Luxembourg’s well-established reputation as a leading financial centre makes it a natural candidate for financial companies weighing their Brexit relocation options. The jurisdiction offers advantageous tax measures to financial companies and their employees.
Low tax regime for financial companies
Corporate income tax – Financial companies established in Luxembourg city are subject to corporate income tax at a global rate of 26.01%. There are exemptions and tax deductions specifically for financial companies. These include the deduction of provisions booked by financial institutions to cover the risk of default on certain categories of assets or against loans where no specific or foreseeable risk, other than normal credit risk, is involved. Contributions made by financial institutions in the deposit guarantee scheme, dividends and capital gains are also deductible.
Significantly, Luxembourg decided to exclude financial institutions and insurance companies from the scope of the rule limiting interest deductibility following transposition into Luxembourg law of the EU Anti-tax Avoidance Directive (ATAD).
Net wealth tax – Luxembourg financial companies are subject to net wealth tax based on wealth located in Luxembourg at sliding scale between 0.5 and 0.05%.
VAT – Financial institutions established in Luxembourg are treated as VAT taxable persons and are subject to the 17% maximum VAT rate. In principle, management funds, insurance and main banking activities are VAT exempt. Financial companies may benefit from the VAT group rules introduced in 2018, which allows intermediate supplies between the members of a VAT group to be treated as internal supplies and is thus ignored for VAT purposes.
Individual tax exemptions
Individuals in Luxembourg are subject to a progressive rate up to 42%, depending on their income and personal situation. The double taxation treaty signed with the UK solves potential issues concerning dual residency.
Some income may be totally or partly exempted, such as dividends and capital gains on non-substantial participation held for more than six months.
Individuals established in Luxembourg are not subject to Luxembourg net wealth tax. Luxembourg is also known for its favourable inheritance tax regime, which includes exemption in direct line and a registration gift rate of between 1.8 and 2.4% in direct line.
Some interesting compensation structures may be put in place by employers for individuals working for a Luxembourg company as, for instance, stock option plan and carried interest scheme.
Individuals moving to Luxembourg also benefit from the Luxembourg “step up” mechanism which allows the revaluation of the acquisition price of substantial shareholdings to their market value at the date of arrival in Luxembourg.
Attracting highly skilled and qualified workers
Luxembourg has set up tax incentives covering the employer-sponsored costs and expenses of relocating highly skilled and qualified workers to Luxembourg. Some costs and expenses are treated as deductible operating income for the employer and are not seen as taxable income for employees. These include moving costs (including travel and packing costs), accommodation costs, children’s school fees and travel expenses for special occasions.
User-friendly employment law regime
As of May 2018, 33 companies had already migrated from the UK to Luxembourg in preparation for Brexit, creating over 200 jobs. Most of these moves were in the financial sector, specifically in banking and funds. As outlined above, the Luxembourg tax regime has specific measures that makes employing workers from the UK financially interesting, both for the employees and the employer. Key aspects of Luxembourg’s employment law regime could also play a role for companies considering making the move.
Employees in Luxembourg benefit from safeguarding measures covering pay, dismissal procedures, staff representation and social security.
Pay – Salaries are linked to the cost of living – if the consumer price index rises by 2.5%, salaries in Luxembourg must be adjusted by this percentage. The minimum monthly wage for a full-time employee is EUR 2,048.54 (EUR 2,458.25 for qualified workers)
Unfair dismissal – Luxembourg workers are protected against dismissal in case of sickness, maternity or parental leave. They can only be dismissed for gross misconduct or for real and serious reasons linked to their performance or the financial situation of the company. Summary dismissals based on health are unfounded are therefore prohibited. The only exception is during the trial period (up to 12 months depending on the qualification of the employee), when employers are free to terminate the employment contract without having to justify their decision.
Employee representation – Staff representatives are required in any company that employs at least 15 employees. Depending on the situation, they either have an information and consultation role or a co-determination right. Unions exist in Luxembourg but are not as aggressive as in neighbouring countries and strikes almost never happen. Unions play an important role in specific circumstances, however, such as in collective redundancies. In these cases, the employer must agree a social plan with the unions and this often involves negotiating extra-legal indemnities for the employees affected.
Social security – Employees are well covered as Luxembourg’s social security scheme includes health insurance, long-term care insurance, pension insurance, accident insurance and unemployment insurance for a cost that is quite low compared to other EU countries. Contributions are shared between the employee and the employer, each paying around 14% of the employee's gross salary.
Luxembourg’s courts are neither pro-employee nor pro-employer; they tend to be as objective as possible. Damages for unfair dismissal are limited and rarely reach more than 12 months’ pay. Luxembourg has a strong practice of settling labour disputes out-of-court.
Flexible working arrangements are possible in Luxembourg. These include the global employment contract, which enables several companies of the same group to share employees under one sole employment agreement.