On 14 October 2020, the Luxembourg government published the 2021 budget bill of law (the Bill). An earlier announced broader tax reform has been postponed due to the COVID-19 outbreak. The main tax measures concern a new tax on income from Luxembourg real estate and changes to employee incentive plans.
The date of entry into force of the law will be 1 January 2021, unless otherwise specified for certain provisions.
Real estate investments
Introduction of a new real estate tax for investment vehicles
Certain investment vehicles will be subject to a new real estate tax, at a flat rate of 20%, on income derived from real estate assets situated in Luxembourg.
The investment vehicles in the scope of this new tax are specialized investment funds (SIFs), so-called "Part II" undertakings for collective investment (UCIs) and reserved alternative investment funds (RAIFs), that are not, briefly put, a tax transparent partnership or a fonds commun de placement (FCP). The tax would apply to income and gains derived from Luxembourg real estate assets held directly and indirectly if they are held through partnerships or FCPs.
Targeted real estate income includes gross rental income, capital gains upon the transfer of a Luxembourg real estate asset (at the moment of a sale, contribution, merger, liquidation, etc.) and income from the disposal of "shares" in certain tax transparent entities and FCPs, to the extent the value of these "shares" reflects the value of real estate located in Luxembourg, including when these transfers do not lead to cash generation (e.g., intragroup restructuring).
- Private wealth management companies (SPFs) may
no longer indirectly hold real estate via a partnership or a FCP.
This prohibition concerns all real estate assets and not only those
situated in Luxembourg.
- Significant changes in relation to registration duties: a
contribution of real estate situated in Luxembourg to the capital
of a civil or commercial company would become subject to a
registration duty of 2.40% as from fiscal year 2021, as opposed to
the current rate of 0.6%.
- The rates and period of the accelerated amortization are amended in order to decrease speculation on rental property, passing, as a general rule, from 6% to 4% and from 6 years to (less than) 5 years after the construction of the real estate asset.
Personal income taxation
Tax regime for bonuses granted to employees
A bespoke tax regime is to be introduced for bonuses granted to employees on the basis of an employer's annual results. These bonuses would be exempt for 50% from the employee's Luxembourg personal income tax, while being fully tax deductible at the level of the employer as operational expenses.
This regime will only be available for employees that are (i) Luxembourg taxpayers with income derived from an employment activity and (ii) affiliated to the Luxembourg social security regime or any social security regime covered by a bilateral or multilateral social security convention which applies to Luxembourg.
This exemption is capped at a maximum of 25% of the annual gross remuneration. In order to be eligible for this exemption, the employer will need to comply with certain conditions, most notably that the aggregate amount of bonuses awarded, under this regime, as a function of the employer's annual results may not exceed 5% of the employer's annual result for the year immediately preceding the year in which the bonus is granted.
The government announced that in parallel the circular on the stock-option regime should be abolished at year-end.
Impatriate regime implemented into Luxembourg tax legislation
The Bill would codify the Luxembourg impatriate regime by transposing the administrative circular into Luxembourg tax legislation, albeit with some changes. While the administrative circular sets the allowance for impatriate expenses on a lump-sum basis (at the lower of EUR 50,000 and 30% of the impatriate worker's total annual fixed remuneration), the Bill provides for an allowance equal to 50% of the impatriation premium granted by the employer.
Other changes include deleting the requirement of having at least twenty full-time employees on the employer's payroll, increasing the minimum yearly remuneration to EUR 100,000 (currently EUR 50,000), and extending the duration of the regime from 6 to 9 years.
Other tax measures
- With effect as from fiscal year 2020, the Bill proposes to
allow the formation of a horizontal fiscal unity with companies
that are already vertically integrated without triggering the
potentially adverse effects of a dissolution of such vertical
fiscal unity within the 5-year minimum period. This is possible
only if the integrating company remains the same and the switch
merely leads to an extension of the fiscal unity. Groups wishing to
benefit from this special rule have until the end of the 2022 tax
year. After this deadline, the general principles governing the
dissolution of an integrated group will apply to the entities
concerned. Taxpayers will thus be advised going forward to request
the application of the horizontal fiscal unity (which entails a
vertical dimension), where possible.
- The Bill proposes to set a progressively decreasing
subscription tax rate for assets of UCIs governed by the law of 17
December 2010 (currently subject to a fixed annual subscription tax
of 0.05% of the net asset value) in "environmentally
sustainable economic activities". An auditor
certification could be required. These new provisions are scheduled
to come into force on 1 January 2021. Proof of compliance with the
rates, which must normally be provided electronically, may be
subject to subsequent adjustments until 1 January 2022.
- A "Carbon tax" is instituted in the form of an additional autonomous excise duty on oil and gas products. The applicable rates will already anticipate the increase in the price of carbon in 2022 to 25 euros per ton of CO2 and 30 euros per ton of CO2 in 2023.
The Bill will now go through the parliamentary process and is expected to be adopted before the end of December. Parliament may still introduce amendments.
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.