Moving to a new country means a new tax regime and coming to Luxembourg is no different. Laura Foulds, Managing Director of Analie Tax & Consulting, explains the basics, the common pitfalls and where you may need additional help.
The question is: what do you need to know in order to make sure you file the right forms, at the right time, and claim the maximum deductions so that you can keep your dreaded tax bill as low as possible?
Calendar year (1 January – 31 December).
31 March following end of tax year for the main income tax return. Some other forms have specific deadlines. If forms are filed after 31 December following the end of the tax year, there is a risk that any refund arising will not be processed.
Your tax office is allocated according to where you live. A complete list can be found here.
Penalties for late filing
Late filing is not routinely penalised although the tax authorities can issue a penalty up to 10% of the final tax and fines of €1,250.
Tax is assessed on a progressive basis with rates from 0% – 40%. An additional surcharge is assessed on the final tax due at a rate of 7%/9% depending on the level of income arising giving a total maximum tax rate of 43.6% on income over €150,000 (single)/€300,000 (joint).
There are 3 tax classes in Luxembourg. Married couples are assessed under Tax Class 2, unmarried taxpayers under Tax Class 1. In cases of dependent children/divorce/widowed tax class 1a or 2 may apply.
For the correct tax class to be applied to employment income, each individual must obtain a tax card from the tax authorities. More information on tax cards can be found here. Where both spouses are working, if joint income is over €36,000 it is often the case that additional tax will be due when the tax return is filed, so make sure you budget for that!
Taxes are withheld on income from employment, pensions and some savings and investment income. Taxes on other income will be paid via the tax return.
Where tax is owed at the end of the year, it is common for the tax authorities to assess quarterly pre-payments for the following years. These are due on 10 March, 10 June, 10 September, 10 December.
The tax authorities issue an assessment for each income tax return filed. This typically takes around 3-6 months, but can take longer. The assessment determines any tax owed/refund due and you have 1 month to pay any taxes due. Late payments can attract monthly interest charges. You can appeal against any assessment within 3 months of receipt. Tax assessments are not routinely issued in respect of the décompte annuel.
Married couples file jointly (including in the year of marriage) and they also report income of dependent children under 18. Where one spouse is not resident in Luxembourg joint filing can only be obtained by election as long as certain conditions are met. Registered partnerships can also elect to file jointly if they meet certain conditions – this election is requested each year but analysis is required to determine benefit.
Individuals filing jointly are joint debtors of any income tax due.
Who has to file
If your income subject to withholding tax exceeds €100,000 (or €36,000 if you are married and both spouses are working in Luxembourg) or you have more than one type of income you will typically need to file a tax return.
Residents maintain a permanent home in Luxembourg or intend to remain in Luxembourg for at least 6 months. Non-residents do not meet the residency requirements. Extra care should be taken if family remain living outside Luxembourg, a second permanent home is maintained in another country or the individual is considered resident in more than one country.
Residents are taxable on their worldwide income.
Non-residents are taxed on their Luxembourg sourced income but available deductions (described above) are limited. Non-residents do not automatically file jointly, but under certain conditions, it can be beneficial to do so. Non-residents can also elect to be taxed as residents if it is beneficial and they meet certain requirements. Detailed analysis is required to determine the best filing position available.
What is taxed
Income is split into 8 categories:
- Agricultural & forestry
- Self-employment income
- Investments (including interest & dividends) – for significant interest income a separate filing may be beneficial, but case by case analysis is required.
- Miscellaneous (including capital gains)
Each category has its own set of deductions available to it and net income is calculated for each category separately. The main types of income seen by expats are described in more detail below:
Employment income – all cash payments and benefits are reported through the payroll. Monthly tax and social security is withheld based on your tax card. Deductions are available for home to office travel (up to €2,574) and unreimbursed expenses (standard deduction of €540, but more can be claimed in certain cases).
Investments – certain dividends can be treated as 50% exempt and certain interest payments are exempt from tax. An exemption of €1,500 (€3,000 joint filing) is available on taxable investment income and, in addition, incidental costs relating to the investments can be deducted.
Rental – related expenses and mortgage interest and depreciation of the property (at a rate of 2% – 6% depending on the age of the property) can be deducted from rental income.
Capital Gains – short term gains (immovable property sold within 2 years or movable property sold within 6 months) in excess of €500 are taxable. Long term gains from movable property sold after 6 months are tax exempt (unless there is 10% direct or indirect holding). Other long term gains can attract certain reliefs and may be taxed at 50% of the global tax rate.
What you can deduct
A lump sum deduction of €480 (single)/€960 (jointly taxed and both employed) is applied unless certain actual deductions are higher. When claiming additional deductions it’s important to remember to attach evidence such as receipts for each item to your tax return.
Social security – Luxembourg and foreign social security contributions can be deducted (subject to some limitations).
Mortgage interest – mortgage interest paid on your main residence can be deducted up to €750 – €1,500 per member of your household, depending on how long you have occupied the property. It is reduced by an imputed “rental income” which is very low (normally around €100).
Debit interest – interest paid on private loans (excluding mortgages) can be deducted up to €336 per member of your household.
Insurance premiums – premiums paid for life, medical, death 3rd party liability etc. are deductible up to €672 per member of your household.
Home saving scheme – contributions to approved schemes are deductible up to €672 per member of your household.
Personal pensions – contributions to Luxembourg plans (or non-Luxembourg plans that have the same conditions) can be decuted from €1,500 – €3,200 depending on age.
Charitable contributions – contributions to recognised charities (€120 – €1m/20% of income) are deductible
Alimonies– amounts paid to a divorced spouse and/or children living outside the household (€24,000 (spouse) and €3,480 per child under certain conditions) can be deducted
Childcare/Housekeeping – costs for registered cleaners/housekeepers and/or crèche/nursery/daycare for children under 14 limited to €300 per month are deductible.
Extraordinary expenses – in rare cases, significant expenses incurred in extraordinary situations can be deducted depending on expenses incurred and income levels.
Extraprofessional abatement – for jointly taxed couples where both parties are working, an abatement of €4,500 can be claimed.
Child/single parent credits – additional credits can be claimed for bearing children and by single parents. Amounts claimed via tax returns will depend on any amounts paid directly and on other allowances.
Expatriate tax regime
For qualifying individuals coming to Luxembourg, the application of this regime can provide a reduced tax liability. There are a number of qualifying criteria to be met by the employee and the employer as well as some ongoing reporting requirements for the employer.
This is a general guide and is not intended to cover specific situations. Tax, especially for expatriates, is complicated and tax legislation and interpretations change frequently so this guide should not replace personal consultation. If you have any questions regarding your personal income taxes or would like more information on a specific point, please contact Laura Foulds at Analie Tax & Consulting.
Feature photo: Dave Dugdale/flickr (file)