Main corporate tax measures
Corporate tax rate, corporate tax base
Despite the challenging environment due to the COVID-19 pandemic, no changes have been made to the standard corporate tax, or to the general legal rules and regulations regarding the computation of the corporate tax base.
Luxembourg vehicles owning Luxembourg real estate
The availability in Luxembourg of tax opaque vehicles not subject to corporate income tax has led to the possibility for certain investors to reinvest indefinitely untaxed income from immovable properties held by such vehicles. To fight certain structures considered abusive, a new tax on Luxembourg real estate income received by certain Luxembourg vehicles exempt from corporate income tax has been introduced. This tax amounts to 20% (the “20% Tax”) without any possibility of deduction and includes any rental proceeds and capital gains realised on Luxembourg real estate, whether received directly or indirectly via tax transparent vehicles.
Such 20% Tax is however only applicable to certain vehicles exempt from Luxembourg corporate income tax, being the Luxembourg undertakings for collective investment within the meaning of part II of the law of 17 December 2010, as amended, the specialized investment funds within the meaning of the law of 13 February 2007, as amended, and the reserved alternative investment funds within the meaning of the law of 23 July 2016, as amended, not having opted to be taxed in accordance with article 48 of such law . As such, the 20% Tax would not apply to Luxembourg partnerships or contractual funds whether the latter would invest into Luxembourg real estate either directly or indirectly via other tax transparent vehicles.
Whilst the scope of this new tax is rather limited, the reporting obligation thereunder is quite broad and may involve a fixed fine of 10,000 euros in case such requirement wouldn’t be complied with in time. Indeed, all Luxembourg vehicles considered by the 20% Tax must provide a special report by 31 May 2022 at the latest regarding any Luxembourg real estate owned at any time during civil years 2020 and 2021, irrespective of whether or not the vehicle has actually owned any real estate asset or whether it has received any rental proceeds or realised any gain from such asset.
In conclusion, although the aim of the 20% Tax may be comprehensible, an alternative would have been to follow the approach of some other countries and simply foresee that such vehicles with Luxembourg real estate investments would need to distribute (part of) their realised profits to keep their tax-exempt status. By such means, a taxation at the level of the investors would have been assured more effectively compared to the current approach, where the risk exists that the latter or the sponsors simply amend their current structures to avoid this new tax.
Amendment to the private wealth management company regime
To align the purpose of the new 20% tax applied to certain Luxembourg vehicles exempt from corporate income tax and owning real estate in Luxembourg, the Law has amended the regime of private wealth management companies falling within the meaning of the law of 11 May 2007, as amended, insofar the latter are prohibited from holding not only directly any real estate in Luxembourg, but henceforth also indirectly via tax transparent vehicles.
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Tax consolidation regime
Following the decision of the European Court of Justice of 14 May 2020 (C-749/18), the Luxembourg tax consolidation regime has been amended to allow a vertical tax consolidation group to shift to a new horizontal tax consolidation group without the need for the existing group to be dissolved beforehand. Indeed, the European Court of Justice considered in its decision of 14 May 2020 (C-749/18) that the Luxembourg consolidation regime was not in line with the fundamental freedom of establishment. As a consequence, the Law introduces a temporary measure for a vertical tax consolidation group to shift to an horizontal tax consolidation group without considering the existing tax consolidated group being dissolved; as such, any negative tax consequences are avoided during such a shift for the consolidated group members, even if the minimum period of five fiscal years foreseen under the tax consolidation regime would not be met.
This option, available (upon joint request) for the tax years 2020 to 2022, would require certain conditions to be complied with (i.e., the integrating parent of the dissolved consolidated group becomes an integrating subsidiary of the new consolidated group; the range of the new consolidated group is increased compared to the previous consolidated group and the new consolidated group is bound for minimum period of five fiscal years, except if its member was already a member of the previous consolidated group).
As also highlighted by the Luxembourg Chamber of Commerce (Chambre de Commerce), the inclusion of a “temporary” aspect in relation to the above rule remains questionable for ignoring shifts that may occur after this date.
Main individual tax measures
Replacement of the employee participation scheme
The stock option regimes available in Luxembourg under the tax circular L.I.R. n°104/2 dated 29 November 2017 (the Circular n°104/2) has been replaced by a new employee participation scheme considered more reasonable and fairer.
In fact, the Circular n°104/2 has already been abolished on 14 December 2020 with effect as from fiscal year 2021. All regimes included therein aren’t thus applicable anymore as of such date. This approach seems unfortunate, as the Circular n°104/2 included both the so-called “warrant” regime, which involved rules of lower taxation considered abusive by the Luxembourg minister of finance and a more classic stock-option regime which can be found in the legislation of many other countries. Whilst the Chamber of Employees (Chambre des Salariés) has questioned the abolishment of the classic regime as the aim of the amendment is to tackle the warrant regime, fact is that the Luxembourg Parliament clearly reiterated its willingness to repeal the “stock option regime” and that the entire Circular n°104/2has been abolished. Consequently, there seems to be no room left for interpretation and all existing stock option regimes foreseen in the Circular n°104/2 are to be considered abolished as of the fiscal year 2021. In this context, the fate of any bonuses to be paid in 2021 in relation to warrants granted before 1 January 2021 remains uncertain. In accordance with the principles of legal certainty and legitimate expectations, such bonuses should still benefit from the warrant regime. However, this approach seems doubtful absent any grandfathering rule and considering that they will be paid out to employees in 2021, where such regime will be no longer applicable.
Under the new employee participation scheme, certain employees may receive a profit-related bonus with a 50% tax exemption, subject to certain number of conditions (e.g., limitation to 5% of the employer’s profits and 25% of that of the employee’s annual income; availability only to employees affiliated with the Luxembourg social security scheme; presence of regular accounts; etc.). Such bonus payment would be tax deductible as a business expense at the level of the employer.
To apply a coherent and equal treatment, eligible employees of Luxembourg branches of foreign (or at least European) businesses should also benefit from the option offered under this new employee participation scheme.
This new employee participation scheme seems rather restrictive, and in particular the 5% limitation to the employer’s profits may considered detrimental. Indeed, and as pointed out by the Luxembourg Chamber of Commerce and shared in some regards by the Luxembourg Chamber of Trade (Chambre des Métiers), several considerations may be made in respect thereof. First, the need to attract and retain performing talents and employees is applicable for any kind of businesses, whether they make profits or not. Second, such limitation may be considered discriminatory notably towards companies having carried forward losses, start-ups and businesses impacted by the Covid-19 crisis. Third, no option is currently foreseen to calculate the limitation to 5% of the positive result of the operating year on the result of the entire group of companies for that year, even when these companies would be established in Luxembourg.
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Amendments to the impatriate regime
The impatriate regime available in Luxembourg under the tax circular L.I.R. n° 95/2 dated 27 January 2014 (the “Circular n°95/2”) on the impatriate tax regime has been amended and codified to render the regime more attractive. Accordingly, the Circular n°95/2 has been abolished on 14 December 2020 with effect as from fiscal year 2021. However, a grandfathering rule is granted under certain conditions for impatriates where their entry into service occurred between 2016 and 2020.
Under the amended impatriate regime, employers may henceforth pay impatriate employees a 50% tax exempt bonus, which can however not exceed 30% of the impatriate’s gross annual remuneration that needs in addition to amount to at least 100,000 euros.
Further, certain costs incurred by the impatriate in the context of their relocation to Luxembourg and paid by the employer would be exempt at the level of the impatriate from their Luxembourg personal income tax, provided that they are reasonable and above the costs that the impatriate would have occurred in their State of origin. Within those costs, the repetitive costs (i.e., housing; one yearly travel expense to the country of origin and tax equalisation of domestic taxes to compensate for the differential in the tax burden between Luxembourg and the State of origin) would only be tax exempt up to a limit of 50,000 euros (respectively 80,000 euros for a couple) or 30% of the total of the latter fixed remuneration.
The employer may deduct for tax purposes the above-mentioned bonus payment and other costs paid for the benefit of the impatriate as a business expense at their level.
To benefit from such regime, the impatriate employee must fulfil certain conditions, such as not having been tax domiciled nor subject to income tax in Luxembourg on professional income for at least the 5 tax years preceding the entry into service , and not living within 150km of Luxembourg’s borders.
The benefit of these exemptions is limited to a period of 8 tax years (instead of 5 years foreseen in the Circular n°95/2), consecutive to the year of the entry into Luxembourg of the eligible impatriate.
Interestingly, certain restrictive conditions required by the Circular n°95/2 as regards the employer (e.g., employment of at least 20 or more full-time equivalent employees) and the impatriate (e.g., use of their special knowledge and know-how for the benefit of the staff of the employer; recruitment in a difficult sector or profession from a Luxembourg recruitment perspective) have not been included in the new impatriate regime.
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Main green tax measures
Reduction of the subscription tax for UCIs investing in sustainable activities
To further promote the development of sustainable financing, the subscription tax for undertakings for collective investments (“UCIs” ) investing in “environmentally sustainable economic activities” as per the European Union’s taxonomy regulation has been gradually reduced.
If the percentage of the net assets of a UCI or of an individual compartment of a UCI with multiple compartments invests in "environmentally sustainable economic activities" as set out in article 3 of Regulation (EU) 2020/852 of the European Parliament and of the Council of June 18, 2020 on the establishment of a framework to promote sustainable investments and amending Regulation (EU) 2019/2088, represents at least 5% of the total net assets of the UCI or of the individual compartment of a UCI with multiple compartments, the subscription tax rate amounts to 0.04%t for the portion of the net assets as defined in article 174 (3) paragraph 6 of the Luxembourg law of 17 December 2010 on collective investment undertakings, as amended. This rate respectively decreases to 0.03% if at least 20% of the net assets constitute qualified sustainable investments, 0.02% if at least 35% of the net assets constitute qualified sustainable investments and 0.01% if at least 50% of the net assets constitute qualified sustainable investments.
Introduction of an accelerated depreciation rate of 6% on renovation expenses
To promote a sustainable housing policy with a view to combat climate change, the Law has introduced an accelerated depreciation rate of 6% over a period of 10 years on expenses related to sustainable renovation of personal and rented accommodation.
If a rented building (or part of it) has been subjected to a sustainable energy renovation whose completion is prior to 9 years as at 1 January of the tax year at hand, a 6% depreciation rate applicable to investment expenditure relating to this sustainable energy renovation is allowed. In this context, sustainable energy renovation means any measures for the sustainable energy rehabilitation of rental housing for which financial assistance referred to in article 4 of the amended law of 23 December 2016 establishing an aid scheme for the promotion of sustainability, rational use of energy and renewable energies in the housing sector is granted.
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Other tax measures
Allowance on rental income from commercial leases
Given the current sanitary context, a tax allowance is granted to landlords for any waivers made on part or all of rents due, under commercial leases, for the calendar year 2020. Such waiver, which may be given to individual as well as corporate tenants, must however be given until 31 December 2020.
The tax allowance is granted per rented building or part of a building and per commercial lease contract but can’t exceed 15,000 euros per rented building or part of a building. It corresponds to the double of the waived amount, without considering rental charges.
To benefit from such tax allowance, certain conditions need nevertheless to be complied with, besides that any such waiver must be made on 31 December 2020 at the latest. Those are for instance that the waiver must be duly documented, cover the period of 2020 only and must be made in consideration of the negative economic effects due to the COVID-19 crisis. Further, to avoid any abuses, any rental increases occurred in 2020 are only considered for this tax allowance if they had been contractually agreed on before 18 March 2020.
Increase of the registration duties on Luxembourg real estate contributions
To partly align duties to be paid on the contribution of Luxembourg real estate with those related to the sale of Luxembourg real estate, taxes due on such contribution have been significantly increased. As of 1 January 2021, any contribution of Luxembourg real estate will trigger an ad valorem registration duty of 2.4% instead of 0.6% (due to the surcharge rate on registration duties applicable to real estate located in Luxembourg-City, such registration tax would be 3.6% instead of 0.9%) and a transcription tax of 1% instead of 0.5%.
As a result of these changes, the combined taxes on Luxembourg real estate contributions increase from 1.1% to 3.4%, respectively from 1.4% to 4.6% for real estates located in Luxembourg-City, which thus come closer to the combined taxes applicable on the sale of Luxembourg real estate, which are 7%, respectively 10% for real estates located in Luxembourg-City.
Reduction of the accelerated depreciation available for Luxembourg rental housing
The accelerated depreciation for rented Luxembourg real estate has been reduced from 6% to 4% and will henceforth be available only for real estate old less than 5 (instead of the prior 6) years as at 1 January of the tax year at hand. The same applies to renovation costs of an old building where they exceed 20% of the acquisition or cost price of that building and the renovation is completed within five years as from of the tax year at hand.
A grandfather rule has however been implemented for rented Luxembourg real estate acquired or finished before 1 January 2021, respectively renovation costs made in the frame of a renovation finished before 1 January 2021, in which case the accelerated depreciation rate of 6% would remain available (if all other conditions would be met).
Special property allowance
A special property allowance has been introduced for the benefit of taxpayers deriving Luxembourg net taxable income from a commercial, agricultural and forestry, liberal profession or rental activity and to whom an accelerated depreciation of 4% would be granted regarding a rented building (or part of it) acquired or finished after 31 December 2020 and which is older less than 5 years as at 1 January of the tax year at hand.
This special property allowance amounts to 1% of the sum of the depreciable basis of rented Luxembourg real estate, with a cap of 10,000 euros.
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*The Law will only become effective once it has been published in the Luxembourg Official Journal
Authored by Gérard Neiens, Jean-Philippe Monmousseau, Pierre-Luc Wolff, and Grâce Mfuakiadi
Hogan Lovells (Luxembourg) LLP is registered with the Luxembourg bar.
