On 15 December 2020, the Luxembourg Parliament approved the 2021 budget bill.
A request for its exemption from the second round of voting was filed with the State Council. Most provisions will enter into force on 1 January 2021. The most notable tax measures (more details on the provisions can be found here_) contained in the new law include:
• A new “participating bonus” regime for employees (benefiting from a 50% tax exemption under some conditions). This replaces the current stock option regime (as detailed in circular letter N°104/2 of 29 November 2017), to be abolished with effect from the 2021 fiscal year. Whether the tax authorities will issue a circular letter in respect of this new regime remains to be confirmed.
• Modification of the scheme for highly skilled and qualified workers (impatriates), including the option for employers to grant an "impatriation bonus" benefiting from a tax exemption of up to 50% (subject to conditions) for an amount not exceeding 30% of the relevant impatriate’s annual remuneration. This measure entails the repeal of circular letter N°95/2 of 27 January 2014 on the current tax impatriate regime, with effect from the 2021 fiscal year. Employees who benefit from the repealed circular and whose Luxembourg employment began during the period 2016 to 2020 will still be able to apply the old circular (subject to conditions).
• Reduced subscription tax for sustainable investment funds, with a rate that decreases depending on the degree of investment in sustainable activities within the meaning of Article 3 of Regulation (EU) 2020/852 of 18 June 2020.
• A lump-sum 20% real estate levy on gross income (rents and capital gains) derived from real estate located in Luxembourg by SIFs, UCIs and RAIFs. In addition, by 31 May 2022, each SIF, RAIF and UCI must declare if it held Luxembourg-situated real estate (directly or through a transparent entity) in 2020 and 2021. If a fund fails to report on time, the tax administration can impose a lump-sum penalty of EUR 10,000. Structures through which real estate outside of Luxembourg is held and funds qualifying as transparent for Luxembourg tax purposes will remain unaffected by this measure. Additionally, the 20% levy will not apply where Luxembourg real estate is held by a fully taxable domestic or foreign company.
• Final enactment of an anticipated restriction of SPFs, which will no longer be able to hold real estate through partnerships or other tax-transparent entities as from 1 July 2021.
• Increase in the rate of real estate transfer tax levied upon contributions of Luxembourg real estate to the share capital of Luxembourg civil or commercial companies, from a current aggregate of 1.1% to 3.4%.
• Modification of the tax consolidation regime to allow a group benefiting from "vertical consolidation" to form a new group integrated through "horizontal consolidation", without any negative tax consequences for the individual members of the tax consolidation group, subject to conditions and up to the 2022 fiscal year.
Concluding remarks
The proposed measures are driven primarily by the COVID-19 crisis and resulting budget constraints, as well as the will to ensure social fairness. Contrary to some expectations, the government deliberately chose not to increase or introduce new taxes that would hinder the swift recovery of the local economy.
As a tax competitiveness measure, the modified impatriate regime could prove in practice to be an effective tool: employers that have moved their activities to Luxembourg or are considering doing so may find the impatriate regime particularly attractive with respect to relocating their staff.
The government had long announced its plan to reform the rules with respect to Luxembourg-situated real estate. It is, however, important to stress the limited scope of the new measures in this respect. In particular, the new 20% levy will have no impact for pan-European real estate funds (which regularly use Luxembourg fund structures) to the extent that these do not hold Luxembourg-situated real estate assets.
