Government coalition agreement 2023-2028: proposed tax measures

Following legislative elections in October 2023, the new Luxembourg government officially issued the text of its 2023-2028 coalition agreement (in French only) on 20 November, setting out, among others, the tax measures envisaged for the next five years. These measures must be included in draft legislation and be submitted to and approved by parliament before they can become law.

The new government states that its economic policy will be based on a socio-liberal sustainable market and a balance between efficiency and solidarity.

Through the implementation of a responsible and sustainable economic policy, the government wants to ensure that Luxembourg’s AAA credit rating is maintained, a rating that demonstrates Luxembourg’s financial strength and is a guarantee of its economic attractiveness.

In the public services sector, the government wants to encourage the digitalization and modernization of its services, promote the simplification of administrative procedures, as well as explore the possibility of generalizing the principle of “silence equals agreement” in these procedures, after analyzing the areas in which it could apply.

Below is a summary of the proposed financial sector, tax, and housing measures that the government intends to enact into law in the coming years.
 

Proposed financial sector measures

In the coalition agreement, the government expressed its intended objectives regarding the financial sector, which continues to be fundamental to Luxembourg’s economy. In particular, the government stated that it will:

• Continue to actively support the financial sector’s development, diversification, and promotion;
• Ensure that it provides a legal framework favorable to alternative funds and the development of digital assets;
• Continue to focus on the development of sustainable, socially-responsible, and innovative financial products, positioning Luxembourg’s financial center as an international hub for sustainable finance and supporting, among other things, initiatives in the field of fintech as well as gender finance;
• Actively participate in the development of European and international regulations in the field of finance and taxation to ensure that the specificities of Luxembourg and its financial center are considered; and
• Analyze the possibility of reducing the subscription tax for actively managed UCITS-ETF funds and for investment funds investing in sustainable economic activities.

Other proposed tax measures

The government intends to continue developing Luxembourg’s network of double tax treaties.

At the EU level, the government is committed to proceeding according to the principle of “the whole directive and nothing but the directive” to ensure accurate transposition of EU directives into domestic legislation. It is also committed to defending the principle of unanimity in EU tax matters, ensuring that the specificities of each member state are considered. Moreover, the government intends to oppose the introduction of a tax on digital and financial transactions.

In addition, the coalition agreement proposes the following measures:

• Proposed corporate tax measures:
  • Adjust the corporate income tax and municipal business tax rates to bring them closer to the average in OECD countries in the medium term. Based on the OECD Corporate Tax Statistics report issued on 21 November 2023, the average combined statutory tax rate is 21.1%;
  • Explore the possibility of tax reductions for small and medium-sized enterprises;
  • Support companies investing in the sustainable and digital transition as well as in research and development. To this end, the tax credit system would be supplemented; and
  • Analyze the taxation of the transfer of companies with the aim of promoting their sustainability.
     
• Proposed individual tax measures:
  • Adapt the personal income tax scale as from 1 January 2024 by reducing the tax burden on low- and middle-income without increasing the top marginal tax rate;
  • Introduce a single tax class as from 2026. As an interim measure, relief would be provided for individuals belonging to tax class 1a (i.e., widowed individuals, single parents, and individuals aged 65 and older);
  • Introduce a tax allowance up to a certain level of income for individuals entering work;
  • Set up a tax regime encouraging individuals to invest in innovative startups in the sustainable and digital transition field;
  • Make the deductibility of certain expenses more advantageous and flexible, including for supplementary pension schemes;
  • Clarify and simplify the tax treatment of benefits in kind granted by companies to their employees;
  • Strengthen the profit-sharing bonus regime (“prime participative”) and the inpatriate regime to support the recruitment and retention of talent;
  • Encourage the participation of employees in the capital of the enterprises that employ them;
  • Analyze how the tax framework for remote working could be clarified;
  • Analyze the treatment of gifts to lineal descendants to facilitate the transfer of assets; and
  • Agree not to introduce a wealth tax for individuals or an inheritance tax for lineal descendants.
    
    
• Proposed housing measures: As from the 2024 fiscal year, the government would adopt certain measures to stimulate the housing construction market, namely:
  • Increase the accelerated depreciation rate for properties built for rental purposes and increase the length of the depreciation period. The total amount of the tax relief would be capped;
  • Reduce the capital gains tax on property sales;
  • Introduce a new “Bëllegen Akt” tax credit for investments in rental housing by individuals;
  • Increase the “Bëllegen Akt” tax credit for the acquisition of a primary residence;
  • Increase the tax deductible amounts for interest expenses incurred on properties occupied, or intended to be occupied, by the owner;
  • Continue the work carried out by the previous government to reform the property tax and introduce a national tax on unoccupied dwellings and the mobilization of land; and
  • Provide a tax exemption for premiums paid by companies to rent a home, which would be capped and reserved for young employees whose income level does not exceed a certain threshold.
     
• Proposed VAT measures: The government proposes to increase the amount of the tax benefit arising from the reduced VAT rate for the construction or renovation of a main dwelling, which is currently limited to EUR 50,000 (it is worth noting that the tax benefit was EUR 60,000 from 2008 to 2011). However, this is subject to approval by the European Commission.