Luxembourg Parliament Adopts 2017 Tax Reform Measure

The Luxembourg Parliament has adopted new tax measures that affect individual and corporate taxpayers, with effect from 1 January 2017.¹ This article summarizes key measures.

Tax Measures Applicable to Corporations 

Reduction of Corporate Income Tax Rate 

The corporate income tax rate (impôt sur le revenu des collectivités) is being reduced from 21% to 18% over the next two years (19% for 2017 and 18% for 2018). Since the rates applicable to the municipal business tax (impôt commercial communal) and the solidarity surcharge (contribution au fonds pour l'emploi) remain unchanged, the global combined corporation tax rate will be 27.08% in 2017 and 26.01% in 2018 for companies with taxable profits exceeding EUR 30,000 in Luxembourg City. 

Commencing with the tax returns for 2017, all corporate tax returns, municipal business tax returns and net wealth tax returns must be filed electronically (as from 1 January 2018 for net wealth tax returns). 

Limitation on Use of Loss Carry-Forwards 

Luxembourg tax law previously provided that Luxembourg companies could carry their losses forward indefinitely and off-set them against any future profits. The 2017 tax reform provides that losses generated during and after 2017 may only be carried forward for a maximum period of 17 years. Losses that were realized before 2017 will remain unaffected by this time limit. 

Abolition of Tax on Transfers of Claims 

From 2017, registration duties will be levied only on mandatory registration deeds. Therefore, the 0.24% registration duty due on notarial deeds documenting the transfer of debt agreements (notably in case of in-kind contributions of such claims to share capital) has been abolished. 

Increase in Minimum Net Wealth 

Tax From 2017, the minimum net wealth tax applicable to Luxembourg corporate taxpayers holding financial assets representing (i) more than 90% of their total balance sheet (e.g., fixed financial assets, intercompany loans, transferable securities and cash in bank accounts) and (ii) more than EUR 350,000, will be subject to a fixed minimum net wealth tax of EUR 4,815 (an increase from EUR 3,210 for fiscal 2016). 

VAT 

New provisions have been introduced pursuant to which directors who are in charge of the daily management of a corporation (who may include shadow directors) can be held jointly and personally liable in case of culpable non-compliance (inexécution fautive) with their legal obligations. Daily management encompasses those actions which must be taken day-to-day to ensure the functioning of the corporate affairs of the company.² 

The penalties that can be imposed by the Luxembourg VAT authorities generally have been increased. In this regard, the penalties due in case of VAT evasion are substantially increased – to 50%, from the prior rate of 10% of the avoided or improperly reclaimed VAT. 

Further, new provisions have been introduced in the VAT law and the Criminal Code to combat VAT fraud and VAT evasion. 

Tax Measures Applicable to Individuals 

Increase in Withholding Tax on Interest Payments to Luxembourg-Resident Individuals 

Interest payments made to Luxembourg-resident individuals by paying agents established in Luxembourg had been subject to a final 10% withholding tax, pursuant to the law of 23 December 2005. From 2017, the rate of this withholding tax has been increased to 20%. 

Abolition of the Temporary Budget Balancing Tax 

A temporary tax of 0.5% to balance the state budget (impôt d’équilibrage budgétaire temporaire), applicable to all categories of income received by individuals in Luxembourg, was levied for two years (2015 and 2016). From 2017, this tax has been abolished. 

Revision of the Income Tax Scale 

New tax income tax brackets have been introduced. The marginal income tax rate has increased to 42% (from 40%) for an annual net income exceeding EUR 200,004 (or EUR 400,008 for jointly taxed couples). Further, an intermediary rate of 41% has been introduced for an annual net income between EUR 150,000 and EUR 200,004 (or between EUR 300,000 and EUR 400,008 for jointly taxed couples). 

Country-by-Country Reporting 

On 13 December 2016, the Luxembourg Parliament adopted a bill implementing the European Directive on country-by-country reporting.³ In accordance with this new law, all Luxembourg tax-resident corporate entities that are part of a multinational group, and which meet certain financial thresholds, will need to comply with the country-by-country reporting requirements. 

Footnotes 

_{1) Luxembourg parliamentary document n°7020, adopted 14 December 2016.
2) The director of the indirect tax administration (Administration de l’Enregistrement et des Domaines) has been granted the power to issue a notice of secondary liability (appel en garantie) against these persons.
3) European Directive 2016/881/EU on country-by-country reporting (parliamentary document n°7031).}