New tax measures announced for the Luxembourg 2017 tax reform

On 26 April 2016, Prime Minister Xavier Bettel delivered his State of the Nation speech, during which he highlighted some of the proposed changes to the Luxembourg tax system to be implemented in 2017.

Most of these measures had already been announced by the government in February 2016, amongst which was the expected progressive decrease of the corporate income tax rate from 21% to 18% (thus leading to a global tax rate of appr. 26% in 2018). Other promising actions pledged by the government in February targeted not only the taxation of corporations, but also of individuals. For more details on the measures announced in February, see our previous newsletter here.

On 21 April 2016, Finance Minister Pierre Gramegna presented clarifications and announced additional measures to be included in the tax reform for 2017, again for both individuals and corporations. These measures were confirmed by Prime Minister Bettel during his allocution before Parliament.

Additional measures for corporations:

Facing the challenge of maintaining Luxembourg's tax competitiveness, the government reaffirmed that the developments in the international tax landscape and in particular the transposition of the BEPS measures at the European level will be followed closely. The objective, said Finance Minister Gramegna, is to adapt the Luxembourg tax framework to these changes in order to ensure that it remains attractive while also respecting the new international and European standards, in the spirit of a level playing field.

In addition, the government announced the creation of specialised working groups to address various key topics for the competitiveness of the country, such as the development of start-ups and more generally of small- and medium-sized enterprises, as well as the introduction of a regime for an immunised reserve for investment.

To remain competitive and stimulate corporate investments in Luxembourg, in particular in the innovation sector, the government also proposed an increase in investment tax credit rates by one percentage point. Consequently, the complementary and global investment tax credits would be increased from 12% to 13% and from 7% to 8% respectively (while the current 2% rate for investments exceeding €150,000 would remain unchanged). The investment tax credit for assets approved for the special depreciation regime would be correspondingly increased by one percentage point, from 8% to 9% (while the current 4% rate for investments exceeding €150,000 would remain unchanged).

Finally, the Finance Minister gave some clarification on the proposed limitations to the tax losses carried forward. Tax losses incurred as from the tax year 2017 would only be offset against 75% of the annual taxable profit realised in future years and the carry-forward period would be limited to 17 years.

Additional measures for individuals:

The main measures proposed by the government, in addition to those announced in February, are:

  • The tax credit granted to single parents would only be reduced if the annual child alimonies exceed €2,208 (instead of €1,920).
  • The deductible amount of education allowance for children not part of the household would increase, from €3,480 to €4,020.
  • There would be an increase in the value of lunch vouchers from €8.40 to €10.80.
  • There would be an increase in the maximum tax amount deductible for combined childcare costs, housekeeping costs, and home assistance for the disabled, from €3,600 to €5,400 per year.
  • The maximum tax amount deductible for contributions to qualifying home saving schemes would increase, from €672 to €1,344, for individuals aged up to 40.
  • Equality of tax treatment would be introduced between cross-border workers and residents living in Luxembourg with respect to the applicable tax classes and tax allowances (if applicable).

The announcements made by Finance Minister Gramegna and Prime Minister Bettel show Luxembourg's willingness to maintain its tax competitiveness in the current, evolving international tax landscape. Individual taxpayers should also be positively affected by the proposed tax reform, in line with the government's aspirations towards a fair tax system.

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