New bill on the implementation of the 2017 tax reform package

On 26 July 2016, bill of law N° 7020 on the implementation of the 2017 tax reform package was filed by the Luxembourg Government with the Parliament (Chambre des Députés). The new measures affecting both business and individual taxation were originally announced on 29 February 2016 (please refer to our Newsflash dated 29 February 2016 available in our website). The bill mainly follows the announced measures with certain amendments. The key measures may be summarised as follows:

Business taxation

Decrease in the statutory corporate income tax rate

The maximum statutory corporate income tax (”CIT”) rate will be progressively decreased from its current rate of 21% to 19% in 2017 and then to 18% in 2018. The decrease will lead to a maximum aggregate rate for CIT, municipal business tax (Luxembourg-city) and the contribution to the employment fund of 27.08% in 2017 and 26.01% in 2018. In addition, companies whose annual net profits do not exceed €25,000 may benefit from a reduced CIT rate of 15% (currently a reduced rate of 20% applies to companies whose annual net profits do not exceed €15,000). An intermediary rate for net profits between €25,000 and €30,000 has lastly been added in the bill. Such intermediary rate is set at €3,750 plus 33% of the net profits exceeding €25,000.

Limitation of the carry forward of tax losses

The carry forward of tax losses incurred as from 2017 will be limited to 17 years. The initial proposal included a double limit of 10 years and offset against only 80% of the net taxable profit, but the final bill has been improved in this respect. The 17-year limit is motivated by the expectation that a viable business should be able to absorb losses within the 17 following years. The limitation of the carry forward will only apply to losses incurred within financial years ending after 31 December 2016 while those realised within previous exercises continue to benefit from the current rules which provide that tax losses will be carried forward indefinitely by the taxpayer who has suffered them.

Increase and extension of the investment tax credits

Tax credits currently creditable against CIT may be granted upon demand for (i) certain qualifying additional investments and (ii) global investments. The bill increases the rate of the tax credit from 12% to 13% for qualifying additional investments and from 7% to 8% for global investments on the first tranche of annual global investments not exceeding €150,000. While the initial proposal only aimed at increasing the rates thereof for agricultural enterprises, the final bill extends the increases in rates to all enterprises. In addition, investment tax credits will also be made available for investments in assets that are physically exploited within a Member State of the European Economic Area, which is currently not the case.

Increase in the Minimum Net Wealth Tax

The minimum net wealth tax applicable to Luxembourg companies whose financial assets, receivables against related companies, transferable securities and cash deposits exceed both (i) 90% of their total balance sheet and (ii) €350,000 will be increased from the current amount of €3,210 to €4,815 (including the contribution to the employment fund).

Value added tax

The bill also contains certain significant amendments in the field of VAT:

- Introduction of new provisions to render ipso jure or de factomanagers (dirigeants de droit ou de fait) liable for the fulfillment of the VAT obligations, including the payment of the VAT due, incurred by companies which they are in charge of. This rule also applies to liquidators and receivers;
- Introduction of personal and joint liability for the ipso jure or de facto managers, liquidators and receivers where VAT obligations have not been met and where the VAT debt has not been settled by the companies which they are in charge of;
- Increase in fixed penalties from the current amount of €5,000 to €25,000;
- Increase in ad valorem penalties from the current rate of 10% to 50% in the event that the payment of VAT has been evaded or where the refund of VAT is unduly obtained; and
- Introduction of specific new measures in the VAT Law and in the Criminal Code to combat VAT fraud and VAT evasion.

Other tax measures

Other measures include the following:

- Introduction of deferred depreciations;
- Introduction of a rollover relief for capital gains on real estate for family business transmission;
- Abolition of the ad valorem registration duty of 0.24% levied on the registration of a transfer of a claim;
- Retroactive extension of the rollover relief for foreign exchange gains on assets denominated in a foreign currency as from the fiscal year 2016; and
- Abrogation of the tax deductibility of the contributions to the Luxembourg deposit’s guarantee fund and the Luxembourg resolution fund (gains on the recovery of the relevant provisions may nevertheless by offset by contributions made to said funds until 2026).

Individual taxation

Amendments to the progressive income tax rate schedule

The progressive income tax rate schedule will be adjusted to ensure that low income is less taxed (0% for net annual income up to €11,265). The marginal personal income tax rate will be increased from the current rate of 40% to 42% for an annual net income exceeding €200,004 realised by resident and non-resident individuals (tax class 1) and an intermediary rate of 41% will be introduced for income between €150,000 and €200,004.

Abolition of the temporary equalization tax

The temporary equalisation tax of 0.5% will be abolished. This temporary tax set as of 1 January 2015 and levied on professional and substitute income or on income from private wealth realised by individuals aimed to equalise the Luxembourg budget. The tax was intended to be temporary from the outset and will thus have been levied for two years (2015 and 2016).

Other tax measures

Other tax measures for individuals include the following:

- Introduction of the optional individual tax return instead of the mandatory collective assessment for resident or non-resident spouses / partners;
- Increase in the withholding tax on interest paid to Luxembourg resident individuals from the current rate of 10% to 20%;
- Assimilation of non-residents to residents in order to avoid any discrimination;
- Increase in tax credits for employees, pensioners and independent professionals;
- Incentives in respect of social housing; 
- Introduction of an abatement regime for low emission cars; and
- Introduction of specific new measures in the General Tax Law and in the Criminal Code to combat tax fraud.

Our view

The bill follows in many respects the announcements made earlier this year and hence its content was largely known. Although the measures try to combine sustainability, social justice and competiveness, the tax package is mainly oriented towards individual taxation and aims at reducing the taxation of middle class workers. Furthermore, it should be noted that several measures combatting tax fraud and money laundering have also been introduced. This being said, the tax package does not significantly alter business taxation given that the initially proposed improvements (e.g. the abolition of withholding tax on dividends and net wealth tax, significant reduction of the CIT rates, extension of the participation exemption, etc.) have not ultimately been included. Nevertheless, the Luxembourg business community continues to lobby to convince the government and the legislator to reconsider these proposals.