Understanding Taxes in Luxembourg

Taxes in Luxembourg

Luxembourg has a developed tax system with taxes imposed at national and municipal levels. The main direct taxes are individual income tax, corporate income tax, and net wealth tax. The standard VAT rate is 17%, with reduced rates of 8% and 3% applying to certain goods and services. Social security contributions are also levied on employment income. Overall, Luxembourg offers a competitive tax regime to attract foreign investment and skilled workers.

1. Personal Income Tax

Personal income tax applies to the worldwide income of Luxembourg tax residents. Non-residents are taxed on Luxembourg-source income only. The tax year runs from 1 January to 31 December.

Income tax is levied on a sliding scale, with a top marginal rate of 42% applying to income over €200,004 (as of 2022). Taxpayers can claim various deductions and allowances to reduce their taxable income, including deductions for business expenses, pension contributions, and donations to charity. Married couples are taxed jointly, which often results in a lower tax burden than individual taxation.

Non-residents who earn at least 90% of their income from Luxembourg employment can benefit from favorable tax classes. Cross-border and frontier workers also enjoy specific deductions to alleviate double taxation.

2. Corporate Income Tax

Companies resident in Luxembourg are taxed on their worldwide income. Non-resident companies are generally taxed on Luxembourg-source income only via withholding taxes. The corporate income tax rate is 18.19% for taxable profits over €175,000. Lower rates apply to profits below this threshold.

Luxembourg offers an extensive network of double tax treaties as well as EU Directives to mitigate cross-border tax obstacles for businesses. There are also generous deductions for R&D activities and investment incentives such as accelerated depreciation. Overall, Luxembourg provides a highly competitive tax jurisdiction for international companies with European operations.

3. Net Wealth Tax

Luxembourg operates a progressive net wealth tax ranging from 0.5% to 1.5% on net assets exceeding €500,000. The taxable base includes real estate, business assets, securities, bank deposits, and other assets, less any deductible liabilities. There is an allowance of €1 million per household.

Wealth tax can be minimized through careful financial planning strategies. Non-residents are exempt from wealth tax except on Luxembourg’s situs assets.

4. VAT

Value added tax (VAT) applies to the supply of most goods and services in Luxembourg. The standard VAT rate is 17%, with reduced rates of 14%, 8%, and 3% for items like food, medicines, books, and passenger transport. Real estate transactions are exempt from VAT.

Businesses established in Luxembourg must register for VAT once annual turnover exceeds the threshold of €35,000. There are slightly different VAT schemes and obligations for small businesses and e-commerce operators.

5. Social Security Contributions

Social Security contributions are paid by employees and employers on employment income at rates up to 18%. This covers programs like healthcare, pension, maternity leave, and disability benefits. High-income earners may also owe a dependency contribution of 1.4%. Self-employed residents pay contributions based on their business profits.

Tax Planning Opportunities

Luxembourg offers ample scope for tax optimization, especially for high-net-worth individuals and international businesses. This includes specialized investment funds, IP holding companies, cross-border dividend planning, and strategic estate planning. Consulting a tax advisor can help develop the ideal structure to minimize taxes.

The handy tax calculator on Luxtoday.lu allows residents to estimate their income tax and social charges based on personalized inputs. This provides a quick snapshot of the potential tax liability for those new to the Luxembourg tax system. However, the calculator is not a substitute for professional tax advice.

In summary, taxes in Luxembourg are competitive but complex. Both individuals and businesses can benefit from tailored tax planning and ongoing compliance support from experienced advisors.