On 15 December 2022, the Luxembourg Parliament approved budget bill n° 8080, for 2023, which had been presented on 12 October 2022 by the Luxembourg Government (the Budget Bill). Despite the current economic and political context, the Budget Bill solely modernizes and clarifies certain aspects of Luxembourg tax provisions without increasing the tax burden of taxpayers.

Most of the tax measures included in the Budget Bill will enter into force on 1 January 2023 and some measures will be applicable as from tax year 2022 (subject to confirmation by the Luxembourg State Council that no second hearing is required).

Clarification of the reverse hybrid mismatch rule

In a nutshell, the reverse hybrid rule (Article 168 quater of the amended Luxembourg income tax law, LITL) provides that a Luxembourg tax transparent entity (such as a partnership) could become subject to Luxembourg corporate income tax (impôt sur le revenu des collectivités) on the portion of the net amount of income that is not otherwise taxed under Luxembourg tax law or the laws of any other jurisdiction, if the majority of its investors are located in a jurisdiction or jurisdictions which regard the Luxembourg entity as opaque (which could otherwise lead to an absence of taxation of the income realized by the investors through the Luxembourg entity).

The Budget Bill clarifies that, as from tax year 2022, a relevant Luxembourg entity could become taxable if an absence of taxation of income results only from a difference in the qualification of the Luxembourg entity between the jurisdictions involved (i.e. qualification as tax transparent in Luxembourg and tax opaque in the jurisdiction of the investors). This means that the reverse hybrid rule should not apply if an absence of taxation results from tax-exempt investors (benefiting from a subjective exemption) or from investors resident or established in a no-tax jurisdiction.

This is a welcome clarification to the scope of application of the reverse hybrid rule in Luxembourg that confirms the market practice and is in line with the opinions published by the professional associations (such as the Association of the Luxembourg Fund Industry, ALFI).

Extension of the deadline for filing income tax returns granted to taxpayers

The Budget Bill extends the filing deadline for corporate taxpayers from 31 May to 31 December and for individuals from 31 March to 31 December of the year following the relevant tax year (§167 of the amended general tax law of 22 May 1931, Abgabenordnung).

This formalizes the current administrative practice in that respect and provides further legal certainty for the taxpayer. As a consequence, however, additional extensions of deadlines should no longer be granted (unless exceptions apply).

The Budget Bill applies to corporate income tax, municipal business tax and personal income tax due for tax year 2022 and onwards, and net wealth tax due for tax year 2023 for net wealth tax and onwards.

More flexibility for the "profit-sharing bonus" regime

The Budget Bill modifies the profit-sharing bonus regime (prime participative) by allowing the qualifying employee to receive a higher amount. The profit-sharing bonus (Article 115 (13) (a) LITL) allows the employer to allocate to their employees a profit-sharing bonus, which is eligible for a 50% exemption if certain conditions are met.

Currently, one of the conditions is that the profit-sharing bonus must not exceed 5% of the positive result of the operating year immediately preceding the one for which the bonus is granted.

The Budget Bill provides that the results of all companies forming part of a fiscal unity can be aggregated to assess the 5% threshold (provided that a fiscal unity existed during the year in which the profit-sharing bonus was granted, as well as during the year immediately preceding that year). As a consequence, employers belonging to a fiscal unity are incentivised to grant a higher bonus to their employees.

A list of all employees who receive the bonus must also be submitted to the tax authorities during the year in which the bonus is granted, otherwise the tax authorities may challenge the exemption of half of the participation bonus.

This change applies as from 1 January 2023.

Modification of the impatriate tax regime

In order to attract talent to Luxembourg, the Budget Bill softens the conditions of the impatriate regime (Article 115 (13) (b) LITL) which provides for certain lump-sum allowances to be paid under certain circumstances to employees who become Luxembourg tax residents in order to compensate for differences in the cost of living and other relocation charges.

Within the framework of the impatriate regime, several expenses paid by the employee in the context of their establishment in Luxembourg are exempt from income tax for a maximum of 8 years as from the year of entry into service in Luxembourg.

Currently, one of the conditions of the impatriate regime is that the employee receives an annual gross fixed remuneration of at least EUR 100,000.

The Budget Bill lowers this threshold from EUR 100,000 to EUR 75,000 (excluding benefits).

This change applies as from 1 January 2023.

Modifications of the Relibi Law

The Budget Bill proposes several amendments to the amended Luxembourg law of 23 December 2005 (Relibi Law):

  • It clarifies the definition of paying agent (Article 3 of the Relibi Law) by specifying that the paying agent must act in the course of its normal economic activity. The Budget Bill formalises a practice which considers as paying agents only professionals of the financial sector who pay interest in the course of their normal economic activity and excludes interest payments which are made outside the regulated market. The Budget Bill also refers to the draft law transposing Directive 2003/48/EC, which considers that a bank intervening only in a purely passive manner is not considered as a paying agent.
  • It adds an exclusion for interest payments made occasionally between private persons (other than credit institutions, other professional of the financial sector, private wealth management companies (SPFs), UCITs and UCIs within the meaning of the amended law of 17 December 2010) or where the debt instrument has not been publicly issued on a regulated market. This new addition limits the scope of the Relibi Law to public savings.
  • It postpones, until 31 December (instead of 31 March), the deadline for the option of beneficial owner to apply the Relibi Law when the paying agent is located outside Luxembourg.

VAT rates

A separate bill n°8083 (the VAT Bill) was introduced to reduce the currently applicable VAT rates by 1%, except for the super-reduced rate which remains at 3%. Provided that the VAT Bill is approved by the Luxembourg Parliament, the new VAT rates should be as follows:

  • Standard VAT rate of 16%.
  • Intermediary VAT rate of 13%.
  • Reduced VAT rate of 7%.

This measure should apply for tax year 2023 only and is thus not part of the Budget Bill.

In addition, the Budget Bill provides that from 1 January 2023, new photovoltaic installations will benefit from the super-reduced VAT rate and the reduced VAT rate will apply to the repair of household appliances and the sale, rental, and repair of bicycles, including e-bikes.

Additional measures for Luxembourg individual taxpayers

To tackle the effects of inflation, the following tax measures have been included in the Budget Bill mainly to alleviate the tax burden for low-income taxpayers:

  • The tax credit for single parents (crédit d'impôt monoparental), currently amounting to EUR 1,500 per year for an annual income up to EUR 35,000, should be increased to EUR 2,505 and granted for an income of up to EUR 60,000 per year.
  • The tax credit for individuals on minimum wage (crédit d'impôt salaire social minimum) of up to EUR 70 should be reviewed with regard to the income brackets as updated to reflect inflation.
  • The relief granted by Article 127bis LITL under certain conditions, for parents of children who are no longer taxed with their parents (i.e. students), currently amounting to EUR 4,020, should be increased to EUR 4,422.

Luxembourg real estate tax rules

The Budget Bill provides that the application of the 4% accelerated depreciation, applicable in case of rental housing, should be limited to two properties or parts of properties used for rental housing acquired or constituted as of 2023 during the taxpayer's entire tax liability period in Luxembourg.

In addition, in order to deal with the shortage of housing, the Budget Bill provides that the additional specific depreciation of 1% (Article 129e (2) LITL) will only be applicable to taxpayers receiving rental income.

Also, the Budget Bill provides that the rental value of a property will have to be determined upon completion of the construction of the property. Thus, expenses, other than interest, should no longer be deductible as from that date if the property is intended for private use.

In order to combat the housing shortage, the Government has also introduced bill n°8082, to amend the current property tax and to introduce a new tax on vacant land and housing in the coming years.

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.