Luxembourg - Main New Tax Measures 2018 At A Glance

by Hogan Lovells

Hogan Lovells

Main corporate tax measures



Decrease of the corporate income tax rate

Introduced by the 2017 Luxembourg Tax Reform, the corporate income tax applicable on taxable income exceeding EUR 30,000 will decrease from 19% to 18%. Therefore, the aggregate corporate income tax rate, including the municipal business tax and the unemployment fund contribution, for companies located in Luxembourg-City will be 26.01% (assuming municipal business tax rates and the unemployment fund contribution remain unchanged).

This decrease of the corporate tax rate is in line with the aim of corporate competiveness of the Luxembourg Government. This new rate is indeed quite competitive if we look at the rates applicable in the neighbouring countries. However, as indicated in our Newsletter on the 2017 Luxembourg Tax Reform, this reduced corporate income tax rate is still considered as too high by the business community if compared to tax rates applied by other EU jurisdictions specialising in the financial investment and private banking sector.


Corporate tax base unchanged

No change to the legal rules and regulations regarding the computation of the corporate tax base.


New incentive for software purchases

The acquisition of software may benefit, under certain conditions, of a new tax credit, which will amount to 8% up to EUR 150,000 of its purchase price, and 2% above such threshold.

However, such advantage is subject to a certain number of limitations:

  • only acquisitions of software may benefit from such measure excluding thus, for instance, the benefit for a software produced within the company;
  • exclusion of the incentive for the acquisition of software from related parties within the meaning of article 56 of the Luxembourg income tax law ("LITL"); this limitation reduces quite significantly the benefit of this measure in view of the rather broad definition of "related entities" under article 56 LITL;
  • limitation of the tax credit to 10% of the tax due for the year in which the software has been purchased; and
  • the income from an eligible software will be excluded from the new Luxembourg IP tax regime, currently discussed and to be implemented in the near future, if the tax credit for such a software is used.

In conclusion, this new tax incentive is in line with the Luxembourg government's goal to increase competitiveness, but its impacts will, in our view, be limited due to its numerous restrictions.


Clarification regarding the taxation of the acquiring entity within a merger

For recollection, under a merger qualifying for the neutralization tax regime, if the acquiring entity holds a participation in the acquired entity, the cancellation of such participation upon the merger is considered a disposal of the shares at fair market value by the acquiring entity, regardless of the value of the assets and liabilities transferred by the acquired entity.

A gain realised in this context by the acquiring entity is subject to income tax. However, such gain may benefit from the Luxembourg participation exemption provided that the holding threshold and holding period requirements thereunder are met. The article dealing with the possibility to benefit from this exemption, i.e. article 171 (3) LITL, covered also another exemption provided for in the EU Merger Directive (Council Directive 2009/133/EC), requiring only a holding threshold to be met. As such, article 171 (3) LITL stipulated the gain realised by the acquiring entity to be tax exempt in any event if the latter holds more than 10% in the acquired entity at the time of the merger, thus regardless of any holding period requirement.

For the sake of clarity, article 171 (3) LITL is now amended to deal with two points:

  • clarification that the gain is tax exempt if the conditions of the Luxembourg participation exemption regime are met, notwithstanding whether the minimum holding period condition is met or not; and
  • alignment of the required holding threshold with the one included in the Luxembourg participation exemption.

As a consequence, article 171 (3) LITL now specifies that any gain realised by the acquiring entity under a merger is tax exempt if the conditions of the Luxembourg participation exemption regime are met, however regardless of the minimum holding period requirement.


Clarification regarding the Luxembourg tax consolidation regime

Article 164bis LITL has been amended to clarify that RAIFs (i.e. reserved alternative investment funds) set-up as SICARs (i.e. companies investing in risk capital) can't benefit from the Luxembourg tax consolidation regime.

This clarification is in fact the rectification of a past error that has slipped in the LITL following the introduction of the law dated 23 July 2016 on RAIFs. Indeed, considering the special tax regime applicable to SICARs, the latter are explicitly excluded from the Luxembourg tax consolidation regime. It is thus coherent that RAIFs set-up as SICARs are also excluded from the Luxembourg tax consolidation regime.



Main individual tax measures



Increase in the flexibility of the taxation method

Married couples resident in Luxembourg have now the choice between joint taxation, strict separate taxation and separate taxation with free reallocation, providing more flexibility in their taxation method.

The choice of strict separate taxation, respectively separate taxation with reallocation, must be made through a joint application before the end of March following the tax year in question. Whilst the choice will be irrevocable for the concerned year if made after the tax year in question, such choice can be withdrawn or amended if taken before or during the tax year in question.

Such flexibility of the taxation method will give married couples the possibility to opt for the most advantageous taxation method in view of their personal situation. Further, the possibility to choose between these three taxation methods until end of March following the tax year in question will help to make the right assessment in view of the global family and financial situation of the couple. However, the utility of the separate taxation with free reallocation is in our opinion questionable given its complexity.


Ease of the assimilation of non-resident taxpayers to resident taxpayers

The assimilation of non-resident taxpayers to resident taxpayers has been facilitated by means of as well the introduction of a new assimilation criterion as the extension of the current 90% threshold.

(a) Introduction of a new assimilation criterion

Currently, only non-resident taxpayers whose worldwide income is taxable for at least 90% in Luxembourg could be treated for Luxembourg tax purposes as a resident taxpayer. From now on, non-resident taxpayers can also be treated for Luxembourg tax purposes as a resident taxpayer if their foreign income does not exceed EUR 13,000, however regardless of the previously mentioned 90% threshold requirement.

To be noted that non-resident taxpayers whose worldwide income is taxable for at least 90% in Luxembourg can continue to be treated for Luxembourg tax purposes as a resident taxpayer even if their foreign income exceeds EUR 13,000.

For married non-resident couples taxed jointly, the new assimilation criterion must be met by one of the spouses only, provided that such spouse has also other taxable income in Luxembourg.

(b) Extension of the current 90% threshold

Recently, cross-border workers have seen changes in the approaches of the neighbouring tax authorities. Indeed, the latter have started to tax, in compliance with the provisions of applicable double tax treaties, employees working for and remunerated by Luxembourg employers in respect of any work performed in or out of their local jurisdiction, provided that such employees were resident of this jurisdiction.

To take into account this recent phenomenon, the assimilation criterion requiring that the worldwide income must be taxable for at least 90% in Luxembourg is broadened on a fictitious basis. Indeed, income from non-resident employees of resident employers that is taxed by foreign tax authorities in accordance with applicable double tax treaties will be considered, based on a pure fiction approach, as Luxembourg taxable income for the computation of the 90% threshold. However, this fiction is limited to an income up to 50 working days and applied for the computation of the 90% threshold only.

For married non-resident couples taxed jointly, the new 90% threshold must be complied with by one of the spouses only.


Enlargement of the inheritance tax regime exemption

An inheritance tax exemption was until now only available between married couples provided that the latter had common descendants. From now on, this exemption will also be available for couples without common descendants, provided that they are married or live together under a registered partnership for at least three years.

This measure is in our view appropriate and respectable as it reflects within our current society the increasing number of married couples without children, respectively recomposed families without common descendants, having regularly lived together over decades. As such, it abolishes a different tax treatment close to a de facto discrimination that had no reason to exist nowadays and is in line with the aim of fairness and tax justice of the Luxembourg Government.



Main green tax measures


The Law has also introduced two new measures in line with one of the main priorities of the Luxembourg Government, which is the reduction of greenhouse gas emission.


Enlargement of the sustainable mobility measures

The sustainable mobility measures introduced by the 2017 Luxembourg Tax Reform have been extended to rechargeable electrical hybrid vehicles for private use, commonly known as PHEV (i.e., plug-in hybrid vehicle) that do not exceed the limit of 50g of CO2 per kilometre.

Resident taxpayers aged 18 or over, who have purchased such vehicles, are granted an allowance of EUR 2,500, which is half the current amount granted for the purchase of zero-emission vehicles.

This allowance is however subject to certain limitations, being that:

  • only rechargeable electrical hybrid vehicles are concerned, excluding thus all other electrical hybrid vehicles;
  • the first registration of the eligible vehicle must be made after 31 December 2017; and
  • no allowance under the sustainable mobility measures is granted if the beneficiary has benefitted from such measure during the last 4 taxation years.

One may again wonder whether a direct incentive (e.g. an aid in the context of the purchase) would have been more appropriate than a tax incentive under the form of a tax allowance, as such a direct incentive would have facilitated the acquisition of these PHEV and targeted a wider population.

Enlargement of the investment tax credits

The acquisition paid by companies of certain cars with zero emission may benefit (after the deduction of possible subsidies) from the global investment tax credit of 8% up to EUR 50,000 per eligible vehicle, and from the complementary investment tax credit of 13% without limitation.

Whilst only being available to eligible cars whose first registration has been made after 31 December 2017, this new measure is available not only for new cars bought but also for cars used under a rental or leasing agreement.

As such, this measure will be of great interest, in particular for companies requiring a large fleet of vehicles.



Other tax measures



Real estate taxation

Capital gains derived from the sale of Luxembourg real estate (including gains on the sale of land) will continue to be taxed until 31 December 2018 at one-fourth of the overall tax rate.

Indeed, this measure, introduced initially as a temporary incentive applicable during 18 months (from 1 July 2016 until 31 December 2017), has been extended to continue the efforts of the Luxembourg Government to increase the real estate offer in Luxembourg.


Introduction of a new VAT exemption

A new VAT (i.e. value added tax) exemption has been implemented for management activities of collective internal funds in life insurance (fonds d'investissement internes collectifs d'assurance-vie) whose financial risks are borne by the subscribers and that are subject to the supervision of the Luxembourg Insurance Commission (Commissariat aux Assurances).

This new exemption is in line with the political goals of the Government to increase Luxembourg's attractiveness as it will render this kind of funds far more appealing. Previously, the VAT incurred for these services was a direct and irrecoverable cost for these funds as they do not have any VAT deduction rights given their activity. Considering that in our experience, such management services are a significant part of the charge incurred by these funds, this incentive is highly appreciated by the business community and meets the request of the Luxembourg insurance sector pushing in this direction.


Exchange of information on request procedure

Further to the decision of the European Court of Justice in the Berlioz case dated 16 May 2017 (click here to read our blog on the decision), the Luxembourg Government needed to adapt the request procedure on the exchange of information.

The provisions initially included in the draft of the Law intended:

  • for the Luxembourg tax administration to ensure that the information requested is foreseeably relevant; and
  • to re-introduce an appeal before the Luxembourg administrative jurisdiction against the decision of the Luxembourg tax authorities.

However, considering the formal opposition and considerations of the Council of State (Conseil d'Etat) on the compatibility of the proceedings for annulment of the Luxembourg tax authorities' decision, this matter will now be dealt with in a separate law.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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