On 14 October 2020, the Luxembourg government submitted to the Parliament the budget bill for fiscal year 2021. It was approved by the Parliament on 17 December 2020 and published in the Official Journal on 23 December 2020 (the Law).
This e-alert provides an overview of the key tax changes as from 2021.
REAL ESTATE INVESTMENTS TAXATION
Introduction of a new special 20% tax on all income derived by tax opaque Luxembourg funds from domestic real estate assets
As from 1 January 2021, a new 20% real estate tax ("prélèvement immobilier") will be due by certain investment vehicles which receive income from real estate located in Luxembourg. Investment vehicles holding real estate located outside of Luxembourg will not be affected by this tax.
Entities within the scope of the prélèvement immobilier
The Luxembourg entities covered by this measure are the following investment funds to the extent they have a legal personality (except for the SCS which is expressly excluded) (i) undertakings for collective investment (UCIs) subject to Part II of the Luxembourg law of 17 December 2010, (ii) specialised investment funds (SIFs) subject to the Luxembourg law of 13 February 2007 and (iii) reserved alternative investment funds (RAIFs) subject to the Luxembourg law of 23 July 2016.
Tax transparent investment vehicles, such as the limited partnership (société en commandite simple), the special limited partnership (société en commandite spéciale) or fund under a contractual form (fond commun de placement), are excluded from the scope of the real estate tax.
Income subject to the real estate tax
Real estate tax is levied on income derived by the Luxembourg investment vehicle from Luxembourg real estate. Income includes rental income (excluding VAT) and capital gains realized directly or through tax transparent vehicles (including the disposal of interest in a transparent body which holds a real estate property located in Luxembourg).
The real estate tax applies at a rate of 20% as from 1 January 2021.
Non deductibility of the real estate tax
The real estate tax is not deductible when determining the amount of income from property and is neither creditable nor deductible by any investor.
Declaration and reporting
The relevant investment vehicles must declare said income to the Luxembourg Tax Authorities (LTA) by 31 May and pay the tax to the LTA by 10 June of the calendar year following the year in which the income is received or realised. First declaration will take place no later than 31 May 2022. An auditor report, to be attached to the return, must certify that the declared income has been computed in accordance with relevant legal provisions and provide details of the computation.
Investment vehicles within the scope of the real estate tax, must inform the LTA by 31 May 2022 at the latest whether or not they have held (directly or indirectly) Luxembourg real estate at any time during the calendar years 2020 and 2021. Such reporting must be filed even if no income was generated from the Luxembourg real estate. Investment vehicles filing a return for 2021 will be deemed compliant with this reporting obligation.
The same reporting applies to investment vehicles having changed, during calendar years 2020 and 2021, their legal form from an entity within the scope of the real estate tax to a tax transparent entity while holding directly or indirectly Luxembourg real estate.
A lump sum fine of EUR 10,000 may apply in the event of failure to declare the aforementioned information.
Lower subscription tax rate for UCIs investing in sustainable economic activities
As from 1 January 2021, under specific conditions, lower subscription tax rates will be available for investment funds covered by the Luxembourg law of 17 December 2010 relating to the undertakings for collective investments (Part I and Part II of the 2010 UCI regime) that invest in sustainable economic activities as defined by EU Regulation 2020/852.
In a nutshell, if the portion of net assets of the UCI, or of the compartment, invested in sustainable economic activities is at least respectively 5%, 20%, 35% and 50% of the total net assets of the UCI or the compartment, then the subscription tax rate will be respectively 0.04%, 0.03%, 0.02% and 0.01 % for that portion of assets. An auditor report must certify the relevant percentage and shall be attached to the subscription tax return.
Updated depreciation rate for rented real estate assets
As from fiscal year 2021, accelerated depreciation rate applicable to rented real estate is decreased from 6% to 4% and will apply to real estate assets whose construction has been completed since less than five years (currently 6 years) at the beginning of the fiscal year.
The same rate will apply for investment expenditures engaged for an older housing to the extent it exceeds 20% of the asset’s acquisition price and at the beginning of the fiscal year renovation work has been completed since less than five years.
A novelty has been introduced with a 6% depreciation rate granted for certain sustainable energy renovation investment expenditure for rented housing. Such depreciation rate is granted if as at 1st January of the fiscal year renovation work has been completed since less than nine years and a financial assistance has been granted for these expenditures under article 4 of the amended law of 23 December 2016 establishing an aid scheme for the promotion of sustainability, rational use of energy and renewable energies in the field of housing.
Existing 6% depreciation rate will continue to apply if existing requirements are met and the building has been built or acquired before 1st January 2021, or if the renovation of an old dwelling has been completed before 1st January 2021.
Special allowance for taxpayers benefiting from the accelerated depreciation rate
As from fiscal year 2021, taxpayers making use of the above-mentioned accelerated depreciation rate may, under certain conditions, claim an additional tax deduction up to EUR 10,000 (doubled in case of joint taxation).
Private wealth management companies (SPF) and real estate investments
Prohibition as from 1 July 2021 for SPF (“sociétés de gestion de patrimoine familial”) to hold via Luxembourg or foreign partnerships or FCPs (“fonds communs de placement”) real estate assets. Indirect detention though joint-stock companies will however remain allowed. This measure complements the existing prohibition contained in the SPF law of 11 May 2007 to directly hold real estate or grant interest bearing loans.
Increase of registration duty for capital contribution of real estate
If the proposal is accepted as it currently stands, capital contributions of immovable property to a civil or commercial (Luxembourg or non-Luxembourg) company will become subject to the common registration duty rules. In case of contribution in kind (“apport pur et simple”), registration duties would therefore be increased from 0.5% + 2/10 to 2% +2/10 and the transcription tax would be increased from 0.5% to 1 %. Furthermore, the delay according to which the property may be subsequently transferred to a shareholder (other than the one who contributed it) after liquidation, wind-up or capital reduction without duty to apply is extended from 5 to 10 years.
The impatriate regime will be codified in Luxembourg law as from 2021 onwards whereas it is now based on administrative guidance (i.e., Circular 95/2 dated 27 January 2014 which will be abolished as from 1 January 2021). Some conditions and effects of the regime will change, for instance the new regime will only apply to impatriate employees earning at least EUR 100,000 per year (currently EUR 50,000 per year) and it will apply for a period of up to 9 years (currently up to 5 years following the year of the employee’s arrival). One of the main differences is that the lump-sum compensation for specific recurring expenses will be changed by a 50% exemption of the impatriation premium not exceeding 30% of the beneficiary’s annual basic salary.
Introduction of a new employee participation mechanism and abolition of the current stock option regime
The current tax regime for stock option and warrant plans governed by circular letter L.I.R. 104/2 issued by the Luxembourg tax authorities on 29 November 2017 will be abolished end of 2020. Instead, the Law introduces in the Luxembourg income tax law a new regime for employee’s participation under which employees can be granted a participative premium connected to the financial result of the employer.
At the level of the employee the participative premium will benefit from a 50% tax exemption and the payment would remain tax deductible at the level of the employer provided certain requirements are met.
The beneficiary of the participative premium must be an employee affiliated to the Luxembourg social security, or to a foreign social security scheme covered by a bi - or multilateral social security instrument and the payment cannot exceed 25% of the beneficiary’s gross annual remuneration received the same year (excluding any benefits in cash and/or in-kind, bonuses, the premium itself).
Several conditions shall also be met at the level of the of the employer in order for the participative premium exemption to apply:
- the employer must realize income that qualifies either as commercial profit, agricultural profit or profit deriving from a liberal activity;
- the employer must maintain regular accounts during the year in which the participative premium is paid and during the preceding tax year;
- the aggregate amount of the participation premiums that may be allocated to employees is limited to 5% of the employer’s profits for the year preceding the allocation of the premium.
An employer deciding to pay such a premium to his employees will be required to inform the Luxembourg tax authorities (tax office in charge of withholding tax on wages).
Introduction of electronic withholding tax cards
Electronic withholding tax cards will be progressively introduced in 2021 by the Luxembourg tax authorities and access will be granted to employers directly. As from 1st January 2022, the withholding tax cards will be accessible only electronically and the employers will be obliged to use the new platform to access said cards.
Changes to the fiscal unity regime
The Luxembourg fiscal unity regime will be amended in line with EU Law following a recent case law of the European Court of Justice (ECJ) (C-749/18). The ECJ ruled in this case that the Luxembourg fiscal unity regime constitutes an infringement of the freedom of establishment considering that a parent company in a Member State other than Luxembourg is obliged to dissolve the vertical fiscal unity between its direct and indirect Luxembourg subsidiaries (potentially resulting in adverse Luxembourg tax consequences) in order to enable its direct subsidiary to establish a horizontal fiscal unity albeit this is not required if the parent company is tax resident in Luxembourg.
Article 7 of the Law temporarily remedies this infringement by allowing a group to change from a vertical fiscal unity to a horizontal fiscal unity tax neutrally provided the following conditions are met:
- the parent company of the dissolved vertical fiscal unity will also be the head of the horizontal fiscal unity;
- the entities that formed part of the dissolved vertical fiscal unity will also form part of the horizontal fiscal unity; and
- the entities bind themselves to form part of the horizontal fiscal unity for at least 5 years (for those entities that were already part of the dissolved vertical fiscal unity, the 5-year period continues to run as if the change of fiscal unity regime had not taken place).
Groups have until the end of the tax year 2022 to tax neutrally change from a vertical fiscal unity to a horizontal fiscal unity. The commentary to the draft law explains that this period should be sufficient for groups to verify if they should expand their current vertical fiscal unity into a horizontal one.
The changes to the fiscal unity regime will enter into force as from tax year 2020.
Small Business Scheme threshold increased
Under the Law, the threshold for the VAT small business scheme to apply is brought from currently EUR 30,000 to EUR 35,000 per year. By way of reminder, taxpayers whose turnover does not exceed the small business scheme threshold are not obliged to pay VAT on their income.
Tax credit for the self-employed, employees and pensioners
As from 2021, existing tax credit for the self-employed, employees and pensioners will be increased. The minimum amount is increased from EUR 300 to EUR 396 and the maximum amount is increased from EUR 600 to EUR 696. Formulas for calculating the credit tax are adjusted accordingly.
Certificate for inheritances free of inheritance tax
In the case of tax-free inheritances, the indirect tax authorities (Administration de l’Enregistrement, des domaines et de la TVA) issue a certificate of fiscal value. As from 2021, this certificate will have a civil value with the objective to ease the access to movable property dependent on such inheritance. Any third-party holder of property (e.g., credit institution) will be required to accept this certificate as proof that the holder of the certificate is an heir.
Introduction of a CO2 tax
An autonomous excise duty on most gas and hydrocarbon is introduced. By way of example, the new tax is expected to lead to a EUR 0.05/L increase for petrol and diesel.
Insurance tax – Electronic filing
Compulsory electronic filing of insurance tax returns with the indirect tax authorities (Administration de l’Enregistrement, des domaines et de la TVA) is introduced.
Abolition of the venture capital investment certificates
The tax regime for venture capital investment certificates will be repealed due to the limited use of this regime.