The end of 2024 saw an important increase in tax measures introduced by the new Luxembourg government generally aimed at increasing Luxembourg’s attractiveness while generating a level playing field and equality among its population. These initiatives are welcome in a year that will be marked by growing pressure over the global economy due to geopolitical disruption and the need to enhance Luxembourg competitiveness.
Measures to increase tax competitiveness
On 11 December 2024, the tax bill 8414 has been approved by the Luxembourg Chamber of Deputies. The law of 20 December 2024 aims at enhancing taxpayers' purchasing power, stimulate the economy and promote inclusive and sustainable economic growth in line with the coalition agreement for 2023 to 2028.
The main measures of this law include:
Adjustment of the personal income tax brackets as from tax year 2025
This law adjusts the tax brackets applicable to individuals as from tax year 2025.
Specific adjustments for individuals benefitting from tax class 1A
In order to reduce their tax burden and reduce the risk of poverty due to inflation and single parent households circumstances, the law (i) provides for specific adjustments for individuals benefitting from tax class A1, (ii) increases the tax credit for single parent and (iii) increases the maximum amount of the allowance for children not forming part of the taxpayer’s household (i.e. from EUR 4,422 to 5,424). These adjustments will be applicable as from tax year 2025.
Minimum social wage tax credit
The law adjusts the amount of minimum social wage tax credit in a way to ensure that individuals receiving the non-qualified minimum social wage will not be subject to income tax irrespective of their tax class. This adjustment will be applicable as from tax year 2025.
Introduction of a tax credit for cross-border employees’ overtime
The law introduces a tax credit applicable for employees from the private sector who performed work during extra hours in Luxembourg. This tax credit will be available if (i) the taxpayer is resident in a state which has concluded a double tax treaty (DTT) with Luxembourg and which allocates the right to tax salary income to Luxembourg, (ii) the DTT provides that the employee’s state of residence avoids double taxation via a tax credit or allows taxation in the employee’s state of residence when Luxembourg does not tax such income and (iii) domestic law of the employee’s state of residence does not contain any provision which allow a full or partial exemption or any tax reduction for income related to such extra hours performed by the employee. This tax credit is set at EUR 700 per year when the annual salary exceeds EUR 4,000. No tax credit is available if the gross remuneration for extra hours is below EUR 1,200. This tax credit will be available as from tax year 2024.
Improvement of the participative premium regime
The participative premium is a regime under which employees can be granted, on a discretionary basis, a participative premium connected to the financial result of the employer. The law further improves the regime in two ways:
- Under conditions, the participative premium benefits from a 50% tax exemption. Among these conditions, Luxembourg tax law used to provide that the participative premium could not exceed 25% of the beneficiary’s gross annual remuneration (excluding benefit in kind and in cash). Such percentage is increased to 30% by the new law.
- The aggregate amount of the participative premium that may be allocated to employees is limited to a certain % of the employer’s profits for the year preceding the allocation of the premium. This percentage has been increased from 5% to 7.5% by the new law
The same amendments hold true in the case where the employer is part of a fiscal unity. These amendments will be applicable as from tax year 2025.
Adjustment of the impatriate tax regime
The law simplifies the regime currently applicable and which provides for a full exemption of certain costs incurred by the employee and a partial exemption of an impatriate premium. The new regime provides for a 50% exemption of the total gross annual remuneration of the employee. The amount of annual gross remuneration which would benefit from this partial exemption is capped at EUR 400,000. The conditions to benefit from said regime remain unchanged. A transitory period is introduced to allow the employee who benefitted from the current regime to continue to benefit from it as long as the conditions are still met. The employee is also granted the right to opt irrevocably for the application of the new exemption as from 2025. In such a situation, the employee will be able to benefit from the 50% exemption until the end of the 8th tax year following the year during which the latter started to work in Luxembourg. This amendment will be applicable as from tax year 2025.
Bonus for young employees
The law introduces a 75% exemption for the bonus paid to employees under the age of 30 who have their first unlimited-term contract in Luxembourg. The exemption is available for a maximum period of five years and only for the first employment contract. If the young employee changes employer within the five years period during which he/she benefits from the partial exemption, the said exemption will no longer be available given that the condition linked to the first employment contract will not be met. The bonus is designed to support young employees at the start of their careers and to retain them with the company which has trained them. The granting of this bonus is left to the discretion of the employer. The bonus exempt amount decreases as the salary increases and is no longer granted above EUR 100,000 “annual gross remuneration” (excluding benefits in kind and in cash). This exemption is available as from tax year 2025.
Single entity group
The law amends the interest deduction limitation rule by introducing the single entity group as an additional equity escape clause. This new rule allows the member of the single entity group, defined as a taxpayer which is not part of a consolidated group for financial accounting purposes and which at the same time is not considered as a stand-alone entity (i.e., an entity without any associated enterprise(s)), to deduct its entire exceeding borrowing costs if the taxpayer can demonstrate that the ratio between its equity to its total assets is equal to or higher than the same ratio of the single entity group. This provision applies to financial year starting as from 1 January 2024.
Reduction of the corporate income tax rate
In order to increase competitiveness of enterprises and to encourage them to invest, innovate and create employment opportunities, the Law reduces the minimum corporate income tax rate from 15% to 14%. It also reduces the maximum corporate income tax rate from 17% to 16% leading to an aggregate corporate taxes rate of 23,87% for Luxembourg-City as from tax year 2025.
Exemption of subscription tax for exchange traded funds (ETFs) which are actively managed
The aim of this measure is to encourage this sector to become more competitive on both European and international financial markets. This exemption is available since the first day of the quarter following the entry into force of the law, law, i.e. 1 January 2025.
Modernization of the law on private wealth management company (SPF)
SPF are subject to an annual subscription tax of 0.25% levied on the amount of equity and part of the debt exceeding eight times the total equity. The subscription tax payable annually cannot be lower than EUR 100 and cannot exceed EUR 125,000. The law increases the minimum annual amount of the subscription tax from EUR 100 to EUR 1,000 while the maximum amount of the subscription tax remains unchanged. This amendment is applicable since the first day of the quarter following the entry into force of the law, i.e., 1 January 2025.
In addition, the law introduces the possibility to impose administrative fines, in some cases up to EUR 250,000, in the event of specific breaches to the law and adjusts the existing procedure for withdrawal of the tax status of SPFs. These sanctions will apply to breaches occurring after the entry into force of the law.
Other tax measures
On 11 December 2024, the tax bill 8388 has been approved by the Luxembourg Chamber of Deputies. This law of 20 December 2024 aims notably at ensuring legal certainty with respect to the application of certain tax provisions following last years’ developments in case law and to provide companies with greater flexibility. Please refer to our previous newsflash for further details.
Among others, this law provides for the following amendments:
Minimum net wealth tax changes
The minimum net wealth tax which now varies between EUR 535 and EUR 4,815 (maximum amount). The determination of the relevant threshold is now based on the taxpayer's total balance sheet and no longer on the composition of its assets. This amendment echoes the decision of the Constitutional Court dated 1 July 2023, which declared unconstitutional the minimum net wealth tax as it leads to a discriminatory situation amongst certain taxpayers in a similar situation. This provision is applicable as from tax year 2025.
Alphabet shares tax treatment
This law clarifies that the redemption of (classes) of shares qualify as a partial liquidation if the following conditions are simultaneously met:
- One entire class of shares must be (i) repurchased/redeemed and (ii) cancelled within six months from the date of the repurchase/redemption;
- Classes of shares must be implemented at incorporation or upon a capital increase;
- Each class must have different economic rights;
- The redemption price, which must reflect the fair market value of the redeemed shares, must be determinable based on criteria set in the articles of association of the company or any other documents mentioned in the articles of association.
Where the holder of the redeemed shares is an individual holding a substantial participation (i.e. broadly, more than 10% holding), the company whose shares are redeemed must provide information regarding the identification of the concerned shareholder in its annual corporate tax return.
Optional participation exemption
The law introduces the possibility for a taxpayer to opt out of the application of (i) the partial exemption of 50% for dividend income and (ii) the full exemption for dividends where the EUR 1.2 million shareholding threshold is met. The option will be available as from tax year 2025 and will need to be exercised by the taxpayer on a yearly basis and for each of its shareholding.
To be noted that a Grand-Ducal Decree which amends the Grand-Ducal Decree dated 21 December 2001 has been enacted on 20 December 2024 to also provide taxpayers with the possibility to opt out of the full exemption for capital gains where the EUR 6 million shareholding threshold is met. The option will need to be exercised under the same conditions as above.
