On 14 October 2020, Luxembourg's Ministry of Finance, Pierre Gramegna, tabled before the Parliament the draft budget law for the year 2021 (the "Draft Budget Law").
The Draft Budget Law proposes amendments which aim at restoring tax justice. In this context, it is noteworthy that some of the most salient tax measures included therein would affect the real estate industry and the current stock-option regime.
Please find below the key suggested tax measures:
- Introduction of a 20% withholding tax on income derived by Luxembourg investment funds from real estate located in Luxembourg
The Draft Budget Law proposes to introduce a 20% withholding tax levied on income (e.g. rental income, capital gains) from a property located in Luxembourg held directly or indirectly (i.e. through one or more transparent entities or common funds) by "Luxembourg Investment Funds".
"Luxembourg Investment Funds" include entities with a legal personality subject to:
- the Law of 17 December 2010 relating to undertakings for collective investments;
- the Law of 13 February 2007 relating to specialised investment funds; and
- the Law of 23 July 2016 relating to reserved alternative investment funds.
Where the Luxembourg Investment Fund derived income through one or more transparent entities or common funds (fonds communs de placement) that holds the real estate located in Luxembourg, the 20% withholding tax would be levied on the portion of the income pro rata to its shares/units in the transparent entities or common funds.
Where capital gains are realised on the sale of the Luxembourg Investment Fund's share/units in a transparent entity or common fund that holds the Luxembourg based real estate, the 20% withholding tax will be levied pro rata its shares/units in the transparent entities or common funds.
Where capital gains are realised on the sale by a transparent entity or common fund of the share/units its holds in another transparent entity or common fund that holds in turn the Luxembourg based real estate, the 20% withholding tax will be levied pro rata the Luxembourg Investment Fund's shares/units in the selling transparent entities or common funds.
The Luxembourg Investment Fund must file a return with the Luxembourg tax authorities ("LTA") regarding the 20% withholding tax before 31 May of the year following the year in which the 20% withholding tax is levied or the real estate income is realised.
Any Luxembourg Investment Funds that do not derive real estate income during the calendar years 2020 and 2021 must, however, file a return with the LTA before 31 May 2022 regarding the properties they hold or the fact that they do not hold any properties during the calendar years 2020 and 2021.
Furthermore, Luxembourg Investment Funds must inform the LTA if they change their legal form to become a transparent entity or a common fund during the calendar years 2020 and 2021 provided they hold, directly or indirectly at this time, a property located in Luxembourg.
- Explicit prohibition, as of 1 January 2021, for private wealth management companies (société de gestion de patrimoine familial, "SPFs") to hold real estate
The Law of 11 May 2007 on SPFs would be amended so as to clearly state therein that SPFs are prohibited from holding real estates through:
- one or more, Luxembourg or non-Luxembourg, tax transparent companies, such as non-commercial real estate companies (sociétés civiles immobilières). The Law of 11 May 2007 on SPFs remains however unchanged, however, on the possibility for a SPF to hold real estate through tax opaque companies; or
- one or more common funds (fonds communs de placement) and other foreign entities subject to a comparable legal and tax regime.
- Increased of the registration duties due upon a contribution of a real estate in exchange for shares
One of the main differences between asset deals compared to share deals is the relatively high Luxembourg registration duty applicable on the transfer of a real estate.
Indeed, contributions of an immovable property located in Luxembourg to a company upon incorporation and capital increases remunerated by shares are subject to a proportional registration duty of 1,1% (including 0,5 % registration fees increased by 2/10ths plus a 0.5% transcription tax).
In contrast, contributions remunerated by means other than shares are subject to a proportional registration duty of 7% (including 5 % registration fees increased by 2/10ths plus 1% transcription tax).
In both cases, a city surtax of 0.3% must be added if the building is located in Luxembourg City.
The Draft Budget Law proposes that the contribution of an immovable property located in Luxembourg remunerated by shares will be subject to a proportional registration duty of 3.4% (including 2 % registration fees, increased by 2/10ths plus a 1% transcription tax). The city surtax of 0.3% must be added if the building is located in Luxembourg City.
- Abolition of the current stock option regime
In the framework of stock option plans, employees are generally offered shares in their employing company at a discount.
The tax regime of stock options plans is currently governed by circular letter L.I.R. 104/2 issued by the LTA on 29 November 2017 (the "Stock Options Circular") which distinguishes between:
- Plans on individual or virtual options (options individuelles ou virtuelles): as such options are not tradable, the income is only taxable at the time the option is exercised. The share price discount is considered as an advantage in kind taxable as income from a salaried occupation in an amount corresponding to the difference between the subscription price and the market value of the shares at time of the exercise. However, where the shares are subject to a lock-up period, the Stock Options Circular provides that the advantage in kind resulting from the share price discount is reduced by a tax abatement of 5% for each year of the lock-up period, with a maximum discount amount of 20%.
- Plans on tradable options (options librement négociables) : As employees may sell their option freely, such options are taxable at grant. The advantage in kind taxable as income from a salaried occupation, corresponds to the difference between the subscription price and the market value of the shares (or share exchange value if the shares are listed). For shares that are not listed, the fair market value can be determined by several financial methods or, if no such method is applied, the Stock Options Circular provides for a lump-sum valuation method according to which the value of the tradable option is set at 30% of the fair market value of the underlying shares at the time of the granting to the extent that it complies with reasonable conditions.
The Stock Options Circular would be abolished on 1 January 2021.
However, in order to keep Luxembourg attractive for talents, a new participative premium regime (prime participative) would be introduced and the current inpatriate regime would be amended.
- Introduction of a new participative premium regime
In parallel to the abolition of the Stock Options Circular, new measures would be introduced allowing employees to participate in the profits of their company in a tax-attractive fashion, i.e. so-called participative premium regime.
Article 95 of the Luxembourg income tax law (the "LITL") would be modified to ensure that the participative premium will qualify as a salaried income for the employee for Luxembourg tax purposes. If the conditions set out below are met, the participative premium will benefit from a 50% tax exemption at the level of the employee. Concurrently, this participative premium will be tax deductible at the level of the employer as operating expenses (as provided under the proposed amendment of Article 46 of the LITL).
The conditions under which the participative premium may be granted would be laid down in a new paragraph 13a to be inserted in Article 115 of the LITL. The said article will contain conditions to be fulfilled by both the employer and the employee:
- a) Conditions to be fulfilled by the employer:
- the employer must realise income that qualifies either as commercial profit, agricultural profit or profit deriving from a liberal activity;
- the employer must hold regular accounts (comptabilité régulière) during the fiscal year in which the participative premium is granted as well as during the previous fiscal year;
- the amount of the participative premium allocated to the employees is limited to 5% of the positive result of the financial year immediately preceding the year in which the premium is granted (i.e. the participation premium may only be granted if the employer has realised a profit during the previous year); and
- the employer shall provide the head of the competent withholding tax office (bureau d'imposition RTS), with a nominative list of all the employee benefiting from the participative premium during the fiscal year. This communication is to be made in the form prescribed by the withholding tax office and at the time the participative premium is settled (au moment de la mise à disposition). In addition, it shall include all elements necessary in order to assess that the conditions relating to the exemption are met.
- b) Conditions to be fulfilled by the employee:
- the beneficiary of the participative premium must be an employee (i.e. he/she must receive an income deriving from a salaried occupation);
- the participative premium may not exceed 25% of the employee's ordinary annual remuneration of the fiscal year during which the participative premium is allocated. For the determination of this 25% threshold, the employer must take into consideration the deemed gross annual salary (salaire brut annuel présumé) to be received by the employee during that year. Advantages in kind and other gratifications, however, will not be taken into account. The 25% threshold is to be calculated exclusive of the participative premium; and
- the employee must be personally affiliated to the Luxembourg social security system or to a foreign social security system covered by a bilateral or multilateral instrument.
- Regime for inpatriates
The regime currently applicable for foreign workers in Luxembourg ("inpatriates") is regulated through an administrative circular, Circulaire du directeur des contributions L.I.R. – n° 95/2 dated 27 January 2014 ("Circular n° 95/2"). The Draft Budget Law foresees a legal basis for this regime by supplementing Article 115 of the LITL, along with certain adjustments.
The Draft Budget Law introduces an inpatriation allowance, for an amount not exceeding 30% of the annual remuneration of the inpatriate that would be exempt from taxation. This inpatriation allowance corresponds to an additional flat-rate premium paid by the employer to the inpatriate to compensate for the differential in the cost of living. In addition, expenses and costs related to hiring inpatriates incurred by the employer would also tax be exempt. Further details on those expenses may be provided in a Grand-Ducal Regulation.
While the majority of the conditions required for the application of such a fiscal regime for inpatriate remains unchanged in the Draft Budget Law, some features of the Circular No. 95/2 would be adjusted, such as the annual remuneration of the inpatriate which would be increased from EUR 50,000 to EUR 100,000. Furthermore, the inpatriate would benefit from the amended tax regime for up to 8 years instead of the 5 years provided in the Circular No 95/2.
- Amendments to the Luxembourg Fiscal unity regime prior to 2015
On 14 May 2020 (C-749/18), the European Court of Justice ruled that Luxembourg's former tax unity regime was contrary to EU freedom of establishment.
The Draft Budget Law intends to implement, for fiscal years 2020, 2021 and 2022, the possibility to dissolve an existing Luxembourg fiscal unity composed of a Luxembourg resident integrating parent company holding one or more Luxembourg resident integrated subsidiaries and to create a new fiscal unity that incudes, in addition, Luxembourg resident sister companies of the Luxembourg resident integrating parent company, without any negative retroactive taxation for the existing members that would otherwise result from the dissolution of the fiscal unity.
The change of fiscal unity is subject to the following cumulative conditions:
- the integrating parent company of the dissolved fiscal unity becomes the integrating subsidiary of the new fiscal unity;
- the change of unity for 2020, 2021 or 2022 must be jointly requested by all the concerned companies on 31 December of the relevant fiscal year, at latest;
- the amount of entities part of the new fiscal unity must be effectively larger compared to the dissolved fiscal unity;
- the new members must remain in the fiscal unity for a period of at least 5 years, whereas the computation of the 5-year period at the level of the former members remains unchanged.
The change of fiscal unity will not have an impact on:
- the choice made, if at all, to apply the interest limitation rule at the level of the fiscal unity rather than individually to each member of the fiscal unity; and
- tax losses incurred prior to or during the dissolved fiscal unity, which will continue to be carried forward insofar as they would have been carried forward at the level of the relevant member had the change of fiscal unity not been made.
The existing Luxembourg tax unity regime had already been amended in 2015 to implement the horizontal tax unity following a prior ruling of the ECJ. Please refer to our previous newsflash for more information.
- Modification of the Law of 17 December 2010 relating to undertakings for collective investments (the "UCI Law") in order to encourage investment in sustainable economic activities
The European Commission has adopted various measures in the field of sustainable finance aiming at taking due account of environmental, social and governance (ESG) considerations. Luxembourg is willing to maintain and reinforce its position as pioneer in this sector.
Against this background, a new paragraph 3 would be inserted in Article 174 of UCI Law in order to encourage Luxembourg undertakings for collective investments ("UCIs") to invest in sustainable economic activities.
According to this new paragraph 3, UCIs, or individual compartments thereof, may benefit from reduced subscription tax rates depending on the value of their net assets invested in economic activities that qualify as environmentally sustainable within the meaning of Article 3 of EU Regulation 2020/852 of 18 June 2020 (the "Qualifying Activities").
The reduced subscription tax rates would be of:
- 0.04% if at least 5% of the total net assets of the UCI, or of the individual compartment, are invested in Qualifying Activities;
- 0.03% if at least 20% of the total net assets of the UCI, or of the individual compartment, are invested in Qualifying Activities;
- 0.02% if at least 35% of the total net assets of the UCI, or of individual compartment, are invested in Qualifying Activities; and
- 0.01% if at least 50% of the total net assets of the UCI, or of individual compartment, are invested in Qualifying Activities.
The subscription tax rates mentioned above would only apply to the net assets invested in Qualifying Activities.
For UCIs, or compartments thereof, willing to benefit from such reduced rates, the part of net assets invested in Qualifying Activities on the last day of the UCI's financial year shall be controlled by an approved statutory auditor (révsieur d'entreprises agréé) or, as the case may be, certified by the auditor in the framework of a reasonable assurance audit (mission d'asssurance raisonnable). This part and the percentage corresponding to net assets invested in Qualifying Activities against the total net assets of the UCI, or its individual compartment, must be included in the annual report or in an assurance report.
A statement certified by the approved statutory auditor (attestation certifiée), containing the percentage of the net assets invested in Qualifying Activities as determined in the annual report or the assurance report, must be filed with the Luxembourg indirect tax authorities ("LITA") with the first subscription tax return following the annual report or the assurance report. This percentage will be used as a basis to determine the tax rate to the part of the net assets invested in Qualifying Activities for the 4 quarters following the filing of the statement.
During a transition period ending on 1 January 2022, entities willing to benefit from the reduced subscription tax rates must electronically file their quarterly return at the rate of 0.05% together with a corrective statement (déclaration rectificative) based on a form made available by the LITA.
- Increase of the small businesses' VAT threshold
In order to allow a greater number of taxable persons to benefit from administrative simplification represented by the VAT exemption regime referred to in Article 57 of the amended Law of 12 February 1979 concerning value added tax ("VAT Law"), it is proposed to raise the threshold of EUR 30,000 currently provided for in the said article to EUR 35,000.
It must be noted that taxable persons whose annual turnover is EUR 35,000 or less were already exempt from VAT as of 1 January 2020 based on an authorisation granted to Luxembourg by the Council of the European Union via Decision No 2019/2210. The EU Council's decision was directly applicable but not yet enshrined in the VAT Law.
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.