Taxation in Luxembourg
Tax revenue in Luxembourg (officially the Grand Duchy of Luxembourg) was 38.65% of GDP in 2017 which is just above the average OECD in 2017 (34.19% of GDP).
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Most important revenue sources for the government
The most important revenue sources for the government are:
- Corporate income tax
- Local business tax
- Net wealth tax
- Personal income tax
- Value added tax
Taxes are administrated by government agencies. Indeed, this is the Minister of Finance that levies the taxes by the intermediate of the director of Taxation, the revenue offices and the tax-collection offices.
Corporate Income Tax (CIT)
There are two possibilities, either the company is a resident company in Luxembourg or a non-resident one.
Resident companies: Luxembourg considers a company to be resident if its management headquarter is in the Grand Duchy. Luxembourg resident companies have to pay taxes on their worldwide income once the foreign taxes (where the company is present and earns an income) are deducted.
Non-resident companies: Luxembourg considers a company to be resident if its principle place of management is located outside the country.
The only companies that are tax-free are:
- Companies with charitable purposes or which work for the general interest
- Private-wealth management companies
- Undertakings for collective investment
To sum up the Corporate income tax in Luxembourg, The Grand Duchy taxes its corporate residents on their worldwide income and non-residents only on Luxembourg-source income.
| Taxable Income | Corporate income tax-rate |
|---|---|
|
< 25,000€ |
15% |
|
[25,000€, 30,001€] |
3,750€ + 33% of the tax base above 25,000€ |
|
> 30,000€ |
18% |
After this tax, the companies will have to pay the solidarity surtax and the municipality business tax on income.
Solidarity surtax
There is a 7% solidarity surtax amount that is imposed on the corporate tax income. For instance, for the companies that have a taxable income that exceeds 30,000 €, the aggregate corporate income tax rate is 19.26% (18% + 0.07x18%).
Municipal business tax on income
This part of corporate taxes depends on the municipalities because it varies from one to another. For the companies that have their management headquarter in Luxembourg City, the municipal business tax is about 6.75%. For instance, for the companies that have a taxable income that exceeds 30,000 €, the effective combined corporate income tax rate is 26.01% (19.26% + 6.75%).
Other taxes on business
There are other taxes on business than the Corporate income tax. For example, there is the value added tax (VAT) which is a Union-wide tax because Luxembourg is a member state of the European Union, the overall framework is provided by the VAT Directive (2006/112/EC). There is also the Net wealth tax (IF) which depends on the assets you have:
| Assets (EUR) | Net wealth tax |
|---|---|
|
< 350,001 |
€500 |
|
[350,001 – 2,000,000] |
€1,500 |
|
[2,000,001 – 10,000,000] |
€5,000 |
|
[10,000,001 – 15,000,000] |
€10,000 |
|
[15,000,001 – 20,000,000] |
€15,000 |
|
[20,000,001 – 30,000,000] |
€20,000 |
|
> 30,000,000 |
€30,000€ |
Personal Income Tax
Resident individuals:
Luxembourg considers individuals as fiscal residents if they have their permanent residence (where they are physically present for an uninterrupted period of more than six months). Therefore, own a residence in Luxembourg is not the only condition you have to respect.
People that are resident in Luxembourg are taxed on their income even if it comes from other countries: they are taxed on their worldwide income. Non-resident individuals are only taxed on their Luxembourg-source income. It is possible for non-residents to optimize their taxes and to be taxed like a Luxembourg resident. Indeed, you can benefit from this treatment only if your income comes from at least 90% of an income derived from Luxembourg sources (50% for Belgium individuals).
Structure of income tax
In Luxembourg, the income tax is divided in eight categories because it considers eight categories of income:
- Trade and business income
- Income from agriculture and forestry
- Income from self-employment
- Income from employment
- Income from pensions and annuities
- Income from movable property
- Rental income
- Miscellaneous income
The taxpayers are classified into three main classes that depend on their personal situation:
- Class 1: Single individuals without children
- Class 1a: Individuals aged > 65
- Class 2: Married couples and for individuals having a partnership contract (joint taxation)
Luxembourg levies the income tax at the source and use the classifications above to compute the amount of income tax that the individual will pay: Tax is calculated in accordance with a sliding increase table, ranging from 0% to 42% depending on your income. Moreover, a solidarity tax of 7% must also be added. Nevertheless, this solidarity tax is about 9% for the tax class 1 and the tax class 1a earning more than 150,000 € and for the tax class 2 earning more than 300,000 €.
Example for the class 1 taxpayers:
| Taxable income bracket (€) | Taxe rate on income in bracket |
|---|---|
| [0:11,265] | 0% |
| [11,266:13,138] | 8% |
| [13,139:15,011] | 9% |
| [15,012:16,884] | 10% |
| [16,885:18,757] | 11% |
| [18,758:20,630] | 12% |
| [20,631:22,503] | 14% |
| [22,504:24,448] | 16% |
| [24,449:26,393] | 18% |
| [26,394:28,338] | 20% |
| [28,339:30,283] | 22% |
| [30,284:32,228] | 24% |
| [32,229:34,173] | 26% |
| [34,174:36,118] | 28% |
| [36,119:38,063] | 30% |
| [38,064:40,008] | 32% |
| [40,009:41,953] | 34% |
| [41,954:43,898] | 36% |
| [43,899:45,843] | 38% |
| [45,844:99,949] | 39% |
| [99,950:149,948] | 40% |
| [149,949:200,003] | 41% |
| > 200,004 | 42% |
Social Security Contributions
In Luxembourg, the social security contributions are payable by employers and employees.
They are divided into 5 types of fund:
- Health insurance
- Old-age pension insurance
- Long-term care insurance
- Accident insurance
- Employers’ mutual insurance fund
There are different rates that are applicable depending on the type of fund and if you are the employee or the employer.
See an example the rates in 2018:
| Type of fund | Employee rate (%) | Employer rate (%) |
|---|---|---|
| Health insurance | 3.05 | 3.05 |
| Old-age pension | 8 | 8 |
| Long-term care insurance | 1.4 | 0 |
| Accident insurance | 0 | 0.9 |
| Occupation health insurance | 0 | 0.11 |
| Employers' mutual insurance fund | 0 | 0.46 – 2.95 |
| Total | 12.45 | 12.52 – 15.01 |
Nevertheless, there is a special case if you are a self-employed person. See the spreadsheet below:
| Type of fund | Self-employed rate (%) |
|---|---|
| Health insurance | 6.1 |
| Old-age pension | 16 |
| Long-term care insurance | 1.4 |
| Accident insurance | 0.9 |
| Occupation health insurance | 0 |
| Employers' mutual insurance fund | 0.46 – 2.95 |
| Total | 24.86 – 27.35 |
References
1. https://guichet.public.lu/en/citoyens/impots-taxes.html
2. https://europa.eu/youreurope/citizens/work/taxes/income-taxes-abroad/luxembourg/index_en.htm
3. https://eur-lex.europa.eu/legal-content/EN/ALL/?uri=celex%3A32006L0112
4. https://ec.europa.eu/taxation_customs/sites/taxation/files/docs/body/lu.pdf
5. https://mfin.gouvernement.lu/en.html