New Luxembourg tax measures following adoption of multiple bills of laws

The Luxembourg Parliament adopted four important tax bills of law that will positively impact the Luxembourg tax landscape of entities and individuals. The purpose of these new measures is notably to increase Luxembourg's attractiveness and enhance its competitiveness in a disrupted global economy.

1. Bill of law n°8414

The adoption of the bill of law n°8414 provides the following changes to Luxembourg tax laws: 

A.  Tax measures related to entities

• decrease of the corporate income tax rate from 17% to 16%. As from fiscal year 2025, the aggregate maximum corporate income tax and municipal business tax rate would be reduced from 24.94% to 23.87% for companies located in Luxembourg city.
• new exclusion under the interest limitation rule: the equity escape clause for single-entity groups. Under this new rule, a single-entity group that is not part of a consolidated group and that does not qualify as a standalone entity might under certain circumstances request to deduct all its borrowing costs without any limitation under the interest limitation rules. The new rule applies retroactively as from 1 January 2024.
• exemption from the 0.05% subscription tax for actively managed UCITS ETFs.
• amendments to the tax regime for private wealth management companies ("SPF"), e.g. increase of the minimum subscription tax from EUR 100 to EUR 1000, scenarios where the SPF status could be withdrawn, etc.

B.  Certain relevant tax measures related to individuals

• simplified and more favourable inpatriate regime. As from fiscal year 2025, a 50% exemption of the gross annual salary, excluding tax-exempt cash benefits and in-kind benefits, for salaries of up to EUR 400,000 applies to inpatriates. The conditions to benefit from the new regime are almost identical to the previous regime.
• more attractive profit-sharing bonus regime (prime participative). Under the new rules, the profit-sharing bonus can constitute up to 30% of an employee's annual gross salary (excluding cash and in-kind benefits) instead of the current 25%. Additionally, the total amount an employer can allocate to this bonus can represent up to 7.5% of the previous year's profit instead of the current 5%.
• partial tax exemption on bonuses for young employees. 75% tax exemption on bonuses for employees under 30 who start their first permanent job with a Luxembourg employer, valid for 5 years with that employer, and subject to certain limitations.
• tax credit for cross-border workers overtime hours subject to double taxation
• amendments to individual income tax brackets. In order to strengthen the purchasing power of taxpayers, in the face of inflation, the bill of law adjusts the personal income tax scale by 2.5 index brackets from fiscal year 2025.

2. Bill of law n°8388

The adoption of bill of law n°8388 provides the following changes to Luxembourg tax laws:

• codification of the tax treatment of the redemption of classes of shares. The codification clarifies that the redemption and cancellation of an entire class of shares qualifies as a partial liquidation free from withholding tax if certain conditions are met. Further, certain reporting obligations are introduced for individuals holding an important participation upon such redemption of a class of shares.
• simplification of the minimum net wealth tax. As fiscal year 2025, the minimum net wealth tax should correspond to one of the three lumpsum amounts ranging between EUR 535 and 4,815 EUR depending on total balance sheet of the company.
• optional application of the participation exemption. In case where the participation exemption is applicable only due to the EUR 1.2m or EUR 6m threshold being met, taxpayers are free to waive the application of the benefits of the participation exemption. The same applies for the general 50% exemption on certain dividends.
• mandatory electronic filing for withholding tax returns regarding director's fees and wages.

3. Bill of law n°8396

The adoption of bill of law n°8396 amends the Luxembourg law of 22 December 2023 in relation to the minimum level of taxation for multinational enterprise groups and large-scale domestic groups (Pillar 2 Law) in order to implement the OECD's Pillar 2 Administrative Guidance issued in February, July and December 2023 and June 2024 into the Pillar 2 Law. 

The following changes or clarifications have, among others, been made: 

• Clarification that investment funds or real estate investment vehicles that do not qualify as an ultimate parent entity for the sole reason that the applicable acceptable financial accounting standard or the authorised financial accounting standard does not require them to prepare consolidated financial statements qualify nevertheless as excluded entities;
• Sovereign wealth funds that qualifies as a governmental entity should not be considered as being an ultimate parent entity of an MNE group or a domestic large-scale domestic group;
• Clarifications on when the activity of an entity is considered as ancillary to the activities of a non-profit organisation in light of the excluded entity provision;
• Clarification that the term "revenue" corresponds to the revenue as reflected in the consolidated financial statements of the MNE group or large-scale domestic group and which includes broadly speaking all ordinary and extraordinary income;
• Guidance on handling accounting period differences between constituent entities and their ultimate parent entity;
• Guidance on determining the tax treatment of an intermediate flow-through entity as either fiscally transparent or a reverse hybrid entity based on local tax rules of the reference entity's jurisdiction, thereby aligning the rules of the tax treatment of flow-through entities with the laws of the closest non-flow-through owner to ensure consistency in income and tax allocation;
• Any qualified domestic top-up tax due by a Luxembourg securitisation entity is shifted to other constituent entities located in Luxembourg that do not qualify as a securitisation entity and which are part of the same MNE group or large scale domestic group;
• A Luxembourg securitisation entity is also not subject to joint and several liability in the presence of other constituent entities located in Luxembourg that do not qualify as a securitisation entity and which are part of the same MNE group or large scale domestic group;
• New guidance regarding the QDMTT in relation to (i) the taking into account of contested taxes,  (ii) the use of the appropriate functional currency for the computation of the qualified domestic top-up tax and (iii) available exemptions during the starting phase of a MNE or large-scale domestic group;
• Clarifications on the computation of the qualifying income or loss, notably with respect to technical provisions for insurance companies and the substance-based income exclusion for operational leases;
• Clarifications on the CBCR Safe Harbour measures on how the transitional measures should apply.

Furthermore, the parliamentary works explicitly clarifies that the deemed consolidation test does not apply where the relevant applicable accounting standards does not require or exempt an entity to consolidate.

4. Bill of law n°8186A

The adoption of bill of law n°8186A provides the following changes that aim to modernise and improve the efficiency of certain Luxembourg administrative tax procedure: 

• Cooperation between the direct tax authorities and the CSSF (Commission de Surveillance du Secteur Financier) / CAA (Commissariat aux Assurances): the cooperation should enable to enhance the exchange of information between these administrations for the exercise of their respective missions.
• New framework for (IT) work performed by external service providers
• Recovery of taxes: inclusion of new instalment plans for taxpayers under certain conditions.

Please feel free to reach out to your usual Ashurst contact or the Ashurst Luxembourg tax team in case you would need any further information on the above or in case you would like to assess whether one of the aforementioned measures can be applied to your particular situation.