Luxembourg Tax Alert 2022-09

On 12 October 2022, Yuriko Backes, the Luxembourg Finance Minister, presented the 2023 budget (“2023 Budget Bill”). As expected, a comprehensive tax reform is not foreseen in the budget, given the current difficult economic circumstances. Nevertheless, a certain number of tax measures have been proposed and are summarized below. This newsletter also includes an overview of the new draft property tax bill that was filed on 10 October with the Luxembourg Parliament.

In the 2023 Budget Bill, the Government proposes to change the yearly filing deadline from 31 March to 31 December for all individual tax returns, corporate, municipal business tax and net wealth tax returns. The change would apply for the first time for FY 2022 for individual, corporate and municipal business tax, and for 2023 for net wealth tax.

The 2023 Budget Bill includes personal income tax measures providing for certain relief or simplification.

Maintenance or increase of tax credits

• Tax credit on the minimum base salary “Crédit d’impôt sur le salaire social minimum” (CISSM) will remain unchanged.
• The single-parent tax credit “Crédit d’impôt monoparental” (CIM) will be enhanced by increasing:
  • the tax credit from EUR 1,500 to EUR 2,505.
  • the maximum taxable income allowed to benefit from the maximum amount of tax credit, from EUR 35,000 to EUR 60,000.

Attraction of key talents in Luxembourg

• Lowering the impatriate tax regime eligibility condition from an annual fixed minimum salary of EUR 100,000 to EUR 75,000.
• Opening the participative premium in a group context: the 5% of the total positive result can – this is optional – be determined based on the global commercial profits of an integrated group (as defined under Article 164bis of the Luxembourg Income Tax Law (“LITL”)).

Other changes

• Restriction of the accelerated depreciation regime on rental real property, as introduced by Budget Law 2021:
  • Lowering the rate from 6% to 4%.
  • Only up to two properties.
  • Only for buildings acquired or built after December 31st, 2022.

These measures would enter into effect as from 1 January 2023.

Reverse hybrid rules

The transposition of the so-called “reverse hybrid rules” of the European Union Anti-Tax Avoidance Directive No. 2 in Luxembourg tax law introduced article 168quater LITL and was effective as from tax year 2022.

In essence, under those provisions Luxembourg entities or arrangements that are in principle tax transparent for Luxembourg tax purposes (i.e. not subject to Luxembourg income tax) could become taxable on their income when certain conditions are met. One of those conditions being that the jurisdiction of the investor(s) consider(s) the Luxembourg entity or arrangement as a taxable (i.e., tax opaque) person in Luxembourg. Such difference in qualification (and thus in allocation of income) would create the hybridity of the Luxembourg entity or arrangement.

In this respect, the 2023 Budget Bill amending article 168quater LITL aims at clarifying that the absence of taxation of the income realized by the investor(s) through the Luxembourg tax transparent entity or arrangement must be due to such difference in qualification (as opposed to a subjective tax exemption of such investor(s)) for the reverse hybrid rules (i.e., art. 168quater LITL) to apply. Such amendment should apply as from tax year 2022.

Amongst others, the 2023 Budget Bill also proposes the following amendments as regards VAT:

• The application of the reduced VAT rate of 8% would be extended to the repairing of household appliances.  The aim of this measure is to promote the circular economy by encouraging consumers to have these repaired, if possible, instead of discarding them.
• This VAT rate of 8% would from now on also cover the sale, rental, and repair of “electric bicycles”. The objective of this measure is to make mobility softer and more sustainable.
• The super-reduced rate of 3% would be applicable to the delivery of new photovoltaic installations for which the invoice is issued after 1 January 2023.

These amendments would enter into force as from 1 January 2023.

Under draft law 8083, the Government also proposes the new temporary cuts to VAT rates that were presented as part of the anti-inflation package (please refer to this newsletter).

As a reminder, it is foreseen that these decreased VAT rates should apply from 1 January to 31 December 2023. The new temporary VAT rate should be 16% (instead of 17%).

The current Luxembourg property tax regime was established more than 80 years ago. The tax measures contained in the new bill basically address the increasing lack of housing in Luxembourg, triggering concerns for a significant number of households to become the owners of their main residence.

The new regime would no longer rely on the old unitary values of 1941 and would be composed of three pillars, including two new taxes to fight against speculation:

The IFON would:

• be due by the owner of built property (i.e., not on the tenant in case the property is being rented), including as well the primary residence of the owner, but with a lump sum tax deduction of EUR 2,000 (subject to conditions) in such a case.
• be levied yearly by municipalities.
• be equal to the basis value of the land on which the property is built (after lump sum deduction, if any), multiplied by a tax rate ranging between 9% and 11% depending on the municipality. Basis values, which should substantially increase compared to the old unitary values, should be determined on a yearly basis and rely on various indicators and coefficients to be reassessed at least every three years.
• remain tax deductible.

The IMOB should be levied every year at the national level (as opposed to municipality level) on all building lands. This should also include land on which there is already built property, but where there would be space for extra property.
On the other hand, land which is too small or not fit to be built on should be excluded from the scope of the IMOB.
A distinction should be made between serviced land, which can be built on immediately, and unserviced land, which requires roadworks and public facilities. A new national registry of unbuilt land will be implemented for this purpose.

This tax would be equal to the basis value of the land (after lump sum deduction, if any), multiplied by a progressive tax rate increasing with the number of years the land remains unbuilt. A lump sum deduction from the basis value is foreseen for taxpayers younger than 25 or having children under 25.

Contrary to IFON, the IMOB is not tax deductible for personal and corporate income tax purposes. 

A housing would be considered unoccupied when no individual has been registered there for the past 6 months, or for example if there is no energy consumption linked to it. This presumption is rebuttable, meaning that the taxpayer can justify the occupation, or the non-occupation based on legitimate reasons. A national registry of unoccupied housing will also be implemented for this purpose.
This tax would be levied yearly at the national level (as opposed to municipality level), for an amount that would start at € 3,000 and would incrementally increase by € 900 per year of non-occupation, to reach a maximum annual amount of € 7,500.

Similarly to IMOB, the INOL is not deductible for tax purposes

The abolishment of the old unitary values of 1941 as per the new bill will also require adjustments in some tax provisions of the Luxembourg income tax law, including, among other, the determination of the acquisition price of real estate properties acquired prior to 1 January 1941 for the purpose of the computation of the capital gain realized on the disposal of such properties.

Once voted, the new law will not immediately enter into force because it will require a period of two years to implement the new registers, related tools and processes. Assuming the bill is voted, for example, in July 2023 (i.e. before the end of the current legislative term), the new law would be effective as from September 2025, which would mean that:

• The IFON would be applicable as from 2026 and levied as from 2027
• The IMOB would be applicable as from 2026, but would only be levied later on, as its progressive rate would be of 0% for the first five years of application
• The INOL would be levied as from 2028

Both the 2023 Budget Bill and the Property Tax Reform Bill now go through the usual legislative process. It may be subject to further amendments as a result of various consultations in the coming weeks. KPMG Tax professionals are at your disposal to answer your questions.