realised between 1 July 2016 and 31 December 2017 are considered as an "extraordinary income" and are taxed at 1/4 of the rate otherwise applicable in accordance with the Luxembourg income tax law.

The 2018 budget law extends the application of this measure until 31 December 2018.

Other announcements - Warrant plans

During the presentation of the 2018 budget, a reform to the tax regime of warrant plans has been announced by Finance Minister Gramegna. Whereas a draft law was initially expected to be released in order to amend the regime, the Government announced later on that the change will be made by means of a circular, which was released on 29 November 2017. We present the changes introduced by the new circular in our dedicated article of these ATOZ Insights (see page 9).

To read this Newsletter in full, please click here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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