The Luxembourg Inland Revenue (Administration des Contributions Directes) changed the special tax regime for highly qualified international employees by way of amending the circular 95/2 on 27 January 2014. The objective of this regime, initially introduced on 31 December 2010, was to strengthen the competitiveness of Luxembourg companies by giving them the means to hire staff internationally and to encourage potential candidates to establish themselves in Luxembourg (“impatriates”).
Key takeaways:
- Tax exemptions for certain recurrent and non-recurrent expenses;
- Certain expenses constitute costs for the employer and do not result in an income of the impatriate;
- Enlargement of the scope for the companies established in member states to the Agreement on the European Economic Area.
Objectives of the circular no. 95/2 introduced by the Luxembourg tax authorities
On 31 December 2010 the Luxembourg Inland Revenue (Administration des Contributions Directes) introduced a special tax regime for highly qualified international employees by way of the circular 95/2. The objective of this circular was to strengthen the competitiveness of Luxembourg companies by giving them the means to hire staff internationally and to encourage potential candidates to establish themselves in Luxembourg (“impatriates”). In fact, highly qualified staff cannot always be found in the Greater Region of Luxembourg. As is generally known, hiring abroad implies significant costs for employers (moving costs, school fees of children, travel costs, e.g. for visits to the employee’s home country etc.)
Previously, the assumption of certain costs directly or indirectly related to the employee’s establishment in Luxembourg by the employer was subject to taxation in Luxembourg as they were considered benefits in-kind received by the employee.
To avoid a negative effect on the impatriate’s net salary, the employer then adjusted the employee’s gross salary which in turn created additional costs for the employer.
Thanks to this circular the employer now benefits from tax exemptions for certain recurrent and non-recurrent expenses related to the establishment of its impatriates in Luxembourg such as moving costs, travel expenses of the employee and its family etc.
The expenses listed above constitute operating costs for the employer. However, within the limits and subject to the conditions set out in the circular, they do not result in an income for the impatriate.
With the aim to maintain the competitiveness and innovation of Luxembourg companies, this circular had initially been amended by the circular no 95/2 of 21 May 2013 (cf. our newsletter of 12 July 2013) followed by the circular no 95/2 of 27 January 2014 (the “Circular”) applicable with retroactive effect from 1 January 2014 which eases the applicable conditions of the tax regime in favour of highly qualified international employees in Luxembourg.
Reforms introduced by the Circular of 27 January 2014 and reminder about the conditions of the implementation of this more favourable tax regime
The Circular expands its scope of application to those companies established in member states to the Agreement on the European Economic Area (whose members are the 28 member states of the European Union as well as Liechtenstein, Iceland and Norway).
It redefines the notion of impatriate. As of now impatriate refers to:
- employees who usually work abroad and are seconded by a company belonging to an international group outside of Luxembourg to exercise their professional activities in a Luxembourg company of the same group;
- employees that are directly recruited abroad by a Luxembourg company or by a company established in one of the member states to the Agreement on the European Economic Area to exercise their professional activities in the company, provided that they fulfil the following conditions:
In addition, to qualify as an impatriate, the following conditions must be fulfilled:
- the impatriate must qualify as a tax resident;
- the impatriate has not had its tax residence in Luxembourg nor been living less than 150 km from the Luxembourg border, nor been subject to Luxembourg personal income tax on a professional income within 5 years preceding the year in which the impatriate takes up employment in Luxembourg;
- the Luxembourg company must employ at least 20 full-time employees or otherwise commit itself to do so in the medium term.
Additional conditions apply to employees in case of secondment or recruitment and to employers.
Among other things the Circular eases the conditions applicable to the new employment contract of the impatriate in Luxembourg and thus, the applicable conditions of the favourable tax regime for highly qualified employees. Although the impatriate is still required to make its specific knowledge and know-how available to the benefit of the company’s staff, the requirement to “stimulate sustainable activities in Luxembourg” has been removed.
To be eligible for the favourable tax regime, the impatriate has to meet the cumulative following criteria:
- to exercise her or his professional activity as a main activity;
- to earn an annual gross remuneration of at least EUR 50,000, additional benefits in cash or kind excluded;
- to share specific knowledge and know-how to the benefit of the company’s staff
- not to replace other employees not covered by the present Circular;
Finally; the Circular introduces the option for the impatriate to be taxed on an assessment basis in the case where the non-resident employer had not proceeded to the withholding tax and the refund of tax credits.
Nevertheless, the employer is obliged to produce a list with all employees falling under the favourable tax regime at the beginning of each year (by 31 January at the latest), so that the competent tax authority can verify whether the highly qualified employees still meet the requirements for the application of the tax regime.
The favourable tax regime applicable to impatriates is granted for a maximum of 5 years, ending after the 5th tax year following the date of entry into service of the employee in Luxembourg, provided that the employee still qualifies for it.
