Luxembourg: Proposed New Tax Measures for 2025

Proposed New Tax Measures for 2025

On July 17, 2024, the Luxembourg government submitted a draft law (n°8414) introducing various tax measures for individuals and companies, aiming to enhance residents' and cross-border workers' purchasing power, as well as the country's competitiveness. Here is a detailed summary of these proposals.

Measures for Individuals:

1. Adjustment of the tax scale to counter inflation:
   • Modification of the personal income tax scale by adding 2.5 index brackets starting from 2025.
   • This measure aims to significantly reduce the tax burden, especially for low-income households.
2. More advantageous calculation formula for certain taxpayers:
   • Revision of the tax treatment for single parents, widows, and citizens over 64 years old.
   • Reduction in tax progression with a more favorable calculation formula, bringing their tax burden closer to that of class 2, with a potential decrease of 2,250 to 2,600 euros annually for incomes exceeding 50,000 euros.
   • Increase of the exempt amount for tax class 1A from 24,876 euros to 26,460 euros.
3. Increase in the single-parent tax credit:
   • The single-parent tax credit (CIM) will increase to 3,504 euros (currently 2,505 euros) for incomes below 60,000 euros.
   • Gradual decrease of the credit for incomes between 60,000 and 105,000 euros.
4. Increase in the minimum social wage tax credit:
   • The minimum social wage tax credit (CISSM) will increase to 81 euros per month (currently 70 euros).
5. Higher deduction for extraordinary expenses:
   • The allowance for extraordinary expenses for children not part of the household will increase from 4,322 euros to 5,424 euros per year per child starting in 2025.
6. Complete tax exemption for the unskilled minimum social wage:
   • Complete elimination of the tax burden for individuals earning the unskilled minimum wage through the CISSM.
   • Extension of the current exemption for tax classes 1a and 2 to tax class 1 from 2025.
7. Profit-sharing scheme:
   • Companies can distribute profit-sharing premiums up to 7.5% of the previous year's net after-tax result (currently 5%).
   • The maximum amount will increase from 25% to 30% of the employee’s annual gross fixed salary.
8. Impatriate tax regime:
   • Complete overhaul of the regime, offering a 50% exemption of gross annual income, capped at 400,000 euros.
   • Requirement for impatriates to spend at least 75% of their working time on the professional activity for which they benefit from the regime.
   • Current beneficiaries can opt into the new regime, which is irrevocable once chosen.
9. Partial tax exemption for bonuses for employees under 30:
   • Introduction of a partial tax exemption for bonuses paid to young employees under their first permanent contract in Luxembourg.
   • Up to 75% of the bonus will be tax-exempt, with limits ranging from 2,500 to 5,000 euros depending on the employee’s salary.
   • No exemption for annual gross salaries exceeding 100,000 euros.
10. Tax credit for cross-border workers' overtime hours:
    • Introduction of a tax credit for overtime hours (CIHS) for non-civil servant employees.
    • Credit proportional to the overtime salary, up to a maximum of 700 euros per year.
    • This credit will not apply to gross overtime earnings below 1,200 euros per year.

Measures for Companies:

1. Reduction of the corporate income tax (CIT) rate:
   • Reduction from 17% to 16% for taxable incomes exceeding 200,000 euros starting in 2025.
   • Reduction from 15% to 14% for small businesses with taxable incomes below 175,000 euros.
   • The overall tax rate for companies in Luxembourg City will decrease from 24.94% to 23.87%.
2. Amendments to interest limitation rules:
   • Introduction of a new exclusion concept for certain groups of entities (single-entity group) from interest limitation rules, under conditions and upon request.
   • Implementation of a safeguard clause based on a ratio between equity and assets.
3. Modernization of the impatriate tax regime:
   • Replacement of the “real expenses” system with a flat-rate exemption of 50% of gross annual income, capped at 400,000 euros.
   • Clarification that the main activity must be performed in Luxembourg for at least 75% of working time.
   • Limitation of employees benefiting from the regime to 30% of the total workforce.
4. Reform of the profit-sharing bonus (prime participative):
   • Increase of the maximum partially tax-exempt amount to 30% of the annual gross salary (excluding benefits in kind).
   • Increase of the total profit-sharing bonuses payable to employees to 7.5% of the previous year's positive result.
5. Adjustment of the tax scale for individuals:
   • Increase in tax brackets to account for cost-of-living indexation.
   • The marginal tax rate of 42% will apply to incomes above 234,870 euros instead of 220,788 euros.
6. Introduction of a young employment bonus:
   • 75% tax exemption on bonuses for young employees under their first permanent contract, limited to 5 years.
   • Specific limits based on annual gross income.
7. Exemption from subscription tax for actively managed ETFs:
   • Actively managed ETFs will benefit from a subscription tax exemption starting in 2025, similar to the existing exemption for passively managed ETFs.
8. Reform of the SPF regime:
   • Increase of the minimum annual subscription tax from 100 euros to 1,000 euros.
   • Requirement for electronic submission of annual compliance certifications.
   • Introduction of graduated sanctions for violations, including administrative fines up to 250,000 euros for serious breaches.

These measures, designed to improve Luxembourg's competitiveness and encourage the creation of high-value-added jobs, are subject to the approval of Parliament and the Council of State and are expected to come into force in 2025, with some exceptions. For more information, our tax team is available to discuss how these measures may affect you.