In the Grand Duchy of Luxembourg, property tax is one of the oldest taxes, and its reform, which has been part of the political discussion for years, is also one of the longest awaited. The situation of the housing market in Luxembourg is well known: the housing shortage is a challenge and the price of building land rose by 137% between 2010 and 2021. This performance is better than that of the Euro Stoxx 50 (+90%), the DAX 30 (+129%) and the CAC 40 (+40%) over the same period, before tax.
The OECD's economic review of Luxembourg, published in July 2019, concluded that housing market pressures include limited use of building land and complex zoning regulations which have pushed up prices and encouraged land speculation. In response, one of the recommendations was to increase the opportunity cost of unused land by reforming periodic taxes on real estate ownership.
On 10 October 2022, a draft law n°8082 was finally presented to the Luxembourg parliament with the aim of carrying out the awaited reform of the Luxembourg property tax. The three major axes of this draft law are based on a modernisation of the property tax and the introduction of two new taxes encouraging property owners to mobilise building land (tax on the mobilisation of land) and uninhabited dwellings (tax on the non-occupation of housing) to combat the increasing housing shortage in Luxembourg. This reform is in line with the philosophy of the OECD’s comments. The draft law on property tax, land mobilisation tax and non- occupancy tax also executes and complements the broad lines set out in the coalition agreement 2018-2023.
The proposed new formula for valuing lands is based on a recognition of factors that are widely recognised as determining the value of a property, namely (1) the building potential, (2) the land use patterns, (3) the geographical location, (4) the development phasing (immediate availability for construction or not), (5) the available surface area, (6) the number of facilities and services available in the neighborhood and (7) the general level of property prices. To keep up to date the data needed for the evaluation of the land, the data will be re-evaluated periodically - at least every 3 years.
The most important parameter defining the value of a land is its geographical location, and more specifically its distance from Luxembourg City. Indeed, studies conducted by the Observatoire de l'Habitat have long confirmed that land prices decrease exponentially in proportion to the distance to the capital. It is emphasised that it was decided to consider the travel time to Luxembourg City, and not the travel distance, as this is the main factor in the choice of the location.
The property tax formula will be a simple multiplication between a unitary value representing the value of a parcel (and no longer an evaluation dating from 1941) and a tax rate set by the municipality where the land is located. Such rate can vary between 9% and 11%.
The reformed property tax also introduces a tax reduction on the main residence. As a result, every individual taxpayer will be entitled to a flat-rate allowance of two thousand euros on the basic value of the property on which he has registered his principal abode. However, no allowance will apply if it brings the base value of a property below 500 euros for the taxpayer concerned. Unless exempt, taxpayers will thus always be subject to a minimum IFON on their property of at least 45 to 55 euros (i.e., 500 x 9-11%).
Here's how the reform looks like:
New property tax (Impôt Foncier, "IFON") computation method
The main objectives of the property tax reform are to eliminate the inequalities generated by the current IFON and to create a new valuation model that will be more objective, transparent and fair. The aim of the property tax reform is not to increase tax revenues, but rather to introduce fair and equitable taxation that does not expose itself to accusations of unequal treatment. The property tax reform targets “the antiquated nature of the current property tax system”. For that purpose, the ambition of the draft law is to revalue all lands ensuring that, in determining the tax base, the proportions of real land value between these lands are respected so that the system is considered as fair, and the tax respects the principle of proportionality and equality before the law.
If the tax allowance for the usual residence is welcome, the way it is implemented is surprising. Indeed, the aim of the reform is to implement a fair system with a tax respecting the principles of proportionality and equality in front of the law. However, as the allowance is allocated by taxpayer (i.e., by owner) and not by property, the fairness of the system is not obvious. Indeed, as a result of this system, two owners, resident in their home built on a property valuated at 3438 euros, will pay less (IFON: 500 x10% x 2 owners = 100) tax in total than a single resident-owner who would reside on the exact same property (IFON: 1438 x 10% = 143,80 euros). In this respect, it seems that the Government applies the same philosophy as the one applicable for the already criticised tax classes rates (i.e., classes 1, 1a and 2) resulting in higher taxes due by single taxpayers/owners compared to the one due by married taxpayers. In addition, in such example, if one of the 2 owners must leave the residence because of a separation/divorce for example, then the total tax payable rises to 221.9 euros (i.e., 50 + 171.9). Similarly, in a more theoretical case, if there are 3 resident-owners in the house, the total IFON due would amount to 150 euros (3438/3 – 2000 would be less than 500 euros so the tax due would be 50X3 = 150 euros). Nothing justifies that the IFON amount varies depending on the number of the property’s owners. As it is the same land with the same building, the amount of tax should be the same. The property tax is a tax on a land/property and thus the personal situation of the owners should not impact the amount of tax due in total.
As a result, wouldn’t it be fairer to apply the tax allowance for residential buildings on the total value of the land/property and not to allocate the allowance to each owner individually? Currently, the level of property tax to be paid depends on the base value of the land, if necessary, broken down between several owners, and then allowances are applied. To better respect the principle of equality and fairness, it should not be the value of the land that is broken down between several owners, but the amount of tax due. The allowance would thus be granted depending on whether the property is assigned to the residence of the owner(s) but would not vary based on the number of owners. In the example above, the IFON due on a house allocated to the residence of at least one of its owners should amount 143,8 euros in every case (i.e. (3438 – 2000) x10%) and such tax should then be shared amongst the owners proportionally to their ownership rights.
To enable citizens to estimate the property tax they will have to pay after the reform, the Government has set up a simulator: grondsteier-rechner.lu
Introduction of two new taxes
Another challenge of this reform is the fight against the notorious housing shortage in Luxembourg. In a recent contribution, we stated that “[a] low level of property tax reduces the financial burden on property investors who decide to keep properties unused”. It was also clear to us that there was a need to “improve the effectiveness of the non-occupation tax to stimulate the rental market and, in the case of long-term vacancies, to encourage the sale of such properties” and to “incentivise (or reduce the barriers to) the sale of vacant buildings or land”, which are now the stated objectives of the new national tax on the non- occupation of housing and on the mobilisation of land.
Introduction of a tax on the mobilisation of land (Impôt à la mobilisation de terrains, “IMOB”)
The draft law introduces a tax on the mobilisation of land, whose purpose is to encourage the effective construction of housing on the land dedicated to this end. Contrary to the IFON, the tax on the mobilisation of land will be a national tax to achieve a uniform situation in the country. The IMOB revenue will accrue entirely to the State. The tax will be brought into play wherever it is possible to build, irrespective of property relations and cadastral boundaries.
The IMOB is an innovation and is based on the establishment of a national register of undeveloped land, which lists all land available for construction under the general development plans (PAG). A distinction is made in this regard between lands that are immediately constructible, and lands that require the completion of prior roadworks and public and collective infrastructures. If a property is of a size or configuration that does not lead itself to the construction of dwellings in compliance with the regulations, it shall not be taxed. Similarly, no tax is levied on land that already has buildings on it and that cannot accommodate additional buildings. However, land which has sufficient residual surface area to erect a new building, even if it is not to erect a new building, even in the presence of an existing building, will be taxed if the available space is not used.
The tax on the mobilisation of land will be calculated on the same basis as the IFON but the Government plans to introduce a flat-rate allowance of 3400 euros for each child under the age of 25. This measure should allow a reasonable size of land for each child to be released from taxation, to enable the future construction of a single-family home. A taxpayer that is under the age of 25 will benefit from the same flat-rate allowance.
IMOB = (Vf – Amob) x Tmob
The rate of the land mobilisation tax will be progressive and will increase sharply in order to motivate recalcitrant owners to take care of their land. For example, the national rates of the tax on the mobilization of lands that are immediately constructible varies from 0% to 450% depending on the duration of registration of the land in the national register of undeveloped land at the reference date of the tax year. National rates of the tax on the mobilisation of lands that are not immediately constructible varies from 0% to 150%. Those rates are in addition inflated by 50% or 100% if the land is located in a priority locality under the terms of the spatial planning policy.
On the one hand, the longer it takes to build, the higher the rate will be. On the other hand, a 0% rate applies during the first 5 to 8 years depending on whether the land is immediately constructible or not. Thus, the progressive evolution of the rates over the years increases the incentive to build over time but also gives the opportunity for the holders of the rights in rem in the land to carry out construction planning. If a transitional period is appreciated, we can nevertheless regret that if the national register of undeveloped land is effective in 2025 for the entry into force of the draft reform and its application as from 2026, the first tax would only be collected in 2031 at the earliest. That transitional period should be way shorter: the holders of the rights in rem in the land can indeed start to carry out construction planning as from today.
The flat-rate allowance of 3400 euros for each child under the age of 25 is also a positive measure that raises questions. The maximum of tax may indeed become due if the land is not mobilised as soon as the children of the taxpayers turn 25, since the applicable rate depends on the duration of registration of the land in the national register of undeveloped land at the reference date of the tax year. We believe that a transitional period starting at the age of 25 of a child would be welcome in this respect. Indeed, at 25, not everybody is settled professionally and financially in a position to build a house. Without a transitional period, we may end up with families that kept land for their children, finally forced to sell when they turn 25 because the tax due is very high and their children have just finished their studies for example. Those families could be penalised twice: first the tax due will probably be the maximum from the first year (if the land is in the register of undeveloped land for at least 20 years) and secondly, they may be forced to sell quickly at a lower price because they do not have the savings to pay such an high amount of tax. This result would be contrary to the aim of the tax allowance which is to allow a family to keep land for their children.
Introduction of a national tax on the non- occupation of housing (impôt national sur la non-occupation de logements, “INOL”)
By introducing the INOL, complementary to the reform of the IFON and the IMOB, the Government intends to mobilise existing unoccupied housing. The municipal tax on unoccupied dwellings, introduced in 2008 on an optional basis as part of the Housing Pact 1.0, failed to produce the expected results and thus will be replaced by this new compulsory national tax.
According to the draft law, a dwelling is considered unoccupied if no natural person is registered in it for a period of six months. For the purpose of the INOL, a dwelling is defined as a set of premises intended for inhabitation, forming a single unit and consisting of at least a living room, a kitchenette and a bathroom with toilet and having direct access to the outside or to common areas.
The municipality must establish that a dwelling is not occupied and to that aim, dwellings are presumed to be unoccupied, according to the draft law, when no natural person is registered in the population register at the address of the dwellings for a period of six consecutive months. Dwellings which have a decrepit external appearance giving rise to a presumption of lack of maintenance; or which are not furnished with the furniture essential to their use as dwellings; or for which the consumption of drinking water or energy services recorded over a period of at least six consecutive months is lower than a minimum consumption level; or for which no tax for the public collection of waste has been paid, may also be presumed to be unoccupied for the purpose of the INOL.
Nevertheless, such presumptions can be overturned by the taxpayer who can justify the occupation of a dwelling, or the non-occupation of a dwelling for legitimate reasons or beyond the control of the taxpayer or in case of “force majeure”. A legitimate reason for non-occupation is a project of repair, improvement, construction or fitting out for the purpose of occupation, which may not exceed two years from the start of the work, provided that the person concerned produces a building permit or a detailed estimate and actually undertakes the work within three months of the justification and ensures that the work is carried out continuously thereafter. The two- year period may be extended in exceptional cases and as deemed necessary in view of a written and duly motivated request submitted by the taxpayer.
The INOL formula will be:
INOL = Vc + (Vc x 0,3 x a)
Vc is the central value for unoccupied housing which is a lump sum per dwelling set at 3000 euros. “ a ” is the number of years following the first year for which the tax is due (N) and may not exceed 5. As a result, the INOL to be levied by the Luxembourg tax authorities for the benefit of the State will amount to 3.000 euros per dwelling for the first year (INOL of year N = 3000 + (3000 x 0,3 x 0)). The tax will increase by 900 euros per year up to a maximum of 7.500 euros (INOL of year N+5 = 3000 + (3000 x 0,3 x 5)). If the property remains unoccupied, this amount will be due annually.
In this respect, it is questionable whether this measure will have the desired effect. Will a monthly tax burden from 250 euros (3000 / 12) to 625 euros (7500/12) per month really make the owner react and encourage him to sell or rent, taking into account the capital gain he is currently making on his property? At the very least, we can ask ourselves this question and it seems that the Government itself does not anticipate any change in behavior since it indicates that “The revenue from this national tax will amount to some 14 million per year”.
The INOL raises also a question of fairness and equality because the amount of the tax is not proportionate to the size of the dwelling, as it is for example the case in Belgium. The amount of INOL proposed in the draft law should be a minimum, for the smallest dwellings, and should increase in proportion to the size and the housing capacity of the unoccupied dwellings.
Who is subject to the taxes and who is exempted?
For purpose of the IFON, the IMOB and the INOL, the taxpayers are in principle the owners of the taxable property or in the case of division of ownership, the usufructuary1, the holder of the right to build (“droit de superficie”), or the holder of the right of emphyteusis on 1 January of the tax year concerned. In undivided ownership as well as in matrimonial communities, the tax due by each taxpayer is fixed in proportion to his respective share, as shown in the cadastral documentation. In the absence of any indication in the cadastral documentation, the taxpayers are presumed to be liable for tax in equal shares. In co-ownership, the tax due by each taxpayer is fixed in proportion to his share in the common parts, as resulting from the descriptive statement of division of the building or, failing that, the cadastral documentation. In the absence of any indication in the cadastral documentation, taxpayers are presumed to be liable according to equal shares.
1 In relation to the IMOB and all man-made usufructs (that are not legal usufructs) established before the law came into force, the usufructuary and the bare owner share the tax burden equally. As usufruct contracts concluded after the entry into force of the law are concluded with full knowledge of the facts, they can anticipate the tax burden by providing for contractual clauses.
The draft law exempts some public institutions from the IFON. As a result, are exempt from property tax: 1° the State, 2° the municipalities ; 3° the syndicates of municipalities; 4° public promoters within the meaning of Article 16 of the amended Act of 25 February 1979 on housing assistance ;5° foundations and non-profit associations recognised as being of public utility, within the meaning of the amended law of 21 April 1928 on non-profit associations and foundations; 6° legal persons governed by public international law and 7° approved sports federations and their affiliated clubs. The draft law does not grant any exemption from the IMOB and the INOL to the public institutions. The Government wishes to treat all the private and public actors such as the State, the municipalities, the public institutions on an equal footing in order not to create an infringement of competition law, as both categories of actors operate in a common market, namely housing.
In relation to the IMOB, the exercise of the right to build for the usufructuary remains difficult in practice, while construction on land already containing a house may require a subdivision. Strictly speaking, the surviving spouse's usufructs relates to the house, but not to the land to be subdivided, so it is questionable whether the surviving spouse is entitled to apply for a subdivision. It is uncertain whether the action of subdividing land is compatible with the obligation of the usufructuary to maintain the substance of the asset. For that reason, the draft law exempts the usufructuary and the bare owner from the tax on the mobilisation of land when the usufruct is constituted by the law, based on article 767-1 of the Civil Code. Except for the legal usufructs, no other exemption will be granted in relation to the IMOB.
In relation to the INOL, the draft law does not provide for any exemption.
Entry into force of the draft reform
This reform is welcome but unfortunately its implementation timeline does not take into consideration the emergency experienced by people wishing to find housing in Luxembourg. Indeed, the law will enter into force on the first day of the first month of September following the completion of 24 months from the publication of the law. So, if the law is voted and published before 1st September 2023, the law will enter into force in September 2025. However, if the draft law is voted and published after 1 September 2023, the entry into force of the law will be postponed to September 2026.
In addition, articles 2 to 12 of the draft law, according to which the IFON and the IMOB are collected, will be applicable only from the 1st of January of the calendar year which follows the year during which the law entered into force. It means that the taxes will be applicable as from 1st January 2026 if the law enters into force in September 2025 or 1st January 2027 if the law enters into force in September 2026.
Moreover, provisions related to the INOL will enter into force on the 1st day of the first month of January following the accomplishment of 36 months after the publication of the law. It means that if the law is published in 2023, it will apply as from 1 January 2027 (i.e., 36 months after a publication in December 2023 brings us to December 2026 and the following 1st day of January is 1st January 2027). If the law is published after 31 December 2023, the INOL will apply as from 1 January 2028 (i.e., 36 months after the publication on the 1 January 2024 brings us to January 2027 and the following 1st day of January is 1 January 2028).
The deadlines for the implementation of the reform do not correspond to the emergency experienced by people wishing to find housing in Luxembourg. We imagine that constraints linked to the administrative and IT implementation of the reform justify this delay. The bill n° 8066 which creates a National Register of Buildings and Dwellings (the tool which will notably allow the identification of unoccupied dwellings) confirms this by giving the municipalities, “given the scale of the task”, 3 full years (from the 1st January following the entry into force of the law) to initialise the municipal register, the data that will be used to feed the national register. However, the argument does not work: the Grand Duchy has demonstrated its ability to mobilise about COVID as a matter of urgency.
Sure, it was a health emergency, but behind the housing crisis there is also a social emergency that has deserved an appropriate response for several years.
Partner, Head of International & Corporate Tax