Amid global economic uncertainties, the Luxembourg government proposes in its 2023 budget bill released on 12 October 2022 to clarify the scope of the reverse hybrid rules, to strengthen the attractiveness of Luxembourg for global talents and to modernise certain aspects of the Luxembourg tax code.
Most measures apply as from 1 January 2023, but several clarifications and technical changes already apply for tax year 2022
Reverse hybrid rules – clarification
The budget bill proposes to clarify that reverse hybrid rules only apply if the double non-taxation of income results from the hybrid mismatch, i.e., from the fact that foreign associated enterprises treat as tax opaque for their local tax purposes a Luxembourg entity that is, on the contrary, tax transparent in Luxembourg. This welcome clarification aligns the reverse hybrid rules with the ordinary anti-hybrid entity rules which – in line with the ATAD 2 directive – do not apply to mismatch outcomes that result from other factors, e.g., the tax-exempt status of the investor.
This clarification will particularly facilitate the reverse hybrid tax analysis for investment funds whose investor base includes foreign pension funds, sovereign wealth funds or entities set up in jurisdictions that do not levy a tax similar to a corporate tax or that apply a territorial tax regime. If adopted, this clarification would already apply for tax year 2022.
Increasing attractiveness for global talents
The government proposes a reduction in the income threshold for foreign employees moving to Luxembourg to fall within the scope of the impatriate regime: instead of EUR 100,000, it would be sufficient that the employee earns a gross income of EUR 75,000 per year (excluding benefits). As a reminder, under the impatriate regime, a range of costs covered by the employer in connection with the move to Luxembourg constitute exempt income for the employee for up to 8 years, subject to certain requirements. This change would apply as from 1 January 2023.
In addition, the budget bill includes a change to the beneficial tax regime for the remuneration allocated to employees under a participation scheme (prime participative). The current regime provides for an exemption of 50% of the remuneration in the form of prime participative subject to certain conditions, amongst others that the prime participative does not exceed 5% of the positive result of the employing company in the relevant year. If the proposed change is adopted, the 5% threshold could instead be assessed in respect of the aggregate results of all companies forming part of a fiscal unity (rather than mandatorily on a company-by-company basis). This change would apply as from 1 January 2023.
The budget bill proposes to extend the filing deadline for corporate income tax, municipal business tax, net wealth tax and personal income tax returns from 31 March to 31 December. This technical change would represent a legalisation of the current administrative practice. In parallel, the budget bill also appears to restrict the flexibility for tax offices to grant extensions of the filing deadline. The new deadline would apply to corporate income tax, municipal business tax and personal income tax due for 2022 and onwards, and to net wealth tax due as from 1 January 2023.
There are also technical changes to the so-called RELIBI law, pursuant to which a 20% withholding tax is due on certain interest income payable to individuals who are resident in Luxembourg and are beneficial owners of such payment. In particular, the paying agent should in order to be recognized as such be making the payment as part of its normal economic activity.
The bill of law needs to go through Parliament where it may be amended. A final vote is expected around mid-December.