On 13 October 2021, the Luxembourg Government filed Budget Bill No. 7878 with the Luxembourg Parliament. Although it contains only limited tax measures for corporate taxpayers, the bill introduces a set of one-off tax measures in favour of individuals, along with some highly specific clean-up modifications.
The budget again shows the general approach that Luxembourg has elected to take to the stability of its fiscal framework, neither introducing new taxes nor substantially amending the corporate income tax legislation against the backdrop of the changing international tax framework.
The main tax measures in the budget bill are as follows:
European individual pension schemes ("PEPP"): introduction of tax provisions (Article 111ter of the Income Tax Law – "ITL") applicable to European individual pension schemes. These schemes are to be introduced into domestic law in line with bill no. 7774 implementing EU regulation 2019/1238. The new tax provisions would be similar those that already apply to the individual pension schemes referred to in Article 111bis ITL, in particular the tax treatment applicable to (i) payments made to individual pension schemes (conditions for deductibility), and (ii) reimbursements under pension scheme premiums (conditions for partial exemption). It should be noted that payments made under individual pension schemes and PEPPs should only be deductible up to an annual cumulative ceiling of EUR 3,200.
Qualifying home saving schemes: annual contributions made to qualifying home saving schemes are deductible within the prescribed ceilings and under the conditions in Article 111 ITL (including i.a. regarding the purposes to which such schemes are put). This would now also apply where the sums received at contract maturity are used to finance solar photovoltaic or solar thermal systems.
Lump sum taxation of temporary workers: introduction of lump sum taxation at 10% of salaried income received by temporary workers, subject to certain conditions.
Brexit-linked tax measures: removal of companies incorporated in the UK from any tax provisions concerning Member State companies (e.g. provisions relating to the Luxembourg participation exemption regime). This should be taken into account in the context of restructuring. However, for inbound and outbound dividend payments, the domestic exemptions in relation to UK companies should still apply.
Definition for ATAD-related measures (interest limitation rules): insertion of the definition of "consolidated group for financial accounting purposes", i.e. a group in which all constituent entities are fully consolidated within consolidated financial statements prepared in accordance with International Financial Reporting Standards or a Member State's national financial reporting standards (such as Luxembourg GAAP).
Next steps
The proposed measures (most of which are to be implemented as from tax years 2022) are shaped by the current situation post-pandemic; according to the government, this situation does not permit a major tax reform, but demands focus on maintaining a stable fiscal environment in Luxembourg.
However, as part of the government's plans to deter speculation with Luxembourg real estate assets, it has also announced the introduction of a bill within the next 12 months to amend Luxembourg's real estate tax rules. The aim of the bill would be to tackle real estate speculation by increasing the tax rates on unbuilt land and unoccupied residential real estate.
The budget bill will now follow the normal legislative process through parliament.
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