New Luxembourg impatriate regime: Analysis and comments
OUR INSIGHTS AT A GLANCE
- On 20 December 2024, Luxembourg passed a law reforming the tax regime for skilled workers considered as 'impatriates'.
- The prior regime was not perceived as competitive enough because it was rather complex to navigate through the conditions to benefit from it and the outcomes it produced.
- This reform aims at strengthening the attractiveness of Luxembourg for talent and highly specialised profiles, and takes into account attractive regimes set up in other countries in the European Union.
- While most conditions for benefiting from the new regime are identical to those applicable under the previous regime, certain conditions evolved with the reform.
- We analyse and comment hereafter on the implications of this new impatriate regime.
In order to modernise its tax regime and make it simpler and more attractive, Luxembourg has recently amended its tax regime for skilled workers considered as 'impatriates'. The aim of this reform, introduced by a law dated 20 December 20241 (the "Law") is to continue to attract to and retain talent in Luxembourg, and to strengthen the competitiveness of Luxembourg companies.
With effect from tax year 2021, the tax regime of impatriates, previously governed by the circular L.I.R. – n° 95/2 dated 27 January 2014 (the "2014 Circular") was, for the first time, incorporated into the Luxembourg income tax law ("LITL"). According to Article 115 of the LITL, impatriate premiums granted by an employer to employees qualifying as impatriates, benefited from a 50% exemption under certain conditions, and certain costs incurred in moving highly qualified workers and borne by the employer were tax-exempt. The prior regime was not perceived as being competitive enough because it was rather complex to navigate through the conditions to benefit from it and the outcomes it produced. With effect from tax year 2025, the Law repeals and replaces that partial exemption of the gross annual remuneration paid in the form of a bonus by employers to impatriates and the exemption of certain costs borne by the employer and generated by the expatriate's move to Luxembourg.
The new impatriate regime, inspired by the Italian and French regimes, is far easier to understand in terms of both the conditions to benefit from it and the outcome it produces. It provides for an exemption of 50% of the gross annual remuneration, including benefits in kind, paid to the impatriate, capped at EUR 400,000 per annum. This measure aims at strengthening the attractiveness of Luxembourg for talent and highly specialized profiles, and takes into account attractive regimes set up in other countries in the European Union.
Taxpayers in scope of the impatriate regime
For the purposes of the new regime, 'impatriate' means:
- an employee who, usually working abroad, is seconded from an undertaking of an international group located outside the Grand Duchy of Luxembourg in order to carry out an activity as an employee in a Luxembourg local undertaking belonging to the same international group; or
- an employee directly recruited abroad by a Luxembourg local undertaking or by an undertaking established in another State party to the Agreement on the European Economic Area, in order to work as an employee in the Luxembourg undertaking.
This regime will not apply to employees hired on the basis of a contract of secondment by a temporary employment agency or within the framework of labour lending.
The conditions to qualify as an impatriate can only be met at one point in time. Therefore, once an employee qualifies as an impatriate upon their arrival in Luxembourg (i.e., year N), they remain an impatriate for the purposes of the regime throughout the entire period of application of this regime. The status is not lost in the year following the employee's arrival in Luxembourg (i.e., year N+1) merely because they are no longer 'directly recruited' that year, for example. For the same reason, the qualification of an employee as impatriate should not be lost because the regime is not effectively applied to that employee as from the moment where the said employee relocates to Luxembourg or due to a potential change of employer.
Conditions for benefiting from the exemption
Most conditions for benefitting from the new regime are identical to those applicable under the previous regime and already described in the 2014 Circular.
To qualify, the following conditions must be met:
- The impatriate is an individual whose tax domicile or habitual residence is in the Grand Duchy of Luxembourg. The impatriate must be resident for tax purposes in Luxembourg, in accordance with the LITL.
- During the five tax years preceding the year in which the impatriate took up employment in the Grand Duchy of Luxembourg, the impatriate has neither been domiciled for tax purposes in the Grand Duchy of Luxembourg, nor lived at a distance of less than 150 km from the border, nor been subject to personal income tax in the Grand Duchy of Luxembourg on professional income.
- The impatriate carries out the professional activity qualifying for the exemption for at least 75% of their working time. The previous regime required that the impatriate was employed for a job that was their main professional occupation. However, to assess the 75% threshold, it remains unclear what type of activities (e.g., volunteering, non-remunerated mandates, etc.) fall within the scope of the "working time" and whether this threshold must be assessed annually, monthly or even weekly.
- Like under the previous regime, the impatriate earns a fixed annual remuneration of at least EUR 75,000. The fixed remuneration to be taken into consideration being the gross amount, before incorporation of benefits in cash and in kind;
- The impatriate does not replace another employee not considered as an impatriate meeting all the criteria to benefit from the regime;
- In the case of a secondment,
- the seconded impatriate has a seniority within the international group of at least five years or has acquired at least five years of specialised professional experience in the sector concerned,
- an employment relationship exists between the seconding company and the employee during the period of secondment,
- the temporary assignment of the seconded employee provides for a right for the employee to return to the seconding establishment at the end of the period of secondment, and
- a contract relating to the secondment of the employee is concluded between the seconding company and the local company;
- In the case of direct recruitment, the impatriate must have in-depth specialisation in the sector concerned; and
- the number of impatriates entitled to the exemption does not exceed 30% of the total workforce of the local company in which the impatriate works. Parttime employees, including impatriates, are counted in proportion to their workload.
The previous version stated that this last condition was not required for entities that have been in existence for less than 10 years. Now, according to the Law, this condition is not required for companies that have been in existence for less than 10 years on the 1st of January of the calendar year concerned. The parliamentary documents of the Law do not explain why this reference to the 1st of January was added.
Literally interpreted, this exception applies to companies "in existence" on 1st January. Thus, it would not apply to companies incorporated after the 1st of January of the calendar year concerned because they would not have been in existence, for less than 10 years, on the 1st of January of the calendar year. On that date, they do not exist at all. However, such a reading seems contrary to the presumed objective of the exemption, as it would require the application of the 30% threshold for the first year of incorporation of a company and not for the following years. This condition should thus be read, a contrario, as meaning that the 30% threshold requirement is required for entities that have been in existence for 10 years on the 1st of January of the calendar year.
The impatriate regime is no longer applicable when one of the aforementioned conditions related to the impatriate, their employment, or their employer ceases to be met. It is interesting to note in this respect that the Law does not provide, contrary to what has been provided for the young employee bonus exemption, any restrictions that would prevent an employee qualifying as an impatriate from changing employers, whether within the same group or not.
Period of application of the regime
Employees who have benefitted from the previous impatriate regime, applicable up to and including 2024, remain subject to this previous version of the impatriate regime as long as the conditions for its application are met, unless the employee expressly asks for the application of the new impatriate regime as from 2025.
The choice to apply the new impatriate regime needs to be communicated to the Luxembourg tax authorities and is irrevocable.
The impatriate regime is applicable during the entire secondment of the impatriate to Luxembourg, respectively the entire time the impatriate is working for the local company, but only until the end of the 8th tax year following the year during which the impatriate started to work in the Grand Duchy of Luxembourg. This therefore means that the impatriate may benefit from the new regime the year in which individual relocates to Luxembourg and the full eight fiscal years thereafter.
Declaration to be performed by the employers
According to the Law, each year, by 31 January at the latest, employers must provide the tax authorities with a list of the names of their employees who are eligible for the impatriate regime during the tax year in question.
In this regard, a newsletter issued by the tax authorities on 24 January 2025 provides that "no later than 31 January of tax year N, employers are required to provide the RTS office responsible for employer verification with a list of the names of their employees who benefited from the tax regime for impatriates during the period from 1 January to 31 December of tax year N-1."
However, this newsletter states conditions that are not in the Law and therefore are contra legem. It is also surprising that this "clarification" would be needed in 2025 while this employer's declaration was already required, under the same terms, under the 2014 Circular and under the previous regime.
This newsletter seems to imply that the employer declaration is a condition for the application of the regime but that is not what the Law provides. According to the Law, the employer's declaration is not a condition for the application of the impatriate regime. It rather seems to be a modality allowing the tax authorities to issue the withholding tax forms (la fiche de retenue d'impôt). Indeed, the following sentence of the paragraph of the legal provision establishing this employer's declaration specifies that when the employer is a foreign company with no withholding tax obligation on salaries in Luxembourg (for example, if the company has no permanent establishment in Luxembourg), the employee is taxable by means of a tax return only and the employer is not required to pay the withholding tax on the payroll.
To view the full article, 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.
