Expatriate tax - Luxembourg

Luxembourg taxes its residents on their worldwide income. Non-residents are normally taxed only on the Luxemburgish income but they can ask to be taxed as residents in order to have better tax rates or other deductions possibilities. Taxation system can be changed during the year latest with filing the annual tax return.

There are no pre arrival procedures to respect besides controlling if of a work permit is necessary.

The tax year runs from 1 January to 31 December.

An individual who is a resident of Luxembourg or has taxable income in Luxembourg during the tax year files a form 100.

Tax return filling is not always an obligation. If the income does not exceed certain limits, the withholding tax on the salary can be regarded as final taxation.

Individual income tax returns are due on 31 December N+1. 

There are 3 categories of filing status (= tax classes) that may apply to a taxpayer:

Tax class 1: single or married filing separately

Tax class 1a: single parent, taxpayers older than 64 years

Tax class 2: married filing jointly 

Married filing jointly often provides the lowest tax; however, results may differ depending on income levels of the spouses.

Income tax calculation (for residents only)

Assume a married individual with two children (both under 17 years old) and all family members considered tax residents for the entire tax year.

Residents and non-resident taxpayers are taxed under the same rules and subject to tax at graduated rates. Residents are taxed on worldwide income; non-residents can ask to be taxed as residents.

If non-resident taxpayer apply to be taxed as tax residents, they will be taxed on their worldwide income.

The taxpayer is seen resident from the first day of moving to Luxembourg or if his vital interest (family, fortune…) are based in Luxembourg. The residence ends with the deregistration in Luxembourg and move from Luxembourg.

Generally, all earnings deriving from an activity, occasional or regular, are taxed as income from employment provided that the income is not considered business income or income from capital. All earnings from an employer to an employee are reportable and taxable as income from employment, i.e. wages, fees, sickness allowances, severance pay as well as benefits in kind i.e. free meals, a company car, interest subsidies, travel benefits and expense allowances, e.g. subsistence allowances and travel compensation.

The taxation of an individual on stock option income depends on what kind of option has been granted, (i.e. incentive stock options or nonqualified options). This similarly applies to other equity-based compensation. A stock option is the right granted to an employee in consideration for the performance of services, to purchase shares in a corporate employer or related company.

The option agreement usually specifies the purchase price and time period during which the option may be exercised. Income from the exercise of traditional stock option plans is generally taxed at ordinary tax rates and is subject to withholding upon exercise. The tax treatment of stock options and other equity-based compensation is a complicated area and advice should be sought, particularly if options are earned in multiple countries and the vesting period relates to duties performed

The source of employment is generally determined by the place where services are performed.

Generally, an individual is liable to pay tax on any benefits (in kind) received.

Following tax exemptions accrue

• Without ceiling:
  • One-off expenses relating to the move (Removal costs, travel costs, repatriation costs,…);
  • Furnishing costs for the residence in Luxembourg (purchase of furniture, appliances, dishwasher,…);
  • Travel expenses for exceptional circumstances (marriage, death, birth of a family member);
    • Those costs must be justified with bill, invoices or any other legal proof.
  • Supplementary school fees related to primary and secondary school;

• With ceiling:
  • Housing costs of the residence in Luxembourg (rent, heating, water, electricity, property taxes…) provided that the “inpatriate” keeps a residence in his home country, otherwise only cost in excess are exempted
  • Home leave: one trip per year per family member (only travel costs are exempt)
  • Tax equalization expenses

The above recurring expenses cannot exceed neither € 50,000 per year nor 30% of the fixed annual remuneration (€ 80,000 for couple living together)

• Inpatriation premium : 50% of the inpatriation premium will be exempted, in the limit of 30% of the fixed annual remuneration 

Depending on the length and terms of the assignment, tax relief may be available under the provisions of a bilateral tax treaty between Luxembourg and the home country.

The inpatriate can benefit from the regime for up to eight years following the year of arrival, provided that the conditions are met.

Luxembourg applies either tax credits or exemptions methods to avoid double taxation.

As a Luxembourg resident, a number of deductions may be taken against gross income to arrive at an individual’s taxable income. Unlike non-resident taxpayers, who have limited deductions, a Luxembourg resident has the option of claiming more deductions.

Some examples for deductions are income related expenses, special expenses and allowances, exceptional expenses. 

Luxembourg has an extensive income tax treaty network with 100 countries.

Capital gains from the sale of investment assets held for less than 6 months are generally taxed at the taxpayer’s ordinary income tax rates. Long term capital gains (sale of investment assets) are only taxable if it is a major participation and are taxable with half of the personal global tax rate. 

Tax exempted if occupied as main residence of the owner since the beginning or at least 5 years before the sale.

Inheritance and gift taxes differ from the rules for income taxes. This should be seen with a notary in Luxembourg. 

Generally, investment income such as dividends, interest where the RELIBI taxes do not apply and royalties received by a resident of Luxembourg is taxed as income. The taxation of rental income depend on where the real estate lays.

Non applicable for Luxembourg

Real estate (property) taxes are generally assessed at the local level and are paid on property. 

As a general rule, all professional income earned in Luxembourg is subject to social security contribution to be paid to the Centre Commun du Sécurité Social (CCSS). Certain non-resident taxpayers, however, may pay their social security in their home country due to European legislation.

CCSS requires matching contributions from the employer and the employee for both illness and old age  social security.

Since September 2023 the rates are as follows:

• Illness                    5,6% + 0.5%
• Old age/pension   16%

Those contributions are imposed up to a wage cap that is adjusted for inflation regularly and is € 154.255,68 for the year ( € 12.854,64 for the month ) since September 2023.

The long time illness rate for employees only is 1.4 % and is not capped.

Accident insurance according to the level of risk as well as continued salary payment insurance according to the level of absences is to be paid by the employer only.

There is no wealth tax for individuals in Luxembourg.

Non applicable for Luxembourg

In Luxembourg only income on worldwide assets has to be declared. Based on the data exchange between the foreign and local authorities the tax office could request further information.