Income Tax in Luxembourg

Income Tax in Luxembourg

Updated on Monday 13th July 2020

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Income-Tax-in-LuxembourgLuxembourg 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.

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.

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.