Tax reforms to encourage investments in Luxembourg

The passing of two new tax laws will have an impact on Luxembourg’s tax landscape in 2025, according to tax experts Stephanie Raffini and David Maria of Pinsent Masons. The new legislation is set to bring a wide range of changes to the income tax law and corporate tax regime in Luxembourg.

The reforms include amending Luxembourg’s partial liquidation regime, which allows taxpayers to proceed to the redemption of a full class of shares followed by a share capital reduction without being subject to the 15% withholding tax applicable to dividend distribution provided that certain conditions are met. Following recent case law, the new law also addresses the uncertainty faced by investors in Luxembourg companies regarding the application of the regime by the Luxembourg tax authorities.

Another aim of the tax reforms is to simplify the minimum net wealth tax (NWT) regime after the Constitutional Court, in a decision dated November 2023, considered it not in line with the constitutional principle of egality before the law. Under the new law, the Luxembourg tax authority will only refer to the amount of the total balance sheet to determine the minimum NWT due by Luxembourg companies. For Luxembourg companies with a total balance sheet below or equal to €350,000, the minimum NWT due is €535. The amount goes up to €1,605 when the company’s total balance sheet is above €350,000 and below or equal to €2 million. The minimum NWT will be €4,815 when the company’s total balance sheet is above €2 million. The minimum NWT could amount to €32,100 in certain cases.

The tax reforms have also introduced a new obligation to electronically file withholding tax returns for some revenues such as director fees. Provisions have also been introduced to allow taxpayers to opt out from certain exemptions upon request, such as the 50% exemption on dividends paid by an eligible company or the exemption for dividend/capital gain provided by the Luxembourg Participation Exemption regime based on an acquisition price of a shareholding participation of at least €1.2 million/ €6 million. This waiver must be made individually for each fiscal year and for each participation.

A separate package of tax reliefs for both businesses and individuals has also been approved by the Luxembourg parliament, as part of its effort to improve Luxembourg’s competitiveness in the global market and boost its economy. The package includes a 1% cut of the corporate income tax rate, a new subscription tax exemption for actively managed exchange-traded funds (ETFs) and the introduction of the ‘single entity group’ (SEG) concept for interest limitation rules.

The corporate income tax rate has been reduced from 15% to 14% for companies with taxable income below €175,000, while the rate for companies with taxable income above €200,000 has been lowered to 16% from 17%. The aggregate corporate tax rate including the municipal business tax for Luxembourg companies located in Luxembourg City and the 7% surcharge for unemployment fund applicable to corporate income tax rates is thus brought to 23.87%.

Actively managed ETFs can benefit from the newly introduced subscription tax exemption if they meet certain criteria, such as if their units or shares are traded all day long on at least one regulated market or multilateral trading facility. The objective of the new exemption, according to the Luxembourg government, is to improve the tax framework of Luxembourg investment funds and enhance the competitiveness of this sector both in Europe and globally.

The SEG concept allows a company part of a single entity group to be treated as a single entity for the purpose of interest deduction under the Luxembourg income tax law. This means that all borrowing costs within the group can be consolidated and deducted, provided certain conditions are met and subject to anti-avoidance rules.  

Various measures for private wealth management companies (SPFs) have been introduced. One of the changes is the minimum annual subscription tax, which has been increased from €100 to €1,000.

The tax relief package also includes amendments to employee and individual tax measures, aiming to attract more skilled foreign workers. Inpatriates now benefit from a 50% exemption on their gross annual remuneration, up to a maximum of €400,000. The personal income tax brackets have been adjusted. For example, the 42% tax rate that applies to the highest tier used to be for the part of revenue exceeding €220,788. The threshold for the highest rate has increased to €234,870.