The Luxembourg Parliament adopted the 2017 tax reform (parliamentary document n°7020) on 14 December 2016 which introduces new tax measures affecting both individual and corporate taxpayers. The publication of the law is expected to be made in the coming days with entry into force from 1 January 2017. The key measures of importance for corporations and individuals are summarized below.
Tax measures applicable to corporations
Reduction of corporate income tax rate
The corporate income tax rate (impôt sur le revenu des collectivités) currently stands at 21%. It will be reduced to 18% over the next two years (19% for 2017 and 18% for 2018). However, the rates applicable to the municipal business tax (impôt commercial communal) and the solidarity surcharge (contribution au fonds pour l'emploi) will not be amended.
As a result, the global combined corporation tax rate will stand at 27.08% in 2017 and 26.01% from 2018 for companies with taxable profits exceeding EUR 30,000 in Luxembourg-City, taking into account the municipal business tax and the solidarity surcharge.
Finally, it was clarified during the legislative process that the electronic filing of corporate tax returns, municipal business tax returns and net wealth tax returns for corporations will be mandatory from 2018 for the 2017 tax returns (1 January 2018 for the net wealth tax returns).
Limitation of the use of losses carry-forward
Luxembourg tax law currently provides that Luxembourg companies may carry their losses forward indefinitely and off-set them against any future profits. The 2017 tax reform provides that losses generated during and after 2017 will only be carried forward for a maximum period of 17 years. Losses that have been realized before 2017 will remain unaffected by this time limit.
Abolition of tax on transfers of claims
From 2017, registration duties should only be levied on mandatory registration deed. Therefore, the 0.24% registration duty due on notarial deeds documenting the transfer of debt agreements (notably in case of contribution in kind of such claims to the share capital) will be abolished.
Increase of the minimum net wealth tax
From 2017, the minimum net wealth tax applicable to Luxembourg corporate taxpayers holding financial assets representing (i) more than 90% of their total balance sheet (e.g., fixed financial assets, intercompany loans, transferable securities and cash at bank) and (ii) more than EUR 350,000, will be subject to a fixed minimum net wealth tax at an increased amount of EUR 4,815 from the fiscal year 2017 (EUR 3,210 for 2016).
New provisions pursuant to which directors who are in charge of the daily management (including de facto and de jure directors) can be held jointly and personally liable in case of culpable non-compliance (inexécution fautive) with their legal obligations have been introduced. The daily management includes all actions which must be accomplished day to day to ensure the functioning of the corporate affairs of the company.
The director of the indirect tax administration (Administration de l’Enregistrement et des Domaines) has now been granted the power to issue a notice of secondary liability (appel en garantie) against these persons.
The penalties that can be imposed by the Luxembourg VAT authorities have generally been increased and the penalties due in case of VAT evasion will also be increased from the current rate of 10% of the avoided or improperly reclaimed VAT to 50%.
Finally, new specific provisions have been introduced in the VAT law and in the Criminal Code to combat VAT fraud and VAT evasion.
Tax measures applicable to individuals
Increase of withholding tax on interest payments to Luxembourg-resident individuals
In application of the law of 23 December 2005, interest payments made to Luxembourg-resident individuals by paying agents established in Luxembourg were subject to a final 10% withholding tax. From 2017, the rate of this withholding tax will increase to 20%.
Abolition of the temporary budget balancing tax
From 2017, the temporary tax to balance the state budget (impôt d’équilibrage budgétaire temporaire) of 0.5% which applies to all categories of income received by individuals in Luxembourg will be abolished. This tax has therefore been levied for two years (2015 and 2016).
Revision of the income tax scale
From 2017, new tax income tax brackets will be introduced. The marginal income tax rate will increase from the current rate of 40% to 42% for an annual net income exceeding EUR 200,004 (or EUR 400,008 for joint taxed couples) and an intermediary rate of 41% will be introduced between EUR 150,000 and EUR 200,004 (or between EUR 300,000 and EUR 400,008 for joint taxed couples).
In addition, it should be noted that on 13 December 2016, the Luxembourg Parliament adopted the bill implementing the European Directive 2016/881/EU on country-by-country reporting (parliamentary document n°7031). In accordance with the law introducing the country-by-country reporting, all Luxembourg tax resident corporate entities which are part of a multinational group meeting certain financial thresholds will need to comply with the country-by-country reporting requirements.