How does the income tax system work in Luxembourg?

First of all, you have to know that the taxation of individuals in Luxembourg is based entirely on the concept of residence, regardless of nationality. Individuals are considered to be resident taxpayers if they have their fiscal residence in Luxembourg and have been living in the country for longer than six months consecutively. Non-resident taxpayers refer to people who cross the border to work and to new incomers to Luxembourg within the first six months. Residents have to pay income tax according to their global earnings while non-residents are taxable on their Luxembourg income source only. There are, however, a number of situations where resident foreigners may be granted a special status, allowing them to be taxed as non-residents on certain categories of income.

There are double tax treaties between the Grand-Duchy of Luxembourg and 80 or more countries, designed to ensure that income that has already been taxed in one country isn’t taxed again in another. You can check the list of the Luxembourg double tax treaties in force on the direct tax authority website. If you are subject to double taxation, you are strongly advised to consult a tax expert to optimize your taxation.  

Income tax rates are progressive in Luxembourg. They vary from 0% up to 42%. There are five categories of taxable income in Luxembourg: income from trades or businesses, employment income including salary and benefits, pensions and annuities, investment income and other income including any payments for jobs or services in excess of € 250 and taxable capital gains. The calculation of Luxembourg income taxes depends of the applicable tax class, established according to the individual’s personal situation. There are three tax classes : class 2, class 1a and class 1. Class 2 includes married taxpayers, widows whose partners have died during the last three years preceding the current tax year and separated or divorced individuals for the three years following the year of divorce or separation. Civil partners have to pay collective taxes according to the class 2 rates, upon request, following the end of the fiscal year, through assessment by filling an income tax declaration form provided they have been living at the same address throughout the fiscal year. From 1 January 2018, new measures will enter into force. Upon request, married resident taxpayers will have the possibility to continue to file a joint tax return or to opt for separate individual taxation. Non-resident married taxpayers will be able to opt to be treated as Luxembourg tax residents and benefit from tax class 2 provided that more than 90% of the worldwide income of one member of the household is taxable in Luxembourg.

Class 1a includes widowed persons not included in class 2, individuals aged at least 65 on 1 January and single parents where the child forms part of their household. Class 1 includes everyone not eligible in classes 1a and 2. Resident and non-resident taxpayers are eligible to a tax moderation for their children provided those are less than 18 years old on the 1 January of the fiscal year and are part of the household. 

If you are living in Luxembourg as a highly skilled worker who have been recruited abroad by your company, you are entitled to the impatriate tax regime. Several conditions must be met, such as being a Luxembourg resident, having been employed based on skills that are not replacing another local employee and earning a minimum annual salary of € 50,000. The main advantage of this tax regime is that you can obtain tax relief for certain expenses such as relocation, school fees, rent and utilities and even home leave trips (one trip per year per family member). If you think you might be eligible to the impatriate tax regime, talk to your employer about applying.

Soon after your arrival, you will be issued a tax card (fiche de retenue d’impôt) from the direct tax authority (Administration des Contributions directes). The card contains personal details and the details of any deductions you are entitled to, such as dependent children, and indicates the tax category to which you belong. This information is issued to calculate the amount of tax payable per month and should be given to your employer. In case of any changes to your personal circumstances which may affect the amount you need to pay, you have to notify it to the tax office.

Completing an income tax return (declaration pour l’impôt sur le revenu) can be very complicated. Don’t hesitate to engage the services of a professional accountant. It will cost you money but will make the whole process easier. 

11/19