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Friday, 16 October 2020

Luxembourg draft Budget Law 2021 announces several new tax measures

The Luxembourg Finance Minister Pierre Gramegna has filed on 14 October 2020 with the Chamber of Deputies the draft budget law for 2021. This draft bill introduces several new tax measures that concern investment funds, corporates and individuals. Although still subject to important changes through the parliamentary process, these are summarized below:

Real estate investment:

Taxation of real estate held by investment funds :

A new “real estate tax” should be introduced on income from real estate located in the Grand-Duchy of Luxembourg and held by investment funds. Specialized Investment Funds (“SIFs”), “Part II” undertakings for collective investment (“UCIs”) and reserved alternative investment funds (“RAIFs”), excluding those under the form of a partnership (SCS) or a fonds commun de placement (FCP), should fall in the scope of this measure. Based on the current version of the draft bill, this 20% tax should apply to the rents or capital gains derived by these vehicles on real estate (including when such income is realised through a tax transparent entity or a FCP, or upon the disposal of shares in these latter entities, when they hold real estate). The first tax filings are expected to be made by 31 May 2022 for the income derived during the civil year 2021.

Prohibition for private wealth management companies (société de gestion de patrimoine familial “SPF) to indirectly own real estate

Although not allowed to own real estate directly, the SPFs can currently hold indirect real estate investments, among other through transparent partnerships. In order to ensure consistency with the creation of the “real estate tax”, as of July 1, 2021, SPFs should no longer be allowed to hold real estate (including real estate located abroad) indirectly through a transparent entity or a FCP.

Amendment of the accelerated amortization for rental property

The accelerated amortization rate on new buildings should be decreased from 6% to 4% for a period decreased from 6 to 5 years (after the achievement of the building).

Registration duties

The current aggregate rate of the real estate transfer tax applicable to contributions of a real estate in exchange of share in a Luxembourg company amounts to 1,1%. It is foreseen to increase it to an aggregate rate of 3.4%.

Individual income tax

Introduction of new tax regime for bonuses granted to employees

Bonuses granted to employees, provided that they do not exceed 25% of the employee’s gross yearly remuneration, should benefit from a 50% tax exemption while remaining fully deductible at employer’s level. In order to be eligible to this regime, among other conditions, the amount allocated to employees as a bonus cannot exceed 5% of the employer’s commercial profits of the previous financial year.

Simultaneously with the introduction of this new regime, the government announced that the regime resulting from the circular on stock options plans (Circular 104/2 of 29 November 2017), should be abolished by the end of 2020.

Adaptation of the current regime for impatriates

The “impatriates” circular (Circular 95/2 of 27 January 2014) currently provides for a specific tax regime applicable to employees recruited under certain circumstances on the international market.

The draft bill provides for certain changes and for an express implementation of the regime in the tax law. Certain conditions provided by the circular to benefit from the regime have been lift (requirement for the employer to have at least 20 employees on payroll) or modified (minimum yearly salary for the employee decreased from EUR 100.000 to EUR 50.000, or duration of the regime increased from 6 to 9 years). The main change concerns the introduction of a specific exemption of 50% for the “impatriation premium” paid by the employer (limited to 30% of the yearly gross fixed remuneration of the employee).

Other measures:

Temporary measure in terms of tax unity

The draft bill proposes to allow the transition from vertical fiscal unity to horizontal fiscal unity without triggering the adverse consequences usually applicable in case of dissolution of the unity within the 5-year minimum period. In this scope, the integrating parent company must remain the same, the change must only lead to an extension of the scope of the group, the operation must be done by the end of the tax year 2022.

Reduction of the subscription tax for sustainable investment funds

The rate of the subscription tax should be reduced for sustainable investments meeting certain conditions. A fund that invests at least 5% of all of its net assets in sustainable assets, should benefit from a reduced rate of 0.04% on the portion of its net sustainable assets. When sustainable investments exceed the threshold of 20%, 35% or 50%, the subscription tax rate should be further reduced to 0.03%, 0.02% or 0.01% respectively on the portion of sustainable investments.

VAT Small enterprises scheme

The threshold for the application of the small enterprises scheme will be increased from EUR 30.000 to EUR 35.000. Companies whose turnover remains below this threshold can opt not to apply VAT on their supplies. 

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We will monitor and shall keep you timely updated on any further developments. In case you have any questions, or wish to discuss specific circumstances, please contact your usual contact at Tiberghien or reach out to any of the authors of this publication.

Michiel Boeren - Partner (michiel.boeren@tiberghien.com)

Maxime Grosjean - Senior Associate (maxime.grosjean@tiberghien.com)

Ngoc-My Nguyen - Senior Associate (ngoc-my.nguyen@tiberghien.com)

Emma Fontenaud - Associate (emma.fontenaud@tiberghien.com)

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