2019 Budget has been saved
29 April 2019
Luxembourg Tax Alert
Luxembourg’s 2019 budget law was approved by the parliament on 25 April and published in the Official Journal on 26 April. It will become applicable as from 1 May 2019, with some provisions applicable as from 1 January 2019.
The draft budget law follows a temporary budget published in December 2018 to cover the months from January to April 2019, due to the forming of a new government following the autumn elections. It follows on the commitment expressed at the time of the law transposing the EU Anti-Tax Avoidance Directive (ATAD I) into domestic law was voted on to ensure that a rule for tax-integrated groups is adopted for 2019 in connection with the interest expense deduction limitation rule in the ATAD. This law also includes other tax measures designed to strengthen social cohesion and the buying power of individuals, as well as the competitiveness of companies, in line with the priorities set out by the new government coalition.
The following measures in respect of taxation are introduced:
Tax rate reduction
As from the 2019 fiscal year, the corporate income tax rate is reduced from 18% to 17%, while at the same time the income bracket affected by the minimum 15% rate is increased from EUR 25,000 to EUR 175,000. This means that companies closing their taxable year on or after 1 January 2019 will benefit from this new lower tax rate.
The 17% rate applies to taxable income exceeding EUR 200,000. For amounts between EUR 175,000 and EUR 200,000, corporate income tax would be calculated based on a formula where EUR 26,250 is increased by 31% of the income amount exceeding EUR 175,000. The following example has been provided in the comments to the law: “…for a taxable income of EUR 200,000: [EUR 26,250 + (EUR 200,000–175,000) x 31%] = EUR 34,000 of the CIT due.”
Fiscal unity regime
The new article 164bis is introduced in the Income Tax Law in connection with the fiscal unity regime that consolidates and revises the fiscal unity provisions in the previous article 164bis and the related Grand Ducal regulation. The new article specifies the scope of application and clarifies the determination of taxable income under a fiscal unity.
New article 164bis also introduces the ATAD I option to allow a fiscal unity to apply the interest expense deduction limitation rule at the level of the fiscal unity rather than individually to each entity in the group, which is applicable already for the taxable year 2019. Luxembourg implemented the ATAD into its domestic law on 21 December 2018, with the new rules applying for fiscal years starting on or after 1 January 2019. However, the law implementing the directive did not contain the option allowing fiscal unities to determine excess borrowing costs based at the fiscal unity level (i.e. the rule currently applies only at an individual company level). The new budget law includes a provision allowing the deductibility of excess borrowing costs of a fiscal unity up to the higher of 30% of taxable EBITDA (earnings before interest, tax, depreciation and amortization) or EUR 3 million.
The new article contains the following rules for computing the tax basis for the application of the ATAD interest expense deduction limitation:
- The borrowing costs of the “integrating company” (i.e. the head of the fiscal unity) should be calculated by adding together the borrowing costs of each member of the fiscal unity. Only costs incurred by the tax unity members during the period of consolidation should be taken into account for this purpose.
Taxable interest income and other economically equivalent taxable income at the level of the integrating company should be calculated by adding together all taxable interest income of each member of the fiscal unity.
Excess borrowing costs of the integrating company are the excess of the borrowing costs over the taxable interest income. Only tax-deductible borrowing costs will be taken into account.
- The EBITDA of the integrating company will not correspond to the sum of individual group members’ EBITDA. EBITDA will be determined based on the total net income of all members of the fiscal unity, increased by the excess borrowing costs as determined at the level of the integrating company and the depreciation/amortization of all members.
Nondeductible excess borrowing costs in a tax period will be able to be carried forward only by the integrating company for deduction in a subsequent tax period (up to five tax periods).
The safe harbor rule that allows excess borrowing costs up to EUR 3 million to be deducted without limitation will be applicable. In addition, it will be possible to fully deduct excess borrowing costs if it can be demonstrated that the ratio of the integrated group members’ equity over their total assets is equal to or greater than the equivalent ratio of the consolidated group for financial accounting purposes.
The fiscal unity will not be able to deduct excess borrowing costs and unused deduction capacity of a member of the fiscal unity that were accrued before the company joined the consolidated group. Only the group member that incurred the costs will be able to use them, but the costs could be put on hold and used by the entity after it exits the fiscal unity.
Loans which were concluded by a member of the consolidated group before 17 June 2016 or loans used to finance long-term public infrastructure projects will be excluded in computing the amount of excess borrowing costs.
All fiscal unities—both existing and new—will automatically benefit from the above-mentioned treatment at the group level. However, if they prefer to apply the interest expense deduction limitation to each company individually, they will be able to elect to do so. For new fiscal unities, this option has to be clearly indicated in the request to set up a fiscal unity and will apply for the duration of the unity (at least five fiscal years). For existing fiscal unities, the option to apply the interest deduction limitation to each company individually can be applied if all companies in the consolidated group submit a dedicated joint request for its application before the end of the first financial year for which the interest expense deduction limitation rules apply in Luxembourg (i.e. the tax year beginning on or after 1 January 2019).
Minimum social wage tax credit
A new minimum social wage tax credit is also introduced as from tax year 2019. This monthly tax credit will be added to the current tax credit available to wage earners (which ranges from EUR 0 to EUR 600 for the tax year).
The credit is designed to benefit employees whose salary is close to the current minimum social wage. It will grant such individuals an additional monthly EUR 100 net remuneration after individual income tax and social security, after the increase of the implemented and expected minimum social wage for 2019.
Individuals whose salary is slightly above the minimum social wage will also benefit from this measure, subject to a linear reduction from EUR 70 to EUR 0 for monthly gross salaries, from EUR 2,500 to EUR 3,000.
The tax credit will be paid to the employee, together with the monthly net after-tax remuneration and only granted by the employer once a month, based on the employee’s tax card.
The tax credit will also be granted to part-time employees on a proportional basis, as well as to private household employees and cleaning staff, who are taxed on a lump sum basis under article 137, al. 5 of the Income Tax Law. For the latter, the social security authorities will pay the tax credit based on the computation made by each employer.
To be eligible for this tax credit, the taxpayers should be personally affiliated in respect of that employment income with the compulsory social security system either in Luxembourg, or in a foreign country covered by a bi- or multilateral social security agreement.
Taxpayers who derive employment income taxable in Luxembourg, but are not subject to Luxembourg wage tax based on a tax card, can upon their own request receive the minimum social wage tax credit from the Luxembourg tax authorities after the calendar year for which it is due.
Following the budget law, the application of the super reduced (3%) and reduced (8%) VAT rates are extended as from 1 May 2019 in the following manner:
- The 17% standard VAT rate that currently applies to electronic publications (including e-books and e-newspapers) will be reduced to 3% to align with the rate for physical publications. The super reduced rate will also apply to library rentals of publications. This extension follows the EU Council Directive 2018/1713 of 6 November 2018 to modify the EU VAT Directive 2006/112 to allow Member States to apply a reduced VAT rate to electronic publications. It should be noted that Luxembourg had applied the super reduced VAT rate to electronic publications before 1 May 2015 when the Court of Justice of the European Union ruled that reduced rates could not apply to such services. As for physical publications, the super reduced rate will not apply to advertising and pornographic publications. In accordance with the Directive, it will not apply to publications that wholly or predominantly contain video content or audible music.
- The 3% super-reduced VAT rate will be extended to pharmaceutical products normally used for health care, disease prevention and treatment with medical and veterinary findings, including products for use in contraceptive findings and feminine hygiene protection.
- The 8% reduced VAT rate will be extended to plant protection products authorized in organic farming by the Administration of Technical Agricultural Services. This would apply where the requirements laid down in Council Regulation (EC) No 834/2007 of 28 June 2007 on organic production and the labelling of organic products and repealing Regulation (EEC) No 2092/91 are complied with.