The new Luxembourg government releases its coalition agreement

The coalition agreement covers the multiple dimensions of the new government roadmap. We only highlight below the main aspects of the public finances and taxation, housing, economy, and labour dimensions.

Public finances and taxation

The new government expressed its commitment to pursue a sustainable and responsible fiscal policy that will support the economic recovery, the social cohesion, and the ecological/digital transformation in Luxembourg.

To do so, it will support households by increasing their purchasing power. The new government has indicated that the tax scale will be adapted by 4 indicator tranches (instead of an adaptation for 2.5 tranches that was already foreseen) leading therefore to a reduction of personal income taxes as from 1 January 2024. It also commits to reduce the tax burdens of small and medium income and to initiate the creation of a unique tax class for individual taxpayers by 2026. Transitorily, a tax relief is expected for individuals belonging to tax class 1a, which typically applies to single parents with a dependent child, individuals aged 65 years old and older, and may also include people with specific personal situations. Furthermore, no new taxes will be created (no additional tax bracket for high earners, no net wealth tax for individuals, nor inheritance tax in direct line).

The new government wants to strengthen the competitiveness of the economy and the financial sector. In this regard, it is envisaged to adapt, in the medium term, the corporate income tax and municipal business tax rates to be close to the average of the tax rates applied in the OECD countries. There is also a willingness to introduce a tax incentive for individuals investing in young innovative companies in digital and sustainable transition. The regime of investment tax credit will be completed in order to support companies investing in sustainable and digital transformation as well as in research and development (a draft bill has already been released in this respect - see our prior Flash News for further details.

The modernisation of the tax authorities will be continued through the simplification of the tax law and the tax procedures as well as their digitalisation.

To strengthen the competitiveness of the Luxembourg financial centre, the new government aims at continually adapting the legal framework and will analyse the possibility of reducing the subscription tax notably for OPCVM-ETF funds and actively managed funds investing in sustainable activities. It will also continue to support the development of innovative sustainable financial products by positioning Luxembourg as an international hub of sustainable finance.

To increase Luxembourg’s attractiveness and to favour the recruitment and retention of talents, the new government also plans to review the profit-sharing premium remuneration mechanism and the inpatriate tax regime. It will make any adjustments that may be considered necessary. In addition, the new government plans to review the tax treatment of benefits in kind to clarify and simplify it.  

Housing

In the coalition agreement, the new government recognises the housing crisis as a major challenge for the country. It intends therefore to ensure decent and affordable housing for the largest number of people, whether in terms of rental or acquisition. To achieve this goal, it is foreseen to mobilise and build the land reserves owned by the state and the municipalities, prioritising affordable housing, especially for rental purposes.

Furthermore, it is planned to create a favourable framework for the construction of housing in line with the demand. Consequently, a series of tax measures will be introduced for the fiscal year 2024 to stimulate the construction market in the short term. This will notably include:

• An increase of the accelerated amortisation rate for housing built in view of their rental as well as an increase of the duration of the amortisation period (with a cap);
• A reduction of the tax rate for capital gains triggered upon the sale of real estate;
• The introduction of a new tax credit for investments in rental housing by individuals;
• An increase of the tax credit for the acquisition of the primary residence;
• An increase of the tax deductibility of interest charges for owner-occupied housing.

In addition to these short-term tax measures, the new government wants to pursue a reform of the real estate tax, the introduction of a national tax on vacant housing and the mobilisation of land in order to increase the supply and the affordability of housing.

The coalition agreement further promotes the creation of tax incentives for companies to create and provide housing for their employees.

Economy

The new government strives to foster a resilient, diversified and innovative economy that can cope with the challenges and opportunities of the digital and green transitions.

In this context, the willingness of the new government is to create a national digitalisation strategy for all ministries, administrations, and municipalities, by analysing the needs and developing a roadmap for each stakeholder.

The coalition agreement also covers the objective to simplify the administrative procedures for the small and medium enterprises (“SMEs”), by applying the Think Small First principle, by developing the one-stop shop for businesses, by digitalising the process of state subsidies for SMEs, and by creating a data-driven service offer for SMEs in line with the latest proposals at EU level.

Labour

The coalition agreement also outlines the government's proposals to promote a modern and flexible labour law. Some propositions are briefly summarised below:

• To continue developing a legal framework for homeworking, including the improvement of tax and social security impacts of the homeworking and the continuous discussion with neighbouring countries to increase the number of days of homeworking;
• To launch the discussion on teleworking and the development of co-working spaces in the regions close to the boarders through tax incentives;
• To promote a flexible working time environment, in consultation with the social partners, with the aim of allowing more choice and autonomy for workers and enabling a better reconciliation between work and private life.