The 2021 budget law dated 19 December 2020 (the “Law”) added a §13a to article 115 of the Luxembourg Income Tax Law (“LITL”). This measure introduces a new tax regime for bonuses granted to employees and replaces the stock options plans regime that existed under Administrative Circular LITL n°104/2, repealed in December last year.
In a nutshell, the new regime provides for a 50% tax exemption of bonuses granted to employees, within the limit of 25% of the employee’s gross remuneration and 5% of the employer’s commercial profits of the preceding year. Despite the exemption, the bonus also remains fully deductible for the employer.
The Luxembourg Tax Authorities recently clarified certain aspects by publishing Administrative Circular LITL n°115/12 dated 11 February 2021 (the “Circular”) as well as a “Frequently Asked Questions” section available on their website (the “FAQ”).
First of all, when allocating the bonus and granting the exemption to any employee, the employer is required to transmit a specific form (available here) to the relevant tax office (bureau d’imposition RTS) through a secured platform. This communication is a mandatory prerequisite failing which the exemption will be denied and the employer liable for the resulting withholding tax due.
At the level of the employee, bonuses should not exceed 25% of the employee’s gross yearly remuneration. The gross yearly remuneration to take into consideration is the expected gross annual salary (incl. ordinary salary, extra hours, periodic premiums, etc., assessed based on the available data) before incorporation of benefits in cash or in kind (bonus, thirteenth month, interest subsidy, traveling expenses etc.). For the purpose of the calculation, the exempt part of the salary (due to an activity carried out abroad) shall not be deducted but only taken into account in order to calculate the exemption. In case of departure, or decrease of the employee’s activity, then a recalculation will have to be made by the employer.
The overall amount of the bonus cannot exceed 5% of the positive operational income of the year preceding the year during which the bonus is allocated. The FAQ indicated that the financial year concerned is the last financial year closed before the 1st January of the year during which the bonus is granted. For commercial companies, the income to consider is the net result after tax, as reflected in account 142 of the Luxembourg chart of accounts.
The FAQ also clarifies that the exemption only applies to bonuses granted by an employer (as specified in the tax card) to employees directly bound by an employment contract. Therefore, indirect relationships that may exist in a group context are disregarded and do not allow any exemption.
As concerns social contributions, those due on the exempt part of the bonus are not deductible. In this scope, the Circular allows employers to determine the amount of non-deductible social contributions by way of cross-multiplication i.e. (exempt bonus / gross yearly remuneration) x social contributions.
Finally, the Circular confirm that bonuses allocated to shareholders or partners of a capital company, even when those are the only ones to benefit from the bonus, should fully benefit from the exemption, provided the conditions are met.
Michiel Boeren - Partner (michiel.boeren@tiberghien.com)
Maxime Grosjean - Senior Associate (maxime.grosjean@tiberghien.com)
Emma Fontenaud - Associate (emma.fontenaud@tiberghien.com)
