2023 budget law submitted to parliament

On 12 October 2022, Luxembourg’s finance minister presented the draft 2023 budget law to parliament, including direct and indirect tax measures. As indicated in the draft law, the government currently does not have sufficient visibility and budgetary margin to implement the major tax reform that had been expected. However, the draft budget law would provide some relief measures and clarify certain tax provisions, such as the reverse hybrid rule (article 168quater of the Luxembourg Income Tax Law (LITL)). The main proposals are described below.
 

Deadline for tax returns

The draft law proposes that the deadline for filing certain tax returns, as specified in the tax law, be extended from 31 March to 31 December following the tax year. This measure would relate to personal income tax, corporate income tax, municipal business tax, and wealth tax returns and would apply to 2022 tax returns to be filed (in principle) in 2023. The extension also would apply in cases where spouses have made an irrevocable election to be taxed separately.
 

Personal income tax

The existing law allows employers to grant a profit-sharing bonus (“prime participative”) to their employees, based on the employer's financial results (i.e., profits). The granting of the bonus is subject to certain conditions at both the employer and employee levels. One of the employer-level conditions is that the total amount of the bonus (i.e., the bonus pool) that may be granted to employees is limited to 5% of the employer’s profits for the fiscal year immediately preceding the fiscal year in which the bonuses are granted. The draft law includes a proposal that would allow the 5% limit for companies that are part of a fiscal unity to be computed as the total of the companies’ net profits, upon the election of the head of the fiscal unity and all of its integrated companies. The application of this provision would be subject to an election that could be made each year.

Until further possible changes, any “group” context consideration is excluded, meaning that each eligible employer has to be registered in the files of the Luxembourg tax authorities (i.e., the one whose national identification number appears in the "Employment" section of the tax deduction form or “electronic tax card” for any given employee eligible for a profit-sharing bonus).

The draft law also proposes reducing the threshold for the application of the “inpatriate” regime from EUR 100,000 to EUR 75,000, which would extend the scope of application of the regime. The inpatriate regime provides certain tax exemptions for highly skilled executives hired in or assigned to Luxembourg (subject to certain conditions).

The draft law proposes other amendments covering the determination of the rental value of real estate, the definition of a paying agent for the application of the 20% final taxation on interest income of individuals, and the benefit of the special property allowance.

In addition, a grand-ducal decree amending the conditions for the application of 4% accelerated depreciation of property used for home rentals is expected.

Reverse hybrid rule

Article 168quater of the LITL would be amended to specify that the net income of a reverse hybrid entity that is attributable to associated enterprises and that is not taxed in Luxembourg or in another jurisdiction would be subject to corporate income tax only if the non-taxation of the net income of the associated enterprise is due to a mismatch in the characterization of the entity. Based on this clarification, the net income of a reverse hybrid entity attributable to exempt investors would not be subject to corporate income tax. The change would apply as from the 2022 taxable year, which is the first year of application of article 168quater.
 

Indirect taxes

The budget law and an additional draft law include some measures regarding indirect taxes.

The first measure is a proposed reduction of 1% in the standard VAT rate of 17%, the intermediate rate of 14%, and the reduced rate of 8% (to 16%, 13%, and 7%, respectively) in 2023, while the super-reduced rate of 3% would remain unchanged.

The application of the 8% VAT rate (7% in 2023) would be extended to the following:

• Repair services for household appliances; and
• Supplies of bicycles, including electric bicycles, and rental and repair services for such bicycles.

The application of the 3% VAT rate would be extended to the supply and installation of solar panels on and adjacent to private dwellings, housing, and public and other buildings used for activities in the public interest.

An exemption from the additional “CO2” excise tax for biofuels and bioliquids, as defined in EU directive 2018/2001, is included in the draft law.

A modification of the rates of excise duties applicable to cigarettes is expected.

Lastly, some changes are introduced regarding the financial compensation that aims to reduce the sales price of gasoil and liquified petroleum gas. The most important change is the extension of the measure until 31 December 2023.
 

Next steps

The parliament will review, potentially modify, and vote on the draft budget law before the end of 2022.