On 23 December 2022, the Luxembourg Parliament adopted budget bill n°8080 (the Budget Law). The key tax measures introduced by the Budget Law concern personal income tax, filing aspects and a clarification with respect to the reverse hybrid rule.
Another notable change to the Luxembourg 2023 tax environment results from another law (bill n°8083, the VAT Law) which introduces, to combat inflation, a temporary 1 percent reduction of applicable VAT rates for 2023.
The budget law: adding clarity to the reverse hybrid rule
Generally speaking, the reverse hybrid rule under Article 168quarter of the Luxembourg income tax law (LITL) provides that tax-transparent entities (such as partnerships) established in Luxembourg can be subject to Luxembourg corporate income tax on that portion of their net income not otherwise taxed in Luxembourg or under the laws of any other jurisdiction provided that one or more nonresident associated enterprises holds, in aggregate, a direct or indirect interest of 50 percent or more in terms of the voting rights, equity interests or profit entitlement of such tax-transparent entity or arrangement and are located in a jurisdiction which considers such entities to be tax opaque.
The Budget Law is intended to clarify that the reverse hybrid mismatch rule should only apply where the nontaxation of income realized by the investor results from the difference in qualification (i.e. transparent vs. opaque) but not if the nontaxation of income realized by the investor is attributable to the investor’s tax status, i.e. where the investor benefits from a subjective tax exemption in its jurisdiction of establishment.
This measure applies retroactively, from the 2022 tax year.
Update of the employee bonus scheme (prime participative)
The currently applicable employee bonus scheme (prime participative) allows Luxembourg employers to grant to their employees a profit-sharing bonus with a 50 percent tax exemption provided certain conditions are cumulatively fulfilled. Among the required conditions, the overall available amount for such bonus cannot exceed 5 percent of the employer’s profits for the fiscal year immediately preceding the fiscal year in which the bonuses are granted, the employees must be affiliated with the Luxembourg social security and the bonus cannot total more than 25 percent of the employee’s annual income.
In order to provide more flexibility to Luxembourg employers and to improve the attractiveness of Luxembourg, the Budget Law introduces as from 1 January 2023, groups of companies that are part of a fiscal unity to assess the 5 percent threshold limit on an aggregated basis rather than on a standalone basis.
Update of the impatriate regime
The Budget Law provides for additional suppleness to the Luxembourg impatriate regime, whose purpose is to favor talent attraction by granting certain lump-sum allowances to be paid under certain circumstances to employees who become Luxembourg tax residents, to mitigate the increased cost of living and to compensate for relocation expenses.
Until 31 December 2022, the impatriate regime only applied to impatriates receiving an annual gross fixed salary of at least €100,000. Under the Budget Law, from 1 January 2023 this minimum threshold is reduced to €75,000, thus allowing more impatriates to benefit from this regime.
Legitimization of de facto deadline for filing tax returns
Luxembourg resident corporations are obliged to file annual income tax returns for corporate income tax, municipal business tax and net wealth tax purposes before 31 May of the following relevant year, in order to avoid late filing penalties. However, under the current administrative practice, taxpayers are generally allowed to file their tax returns by 31 December without facing penalties for late filing.
The Budget Law legalizes the current administrative practice by officially extending the filing deadline for corporations to 31 December. This extension applies as from the 2022 tax year for corporate income tax and municipal business tax, and from 1 January 2023 for net wealth tax. Similarly, the Budget Law also extends the filing deadline for personal income tax returns from 31 March to 31 December, thus aligning the filing deadline for both corporations and individuals.
Update of the relibi law
The Luxembourg “Relibi Law” (dated 23 December 2005, as amended) introduced a final 20 percent withholding tax on interest payments made by Luxembourg paying agents to individual beneficial owners that are resident in Luxembourg. This has also been further clarified by the Budget Law.
The Budget Law clarifies the definition of paying agent by specifying that a paying agent within the meaning of the Relibi Law must be a professional of the financial sector that pays interest in the course of its normal economic activity.
Likewise, the Budget Law provides that interest payments made between private persons (other than credit institutions, other professionals in the financial sector, private wealth management companies (SPFs), UCITs and UCIs within the meaning of the amended law of 17 December 2010), or where a debt instrument has not been publicly issued on a regulated market, are excluded from the benefit of the Relibi Law.
Finally, the Budget Law extends from 31 March to 31 December the deadline for the beneficial owner to decide to apply the Relibi Law when the paying agent is located outside Luxembourg.
Restriction to the application of the reduced subscription tax for investment funds
The 2021 budget law introduced reduced subscription tax rates for certain investment funds or individual compartments of such funds that invest a specific portion of their net asset value in determined sustainable economic activities.
The European Commission decided to define fossil gas and nuclear energy as sustainable economic activities under the EU Taxonomy. The Luxembourg Government is opposed to nuclear energy and committed to the ecological transition, prioritizing the development of renewable energy. Hence, the Budget Law excludes all investments in nuclear energy and fossil gas from the reduced subscription tax rates.
Tax incentives for individuals
In a move to fight inflation, the Budget Law introduces a tax relief by increasing the maximum amount of the tax credit for single parents from €1,500 to €2,505. The Budget Law also foresees that such maximum tax credit (i.e. €2,505) will apply to the extent the annual adjusted taxable income remains below €60,000 (instead of €35,000).
Furthermore, the Budget Law increases, from 2023, the income brackets under which low-income earners will be eligible for the social minimum wage tax credit while keeping the €70 tax credit per month for those taxpayers.
Real estate taxation
The Budget Law limits the 4 percent accelerated depreciation for buildings (or parts of buildings) used for rental housing to two properties or parts of properties used for rental housing acquired or constituted after 31 December 2022.
Modification of vat rates
From 1 January 2023, the VAT Law decreases currently applicable VAT rates by 1 percent, except for the super- reduced rate, which remains at 3 percent.
This means the following reductions in VAT rates will apply for 2023:
- Standard VAT rate – 16 percent (from 17 percent)
- Intermediary VAT rate – 13 percent (from 14 percent)
- Reduced VAT rate – 7 percent (from 8 percent).
- As noted above, the super-reduced rate remains at 3 percent.
To further promote sustainable investments, from 1 January 2023 the super-reduced VAT rate apples to new photovoltaic installations.