Reform 2017

Insights

Tax Reform 2017

The Luxembourg law N° 7020 on tax reform and the budget, voted on 14 December 2016, introduce tax measures affecting both individual and corporate taxpayers. Most of the measures enter into force from 1 January 2017 onwards with exception to certain measures that will be applicable as from 2016. You will find the key measures summarized below.

The individual income tax measures aim to reinforce households’ spending powers and can be summed up in 3 words: “Durability, Justice and Selectivity ”. (Source : CES – analyse des données fiscales)

34% Monthly household
global income
> 4,000 €

66% Monthly household
global income
< 4,000 €

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1. Employment income: two main changes
The changes affect notably 2 subjects : Lunch vouchers (art. 104 LIR) and company cars

  • Luncheon Vouchers
  • This will have a positive net impact on purchasing power for employees.

    Before

    As from January 2017*

    2.80€ 8.40€ 5.60€

    2.80€ 10.80€ 8€

    * It is at employer's discretion to decide on the value of the voucher as well as on amount of employee participation.

  • Benefit in kind for Company cars
  • This new measure will aim to reinforce sustainable mobility, to reduce carbon emission with the aim to protect our environment by reducing the taxable benefit in kind for “more green” cars and to increase it for more polluting cars.

    Major Objectives:


    • Tax incentive for sustainable mobility
    • Reduce carbon emission
    • Public health and environmental protection purposes

    Current

    January 2017

    1.5% for all cars

    0.5% - 1.8% depending on carbon emission and fuel type

    Applicable on new leasing contracts starting 1st January 2017

    0% for bicycles

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    2. Real Estate income: modifications for taxpayers’ main residence
    A higher mortgage interest deduction will become applicable, together with abolition of the unitary value

    Current

    January 2017

    Unitary value: > 0% / < 2%

    Abolition of unitary value
    → no taxation on taxpayer's residence

    First 6 years Next 5 years Subsequent years

    1,500 € 1,125 € 750 €

    2,000 € 1,500 € 1,000 €

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    3. Personal deductions: new applicable ceilings

  • Home savings accounts: the deductible annual amount for subscribers will change
  • Current

    January 2017

    672 €

    1,344 € Between 18 and 40 years*

    672 € Other cases

      * At beginning of tax year

    • The increased ceiling is determine based on the youngest adult subscriber
    • Additional deductible amount only for spouses taxed jointly
    • Additional deductible amount only for children for which subscriber received “modération d’impôt”
  • Debit interest and life insurance premiums will merge into one ceiling
  • Current

    January 2017

    Debit interest Insurances (life, third party liability, sickness etc.)

    336 €/year 672 €/year

    672 €/year

  • The old age pension scheme: only one applicable ceiling going forward*
  • Current

    January 2017

    Depending on the taxpayer’s age

    Maximum amount fixed at 3,200 €/year

    * From 2017 onwards, taxpayer will be able to receive the accumulated either via a lump sum capital payment or via an annuity (payable monthly) or via a combination of those two.

  • Extraordinary charges and cost for children: increased ceilings
  • Children not living in household

    Costs for children not living as part of the household

    As of 2017:
    4,020 €/year

    Before 2017:
    3,480 €/year

    Tax credit for single parent households

    750 € up to 1,500 €/year

    Modulated depending on the revenues

    Domestic costs

    Domestic costs for housekeeping, cleaners and other home helps, cost of care and assistance in cases of dependence, childcare costs

    As of 2017:
    5,400 € / year

    Before 2017:
    3,600 € /year

    Monthly maintenance allowance

    Monthly maintenance allowance
    Does note reduce the tax credit for single parent household
    (“credit d’impôt monoparental”)

    From 160 € to 184 €/month

  • Tax abatement - Zero emissions cars and e-bikes
  • Only applies to “private” new cars (i.e. bought on taxpayer’s own name)

    Bike

    Allowance: 300 €

    Zero emission cars / electric car

    Allowance: 5,000 €

  • Allowances to be reduced by governmental subsidies
  • Considered after deduction of extraordinary charges and extra-professional abatement
  • Deduction available once every 5 years
  • Applies for registered cars starting 1st January 2017
  • Applicable per tax payer
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    4. Income tax rates updates

  • Progressive Tax Rate - Tax class 1
  • Marginal tax rate (incl. EF):
    45.78%

    Excluding Employment Fund (EF):

    7 % for income < 150 K€ for single taxpayers

    7 % for income < 300 K€ for couples taxed jointly

    9 % for income > 300 K€

    New tax brackets:

    • 41 % for income > 150,000 € and < 200,004 €
    • 42 % for income > 200,004 €

    From 100,002 € to 150,000 €

    • Taxed at 40 %

    From 45,897 € to 100,002 €

    • Taxed at 39 %

    From 20,625 € to 45,897 €:

    • Range grow to 1,944 € between each brackets
    • Taxed from 12 % to 38 %

    From 11,265 € to 20,625 €:

    • Range goes to 1,872 € between each brackets
    • Taxed from 8 % to 12%
    • The temporary 0.5% budgetary compensation tax will be abolished.
    • The withholding tax on interest income in the scope of the “Relibi law” will increase from 10% to 20%.
    • Pensions paid to orphans will be tax exempted

    Circulaire du directeur des contributions L.I.R Relibi n°1 du 4 février 2009

  • Tax credit for employee
  • Tax credit for employed taxpayer on a monthly basis
    Currently: 300 € / year

    January 2017 : will be modulated depending on income level

    Gross income from

    936 € to
    11,265 €

    300 € < yearly
    CIS < 600 €

    Gross income from

    11,266 € to
    40,000 €

    Yearly = 600 €

    Gross income from

    40,000 € to
    79,999 €

    Digressive yearly CIS =
    600 € → 0 €

    • The same mechanism applies for independent workers on their income from self employment income
    • The same mechanism applies for retired persons + bracket from 300 € to 935 € → CIS = 300 €
  • Real estate tax - Temporary favourable regime : 1 July 2016 to 31 December 2017
  • This Law aims to create more dynamism on real estate market.

    Main residence

    Exemption

    Disposal of properties
    < 2 years >

    Exemption

    Others

    Normal tax rate (max 45.78 %)

    Disposal of properties
    < 2 years >

    50,000 € of allowance (x2 if joint taxation)
    1/4 normal tax rate iso ½ tax rate

    Miscellaneous income: Qualifying social dwellings will benefit from a 50% tax exemption on rental income

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    5. Joint vs separate taxation - “Imposition individuelle”

    Major Objectives:


    • Equality between women and men
    • Stop the solidarity between spouses in case of legal separation
    • Reinforce spouse’s financial independence

    Current

    -

    Joint taxation
    =
    Mandatory
    Tax class 2

    As of income 2018

    Option 1

    As from tax year 2018

    Joint taxation
    Tax class 2

    “Pure” separate taxation
    Tax class 1 for each taxpayer

    Separate -Reallocation 50/50
    Tax card for each taxpayer with tax rate calculated on global income

    Separate – free reallocation
    Tax card for each taxpayer with tax rate calculated on global income

    Standard – current system

    Request : deadline 31/12/ N-1
    Tax prepayments cancelled

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    6. Taxation of non-resident married taxpayer

    Objective: the tax regime for non-resident married taxpayers will be aligned more closely with the one of resident taxpayers with regard to the tax classes and applicable tax deductions

    Current

    As of January 2018

    Basis:

    Tax class 1A


    Exception:

    Tax class 2

  • if > 50% of household professional income taxable in Lux
  • If both spouses working in Lux + joint taxation
  • Basis:

    Tax class 1


    Exception:

    Tax class 2 if > 90% condition to be looked at the level of taxpayer working in Luxembourg

  • BUT: application of effective tax rate on tax card, calculated on worldwide income
  • Tax return: mandatory with joint taxation but possibility to opt for separate taxation
  • Joint responsibility of persons in charge of management

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    Persons in charge of the management of a taxpaying entity (managers, directors, etc.) are jointly responsible for the payment of the VAT due in case they do not respect in a faulty manner their VAT obligations.

    Guarantee to be provided by persons in charge of management

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    VAT authorities will be entitled to request a guarantee (“appel en garantie”) from the persons in charge of the management of a taxpaying entity when they do not respect in a faulty manner their VAT obligations.

    Increase of penalties for infringement of VAT obligations

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    Penalties due in case of infringement of VAT obligations, e.g. filing of VAT returns, will be increased to 250 € to 10,000 € instead of 50 € to 5,000 € while those for non-communication of information or documents will be increased to a maximum of 25,000 € per day instead of 50 € to 1,000 €.

    Proportional penalties for infringement of VAT obligations

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    When the infringement of VAT obligations occurs with the aim or result of eluding payment of VAT or to obtain an irregular reimbursement, a penalty of 10 to 50% of the eluded or irregularly reimbursed VAT will be applicable.

    Criminal penalties for infringement of VAT obligations

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    When the infringement of VAT obligations occurs with the aim or result of eluding payment of VAT or to obtain an irregular reimbursement, a fine of € 25,000 to 6 times the tax and 1 month to 3 years of prison will be applicable when some thresholds are exceeded per tax period: a) one fourth of the VAT due or reimbursed, but no lower than 10,000 € or b) 200,000 €.

    The corporate income tax rate

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    To enhance competitiveness, the corporate income tax rate is reduced. For example, for Luxembourg City, the current effective combined income tax rate of 29.22%, including the corporate income tax, municipal business tax and the contribution to the unemployment fund is decreased to 27.08% in 2017 and will be 26.01% in 2018.

    Utilization of carried-forward losses

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    The utilization of carried-forward losses is time-restricted as from 2017 to 17 years.

    Temporary tax relief (Art. 54bis LITL)

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    Currently certain undertakings (e.g. regulated credit institutions, regulated insurances and re-insurances and other undertakings trading monetary and financial assets) benefit from a temporary tax relief on foreign exchange gains derived from assets invested in the foreign currency of the share capital and representing the equity capital of the undertaking (article 54bis of the Luxembourg income tax law). As from tax year 2016, the measure has been extended to all companies which have their contributed capital in a foreign currency (other than euros). The specific deadline for the request linked to tax year 2016 is 1st July 2017.

    A new deferred amortization regime

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    A new deferred amortization regime is introduced. As from tax year 2016, the taxpayer can, under option in the tax returns, differ the deduction allowed by the amortization. This optional mechanism will increase corporate income tax and municipal business tax and allow to limit, under certain conditions, the net wealth tax due.

    Transfer Pricings

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    The new article 56bis LITL intends to add further guidance and clarification on transfer pricing regulations in Luxembourg. This new measure introduces a granular functional and risk analysis based the OECD Transfer Pricing Guidelines for Luxembourg entities engaged in intra-group financing activities.

    Tax Credits

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    As from tax year 2016, the global investment tax credit amounts to 8% (instead of 7%) of the acquisition value of the first EUR 150,000 of investments made during the year, and 2% of the excess over EUR 150,000. The supplementary investment tax credit amounts to 13% (instead of 12%) of the acquisition value of qualifying investments made during the tax year.

    The minimum net wealth tax

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    As from 1st January 2017, the minimum net wealth tax, introduced in 2016 in replacement of the minimum corporate tax is increased from EUR 3,210 to EUR 4,815 for SOPARFIs.

    Electronic filing of the corporate tax returns

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    The electronic filing of the corporate tax returns, municipal business tax returns and net wealth tax returns for corporations will be mandatory.Based on the parliamentary works, this will be mandatory as from 2018 for the 2017 CIT and MBT tax returns (01/01/2018 NWT returns).

    An increase of the amounts of penalties

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    To reinforce the coercive power of the tax authorities, various modifications are entered into force including an increase of the amounts of penalties. For example, the penalty for the late submission of the tax returns, currently amounting to 1,239.47 €, will be increased up to 25,000 €.

    These materials and information contained herein are intended to provide general information on a particular subject or subjects and are not an exhaustive treatment of such subject(s). Accordingly, the information in these materials is not intended to constitute accounting, tax, legal, investment, consulting, or other professional advice or services. The information is not intended to be relied upon as the sole basis for any decision or action which may affect your personal finances or business. Before making any decision or taking any action that might affect your personal finances or business, you should consult a qualified professional adviser. None of Deloitte Touche Tohmatsu Limited, its member firms (including Deloitte Luxembourg), or its and their related entities shall be responsible for any loss whatsoever sustained by any person relating to the use of these materials or the information contained herein.

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