EMEA Tax & Legal Insurance Newsflash
Luxembourg
Vote of two laws amending Luxembourg income tax legislation
I. New measures for corporate taxpayers
1. Reduction of the CIT rate from 17% to 16% (Bill 8414)
The maximum CIT rate currently set at 17% is decreased to 16%.
The aggregate corporate tax rate (including the solidarity surcharge and the municipal business tax) for a company established in Luxembourg City will therefore decrease from 24.94% to 23.87% for tax years 2025.
2. Amendments to the SPF regime (Bill 8414)
The law amends the Law of May 11, 2007, in relation to private wealth management company (Société de gestion de patrimoine familial - “SPF”). The modifications (i) increase the minimum annual amount of subscription tax from EUR 100 to EUR 1,000, (ii) introduce the possibility of imposing administrative fines in the event of specific violations of the Law of May 11, 2007, and (iii) adjust the existing procedure for withdrawing the SPF’s tax status.
3. Exemption from subscription tax for OPCVM ETF (Bill 8414)
Considering the significant development of OPCVM ETF (Organismes de placement collectifs en valeurs mobilières cotées) in Europe but also internationally, the law introduces an exemption from subscription tax for OPCVM ETF.
4. Clarification of the interest limitation rules (Bill 8414)
The law introduces the definition of single entity group (“groupe à entité unique”) under article 168bis 1) of the Luxembourg income tax law (“LIR”) applicable to entities which are not included in a financial consolidation as well as specific rules to apply, on demand, for a group exemption for these entities. Such new group exemption should have a positive impact on orphan securitisation vehicles not included in a financial consolidation.
5. Clarification of the scope of the partial liquidation treatment (Bill 8388)
The law clarifies the conditions under which the redemption or withdrawal and cancellation of a class of shares is treated as a partial liquidation in line with prior practice.
6. Partial optionality of the participation exemption regime (Bill 8388)
Article 115 LIR, which provides, under certain conditions, for a 50% exemption of dividends received is amended to introduce an option for the taxpayer to renounce to the exemption.
A similar option is offered to renounce to the benefit of the 100% exemption of dividends received as foreseen under article 166 LIR and of the capital gain exemption as foreseen under the grand-ducal regulation to the extent that said income are exempt solely due to the acquisition price representing, respectively, at least EUR 1,200,000 or EUR 6 million. In other words, no renunciations may be expressed in relation to participations representing at least 10% in the share capital of a subsidiary.
Said renunciations are to be made individually for each tax year and for each participation.
This modification is applicable as from the 2025 tax year.
II. New measures for individual taxpayers
Luxembourg adopt a set of rules for individuals with a clear objective to improve the net salary of the Luxembourg employees and the competitiveness of the Luxembourg place. We list hereafter the most important one:
1. Impatriate tax regime (Bill 8414)
The current regime will be completely reshaped as from 2025 to allow highly skilled employees relocating to Luxembourg to benefit from an income tax exemption of 50% of their total annual gross remuneration. The amount of annual gross remuneration that can benefit from this exemption is capped at EUR 400,000.
To qualify for the regime, the impatriate must carry out the professional activity for which he benefits from the regime for at least 75% of his working time.
Impatriates who currently benefit from the existing impatriate regime can opt to continue under the former regime or opt into the new one. The request shall be communicated to the Luxembourg tax authorities and is irrevocable.
2. Partial tax exemption for bonuses paid to employees under 30 years old (Bill 8414)
A new incentive will be introduced, in the form of a partial tax exemption for bonuses paid to qualifying employees, i.e. for employees under 30 years old for their first permanent contract in Luxembourg. This incentive intends to support young employees at the beginning of their career.
Up to 75% of the bonus that may be paid by the employer will be tax-exempt, with a limit ranging from EUR 2,500 to EUR 5,000 depending on the employee’s remuneration.
As from an annual gross remuneration of EUR 100,000, no exemption will be applicable.
3. Profit sharing scheme (Bill 8414)
Companies will be able to distribute to employees profit sharing premiums for up to 7.5% (instead of 5% currently) of the company’s previous year after-tax result. Also, the maximum amount is increased from 25% to 30% of the employee’s annual gross fixed salary.
Conclusion
These measures are welcomed and will contribute to enhance Luxembourg's competitiveness and encourage the creation of high-value-added jobs in the country. The anticipated tax revenue loss from certain of these measures is expected to be balanced by increased tax revenues in the medium term. The above changes also demonstrate a clear ambition of the Luxembourg Government to become more digital.
Vote of the law amending Pillar 2 minimum taxation rules in Luxembourg
In brief
The Luxembourg Parliament voted to approve the draft law n°8396 amending the Pillar 2 minimum taxation rules as introduced by the law of 22 December 2023 and transposing the EU Council Directive 2022/2523 of 14 December 2022 on ensuring a global minimum level of taxation for multinational enterprise groups and large-scale domestic groups in the European Union, known as the EU Pillar 2 Directive or the GloBE (Global anti-Base Erosion) Directive.
These amendments broadly incorporate the latest administrative guidance issued by the OECD and clarify some important principles which could be relevant for Luxembourg businesses impacted by the rules.
In detail
The law of 22 December 2023 introducing the Pillar 2 minimum taxation rules (“the Pillar Two Law”) enacted the Income Inclusion Rule (IIR) and the Qualified Domestic Minimum Top-up Tax (QDMTT) which are to be effective for fiscal years starting on or after 31 December 2023, whereas the Undertaxed Profits Rule (UTPR) would generally become effective for fiscal years starting on or after 31 December 2024.
There were however additional amendments brought by the Government after the publication of the draft law to introduce some of the OECD's administrative guidance published in June 2024 as detailed below.
Securitization vehicles
The June 2024 OECD Guidance allows jurisdictions that have introduced a QDMTT to take account of the specific situation of securitization vehicles in the context of the Pillar Two rules.
While securitization vehicles rarely form part of a Pillar 2 group, we welcome the fact that Luxembourg has opted to allow securitization vehicles within the scope of Pillar Two to have their potential additional tax allocated to other constituent entities that are located in Luxembourg. This option enables Luxembourg to retain the benefit of the QDMTT safe harbour. This means that other jurisdictions with Pillar 2 rules are in principle not expected to apply IIR or UTPR provisions on Luxembourg entities that are subject to Luxembourg QDMTT rules.
Securitization vehicles are also excluded from the application of the joint and several liability mechanism. However, if there are no other constituent entities of the MNE group in Luxembourg, the amount of top-up tax remains allocated to the securitization vehicles.
Flow-through entities
New provisions for determining whether an intermediate transparent entity is considered fiscally transparent or a reverse hybrid entity based on local tax rules are included in the Pillar Two Law in line with the June 2024 OECD Guidance. The rules clarify how situations where flowthrough entities holding other flowthrough entities should be treated for Pillar 2 purposes.
Specific rules for the allocation of taxes to hybrid and reverse hybrid entities are also included. The allocation is based on the fiscal treatment of the entity and its owners, ensuring that taxes are appropriately attributed according to the entity's classification at the level of its direct or indirect owners.
Grand-Ducal Regulation
Amendments have been made to allow the issuance of Grand-Ducal regulations to clarify the application of certain rules, such as the deferred tax liability recapture rule, the determination of deferred tax adjustment in situations where there are divergences between the GloBE and accounting value of assets or liabilities and the allocation of cross-border current and deferred taxes in specific situations.
These amendments will enter into force for Fiscal Years ending on or after 31 December 2023. The Luxembourg Government included several arguments to defend the retroactivity of the rules in the commentary to the law.
Conclusion
The draft law amending the Pillar 2 Law introduces several changes to align the domestic rules with the latest OECD guidance. The amendments clarify various aspects of the Pillar 2 rules and are expected to provide more clarity and certainty for taxpayers and tax authorities.
While clarifying certain concepts, doubts still remain with respect to several aspects of the rules, such as the treatment of compartments of funds, the treatment of deferred taxes for entities filing Lux GAAP financial statements and the Pillar 2 filing obligations that will be due in Luxembourg. As many Luxembourg companies will be finalising their FY24 financial statements in the first half of 2025, it remains to be seen whether administrative guidance clarifying some of the issues would be issued early 2025.
Géraud de Borman Partner T: +352 49 48 48 3161 E: geraud.de.borman@pwc.lu
Philippe Ghekiere Partner T: +352 621 333 228 E: philippe.ghekiere@pwc.lu
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