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Income Tax in Luxembourg

Income Tax in Luxembourg

Luxembourg is one of the important economies of the European Union and, as such, it attracts investors and foreign citizens who work here and become important contributors to the economy through the taxes they pay. The most important tax to pay in Luxembourg is the income tax which is paid on various sources of money.

Below, our lawyers in Luxembourg explain the most important provisions of the law on the income tax. If you have a business and need assistance in registering for taxation, you can rely on our lawyers.

Personal income tax liability in Luxembourg

Just like in other European countries, in Luxembourg the income tax liability for natural persons depends on their family situation. In order to establish the taxation level, there are three classes under which individuals are levied, and these are:

  • the Class 1 for singles;
  • the Class 1a for unmarried persons with children and individuals aged 65 at the beginning of a tax year;
  • the Class 2 for married persons and for those living as civil partners.

Starting with 2018, married foreign citizens earning incomes in Luxembourg as non-residents will enter the Class 1 tax category. These can opt to be treated as Luxembourg residents and thus be taxed under the Class 2 bracket which implies a combined assessment for the levy of the income tax. Under this tax bracket, 90% of the entire income obtained by one of the spouses will be taxed in Luxembourg, or the income generated by one of the spouses abroad does not exceed 13,000 euros.

If you need more information on how individuals are levied the Luxembourg income tax under the brackets above, you can rely on the advice of our specialists.

Our law firm in Luxembourg is at your service with details on the tax laws applicable in the Grand Duchy.

The determination of income for taxation purposes in Luxembourg

Natural persons can generate money from various activities based on which they will be taxed accordingly. However, it is important to note that the rates under which the Luxembourg income tax will be imposed depends on the activities completed.

Generally, individuals can obtain income from:

  • employment;
  • capital gains;
  • investment;
  • rental of real estate.

These are also imposed with the income tax in Luxembourg under different conditions for residents and non-residents.

The income obtained from employment implies the money and all the other benefits attached to the employee’s salary and it is levied progressively. In the case of non-residents, their salaries are imposed with the Luxembourg income tax if the work they carry out occurs in the Grand Duchy, however, these can obtain various exemptions under the double tax treaties signed by their home countries with Luxembourg. However, there are certain conditions to be met in order to obtain such exemptions.

A particular situation applies to international employees, as these are subject to different Luxembourg income tax requirements. According to Circular No. 95/2 in the Income Tax Law, international employees qualify for the special regime if:

  • their work is generally completed in another country, however, they were temporarily relocated to Luxembourg to exercise their profession;
  • they were recruited directly by a Luxembourg company to complete activities abroad.

The international employees’ regime comes with several advantages, among which various tax allowances or covered expenses by the Luxembourg company.

Our Luxembourg lawyers can provide more information on the employment regulations in the Grand Duchy.

The income tax for residents and non-residents in Luxembourg

According to the Income Tax Law, local and foreign citizens and companies are subject to the income tax in Luxembourg, the only difference between the taxation of residents and non-residents being the tax base. By this, one should understand that a Luxembourg resident (natural person and corporation) will be imposed with the income tax on the worldwide income, while a non-resident will be taxed on the Luxembourg-sourced income.

A foreign resident must also pay attention to the different exceptions from the income tax applied when a tax treaty exists between Luxembourg and his/her country of origin.

Our law firm in Luxembourg can offer more information on the provisions of the Income Tax Law.

Types of incomes subject to taxation in Luxembourg

The following incomes are subject to taxation in Luxembourg:

  1. the income obtained from employment and/or self-employment and craft activities;
  2. business profits and commercial income made by companies in Luxembourg;
  3. agricultural and forestry activities are also taxed in Luxembourg;
  4. pensions, annuities, investments in various assets are also subject to the income tax;
  5. income generated from the rental of properties and capital gains.

Each type of income is subject to a different rate and is assessed based on the income tax returns which must be filed at least once a year.

It should be noted that in the case of employed persons, there is a specific tax class which depends on whether an individual is married or not and have chosen to be taxed separately or together with his/her spouse. Also, persons who are at least 65 years old and are single parents benefit from a specific income tax. As mentioned above, the income tax in also levied based on the residence status of the taxpayer.

There is also the option for non-residents who make more than 90% of their total income in Luxembourg to choose to be treated as residents from a taxation point of view.

All exceptions from the law can be explained by our tax lawyers in Luxembourg.

Income tax rates in Luxembourg

The income tax in Luxembourg is levied on a progressive basis which includes no less than 23 brackets. The following aspects should be considered:

  • the income tax brackets range between 0% and 42% which is the highest rate applied to individuals;
  • the lowest income tax rate after the 0% is levied at 8% after the first 11,266 euros;
  • the top rate applied at 42% is levied from income surpassing 200,000 euros;
  • employees must also pay between 7% and 9% as social contributions;
  • business profits are taxed a fixed rate of 17% which one of the most advantageous in Europe and EU territory.

It is also worth knowing that other incomes, such as capital gains are also levied the income tax at the 17% standard rate. Apart from this, Luxembourg companies must also consider municipal tax and social contributions.

In the case of non-resident taxpayers, some of these taxes can be reduced if a double tax treaty is in place. Our Luxembourg lawyers can offer more information on the tax reductions one can obtain here.

Taxes applied to various incomes obtained in Luxembourg

Individuals obtaining capital gains from the disposal of various assets are imposed with the Luxembourg income tax at progressive rates ranging between 0% and 45.78%. The main requirement for these is for the assets they own to have a value of more than 500 euros and for them to be held for at least 6 months.

Interests also fall under the category of capital gains at it can be imposed with the income tax at a rare of 22.89% if it is disposed of after 6 months under specific conditions.

Investments are also imposed with the income tax under a dual regime. Interest payments are subject to withholding taxes levied at a standard rate of 20%, while other incomes that do not qualify for the 20% rate will be imposed with the income tax at progressive rates after a 1,500 euros deduction is applied. In the case of married persons, the deduction is doubled if these are taxed under the Class 2 bracket.

Those who own real estate in Luxembourg and rent it must also pay the income tax which is applied progressively. However, in the case of foreign citizens, such an income can be subject to the provisions of double tax agreements.

If you need information on specific double tax treaties signed by Luxembourg, you can request the advice of our lawyers.

Income tax exemptions in Luxembourg

Not all incomes are taxed in Luxembourg, as exemptions are also granted to companies and individuals. For example, lottery winnings are not imposed with the Luxembourg income tax. Furthermore, gifts made by an employer to a worker will not be taxed in the Grand Duchy to a certain extent. Also, redundancy payments can be exempt from the income tax based on meeting specific requirements.

Income tax compliance in Luxembourg

In order to pay the income tax in Luxembourg, a person or company is required to file tax returns based on which the assessment will be made. For this, it is important to know that the tax year is the same as the calendar year, starting on the 1st of January and ending on the 31st of December. For this period, the tax return must be filed by the 31st of March.

A resident taxpayer is exempt from filing a tax return with the Inland Revenue if the taxable income is made of one salary which does not exceed 100,000 euros after all withholding taxes are applied.

The greatest advantage of paying the income tax as a Luxembourg resident is represented by the many deductions available here. Among these, families, single parents, divorcees and widowers are the categories that can benefit from these deductions.

If you have any questions about the Luxembourg income tax or need assistance in filing tax returns, do not hesitate to contact our lawyers. We can also offer detailed information and assistance in becoming a resident of Luxembourg.