On 19 December 2020, the Luxembourg Parliament voted into law the Budget Act 2021 (the "Budget Act"). In the unprecedented context of COVID-19, the main objectives of the Budget Act are to ensure a swift revitalization of the economy, secure businesses regardless of their size, and maintain employment and household spending power. Other goals, such as taking steps towards greater tax fairness and further improving the attractiveness of Luxembourg, are also reflected in the Budget Act. The introduction of a new real estate tax applicable to certain investment funds (UCIs, SIFs and RAIFs) investing locally, the repeal of the circular providing for a simplified valuation method for warrants and stock option plans, and the encouragement of sustainable investment through the introduction of a reduced subscription tax for UCIs (both Part I and Part II funds) are the main drivers in this respect. With regard to improving the attractiveness of Luxembourg and retaining highly qualified employees in the country, the Budget Act improves on the current tax regime applicable to "impatriates" and introduces a 50% tax exemption for employee participation bonuses. Finally, the Budget Act amends the tax unity regime in order to comply with the decision of the Court of Justice of the European Union ("CJEU") of 14 May 2020 (C-749/18).
Special real estate tax (prélèvement immobilier) for funds investing in Luxembourg real property
As from 2021, a 20% non-deductible real estate tax applies to certain undertakings for collective investment ("UCIs"), referred to as Part II UCIs, specialized investment funds ("SIFs"), and reserved alternative investment funds ("RAIFs") with legal personality, but excluding sociétés en commandite simple ("SCS"), on rental income and capital gains arising from real estate located in Luxembourg, held directly or through a tax-transparent entity or entities.
Whilst the tax is only expected to adversely affect certain types of funds investing in real estate located in Luxembourg, the associated reporting obligation has a broader scope and applies to any Part II UCI, SIF or RAIF (whether or not earning income from qualifying real property). For 2020 and 2021, such funds are required to report to the tax authorities, by 31 May 2022 at the latest, if they (i) held Luxembourg real estate directly or through a tax-transparent entity or entities or (ii) changed their corporate form from a company to a tax-transparent entity whilst owning at least one Luxembourg real estate asset (directly or through a tax-transparent entity or entities). Non-compliance with this reporting obligation can trigger a fine of up to EUR 10,000 (i.e., in the absence of filing or for late filing even if no Luxembourg real estate was owned in the relevant years).
New restriction for private wealth management companies ("SPFs") in the context of real estate investments
As from 1 July 2021, SPFs will no longer be allowed to own real estate through (Luxembourg or foreign) tax-transparent entities. No particular restrictions on indirect ownership through non-transparent entities have been introduced.
Real estate transfer taxes upon the contribution of real property to Luxembourg commercial and civil companies
Since 1 January 2021, the gap between (real estate) asset and share deals has been minimized through an increase in the real estate transfer taxes (including the transcription tax) due upon a contribution in kind of real property to a Luxembourg (civil or commercial) company. The increase is as follows:
Furthermore as from this same date, an allocation of real property further to the winding-up, liquidation or capital reduction of a company to a shareholder that did not contribute the asset(s) in question only qualifies for an exemption from real estate transfer taxes as from 10 years following the initial contribution (rather than five years as was previously the case).
Update of the tax rules applicable to highly skilled and qualified workers (impatriates)
Effective 1 January 2021, the requirement to hire or commit to hiring at least 20 full-time employees was lifted and the duration thereof extended from five to eight years. However, the required minimum gross remuneration (i.e., excluding benefits in kind or allowances/bonuses in cash) has been raised from EUR 50,000 to EUR 100,000.
The rules provide that 50% of the cost-of-living allowance (prime d'impatriation) is tax exempt, provided the allowance constitutes less than 30% of the employee's gross annual remuneration (excluding benefits in kind or allowances/bonuses in cash).
Introduction of a participation bonus (prime participative)
Further to the repeal of Circular No 104/2 on warrants and stock option plans, a 50% tax exemption for participation bonuses (primes participatives) paid to employees has been introduced. Such bonuses are in principle tax deductible by the employer and 50% tax exempt for the employee. The exemption is available if, amongst other conditions, (i) the bonus does not exceed 25% of the employee's gross annual remuneration (excluding benefits in kind or allowances/bonuses in cash), (ii) the total participation bonuses granted to all employees does not exceed 5% of the company's profits for the immediately preceding tax year, and (iii) the Luxembourg tax authorities are provided with a list of all employees receiving this benefit.
Changes to the tax unity regime
Following a recent decision of the CJEU, an existing "vertical tax group" may now, under certain conditions, be allowed to form a new "horizontal tax group" without triggering retrospective taxation of the members of the existing group on a stand-alone basis. The ability to form a horizontal tax group is expected to open more alternatives to corporate groups with a common foreign shareholder.
Reduced subscription tax (taxe d'abonnement) for UCIs investing in sustainable projects
Effective 1 January 2021, any UCI (whether a Part I or Part II fund) can benefit from a reduced subscription tax rate when making sustainable investments within the meaning of the relevant EU regulations. A gradual decrease in the subscription tax rate is provided, depending on the fund's volume of sustainable investments: 0.04% if the percentage of net assets under management dedicated to sustainable investments is at least 5%, 0.03% if this percentage is at least 20%, 0.02% for a percentage of at least 35%, and 0.01% if the percentage is 50% or more. The standard subscription tax rate of 0.05% remains applicable to other assets of UCIs.
Other points of interest
Accelerated depreciation rate for real property dedicated to rental accommodation
The accelerated depreciation rate has been reduced from 6% over 6 years to 4% over 5 years for properties acquired or built after 1 January 2021 and for depreciable renovation costs incurred for older properties. However, under certain conditions, tax relief of 1% (capped at EUR 10,000) may be available.
In addition, the Budget Act introduces a specific accelerated depreciation rate of 6% for investment expenses incurred in the context of making energy-efficiency improvements to existing properties.
In order to extend the scope of the VAT exemption for small businesses, the threshold under which taxable persons are VAT exempt has been raised from EUR 30,000 to EUR 35,000.
As from tax year 2022 (in certain cases as from tax year 2021), the Luxembourg tax authorities will issue electronic tax cards to employers (potentially valid for several years under certain conditions) via a secure online platform, meaning employees will no longer be required to provide the employer with a paper version of their tax card. On 18 November 2020, the Luxembourg tax authorities issued a newsletter providing practical information on this subject available here.