Tax news for Luxembourg in 2011

The end of 2010 saw intense legislative and regulatory activity regarding taxation and compulsory contributions. The new measures concern both individuals and corporations, and the following is a summary of their most significant provisions.

Measures affecting corporations

The most important measures are the following:

Introduction of a minimum amount of tax for corporations. This amounts to EUR 1,500 (EUR 1,575 including the contribution to the Employment Fund). The corporations covered by this measure are those that are not subject to a regulatory authority and where more than 90% of asset items consist of financial assets, transferable securities and cash at bank (accounts 23, 50 and 51 in the chart of accounts),
Increase in the rate of solidarity surtax (or contribution to the Employment Fund) to 5%. The overall tax rate for companies based in the city of Luxembourg consequently amounts to 28.80%,
Setting a ceiling on severance payment amount for tax deduction purposes at EUR 300,000. This measure aims at reducing the excessive practices well known as “golden handshakes” granted when a contract is terminated or comes to an end,
Increase of 1% in the rate of tax allowance for investment (complementary and global).

These measures come into effect as from 1 January 2011.

Measures affecting natural persons

The most important measures are the following:

Increase in the marginal rate of tax to 39%. This rate is increased by 4% for the contribution to Employment Fund. Nevertheless, above a taxable income of EUR 150,000 (Tax Classes 1 and 1.a) and a taxable income of EUR 300,000 (Tax Class 2), this increase goes up to 6%. The result is a marginal rate that varies, depending on circumstances, between 40.56% and 41.34%,

Introduction of a crisis contribution of 0.8% applicable to a tax base composed of occupational income, substitution income and patrimonial income. The marginal tax rate will thus be 41.36% or 42.14% for income over EUR 300,000,
Increase in the ceiling of deduction for annuities and permanent obligations (e.g. in the case of alimony paid to a divorced spouse) to EUR 24,000 per annum.

Highly qualified employees

Both expected and called for by local economic operators, the tax regime for highly qualified and specialist or expatriate employees has at last seen the light in Luxembourg through a circular issued by the Direct Contributions Administration on 31 December 2010.

Who are these tax provisions intended for?

An employee who normally works abroad and is seconded temporarily by a foreign company to a Luxembourg company that forms part of the same international group, in order to carry out employment activities there.
An employee directly recruited abroad by a Luxembourg company in order to carry out employment activities temporarily within the company.

The main conditions to be met in order to benefit from this regime are as follows:

As regards the employer:

The employer must form part of an international group (companies linked financially and established both in Luxembourg and in at least two countries other than Luxembourg),
it must employ or undertake to employ at least 20 full-time employees in Luxembourg,
the number of expatriates may not exceed 10% of the company headcount (except for companies established in Luxembourg for less than 10 years).

As regards the expatriate:

He must become a resident taxpayer. He must not have been domiciled or subject to tax in Luxembourg during the 5 years preceding his arrival to work in Luxembourg,
He must provide significant added value to the Luxembourg economy,
He must be a specialist in his field of expertise either through higher education diplomas or through at least 5 years’ professional experience acquired in the sector concerned,
He must operate principally in Luxembourg,
He must receive a salary corresponding, at least to the maximum subject to social security contributions,
He must not be employed to replace another employee,
The employment relationship between the expatriate and the sending company must continue during his period of secondment. His temporary posting to Luxembourg must be accompanied by a right of return to the sending establishment at the end of the period of secondment,
In the case of recruitment by the Luxembourg company, the employee must have acquired an extensive specialisation in a sector or a profession which is characterised by recruitment problems in Luxembourg.

The main benefits of the regime are as follows:

Exemption, as far as the expatriate is concerned, of a certain number of recurring and non-recurring expenses and charges incurred by expatriation to Luxembourg and which are incurred by the employer.
Deduction of the above expenses as far as the employer is concerned as business expenses.

The expenses concerned are:

1. Non-recurring costs incurred through removal, such as:

Removal expenses for the highly qualified employee to move house,
Expenses for fitting out a home in Luxembourg (purchase of furniture,
domestic appliances to local standards, such as dishwasher, washing machine, tumble drier),
Traveling expenses as a result of special circumstances (birth, marriage, death of a family member),
Costs of final return to the country of origin at the end of the highly qualified employee’s secondment, including expenses incurred by moving house.

2. Recurring costs incurred by removal, such as:

Expenses connected with removal:
- Running costs for the residence in Luxembourg: rent, heating, gas, electricity, water and lift charges, and associated taxes and duties,
- Cost of one annual journey between Luxembourg and the home country for the employee himself, his spouse or partner and the children in his household,
- Tax equalisation of taxes in his home country, reimbursement of the difference between the tax charge in Luxembourg and in the country of origin.

These recurring charges may not exceed either EUR 50,000 per annum or 30% of the employee’s total annual fixed remuneration. This limit is increased to EUR 80,000 if the employee lives with his spouse.

Schooling fees for children.
Lump sum compensation for certain other recurring expenses (difference in the cost of living between the host country and the country of origin, limited to 8% of the highly qualified employee’s fixed monthly salary, but which may not exceed the monthly amount of EUR 1,500, doubled if the spouse has no occupation).

The tax regime for expatriates applies from the employee’s year of posting and for a maximum period of 5 years following his beginning in Luxembourg.

The benefit of the expatriate’s tax regime is subject to the employer’s request introduced to the head of its local RTS office with relevant supporting documents proving that the conditions laid down in the circular of the Direct Contributions Administration have been complied with. This request must be lodged at the latest 2 months after the commencement of the expatriate’s work in Luxembourg.

The employer must also, before 31 January of each year, supply the competent tax office with a list of the names of employees benefiting from these favourable measures, to be subject to the control of the latter.

These measures come into effect from 1 January 2011.

Chamber of Commerce Contribution

After much dispute relating in particular to the very legality of a contribution to the Chamber of Commerce, the reform initiated by the government has led to the adoption by Parliament of the law aiming at the reorganisation of the Chamber of Commerce contribution. Two Grand Ducal Regulations will then complete the legal arrangements.

From now on, the system of Chamber of Commerce contributions will have the following features:

An annual contribution, the rate of which will be 0.2% of a contribution basis made up of the taxable profit realized by the taxpayer during the last financial year but one (N-2),
In the event that the taxpayer makes losses, minimal contributions are provided for, i.e. EUR 14 for individuals, EUR 70 for private limited companies and EUR 140 for other stock companies,
As regards taxpayers who make trading profits exceeding EUR 49,500,000, the contribution rate will be degressive, ranging from 0.2% to 0.025%,
The main new feature consists of the introduction of a lump sum contribution of EUR 350 for companies whose main object is to hold shares in other companies and which are listed as such under the NACE nomenclature.

These provisions apply to annual contributions due for the year 2010 (calculated on profits made in 2008) and subsequent years. They are also applicable to adjustments in connection with contributions for years prior to 2010 and occurring after 3 December 2010 (date of publication of the Grand Ducal Regulation of 12 November 2010).