After speaking about expat taxes in numerous countries, including Thailand, South Korea and Japan, Germany, Singapore, France the Philippines and Switzerland, this article will speak about Luxembourg.
People assume that it is a tax-efficient place to live as an expat, but is it true?
Alongside looking at income taxes for individuals, we will also focus on other forms of tax, including for firms and on capital gains taxes.
We also can’t focus on things from the perspective of every nationality, because some countries do apply taxes by citizenship. This is the case for Americans and a few other nationalities.
Whilst this article shouldn’t be considered as tax advice, it is correct as far as we are aware at the time of writing, although some things might have changed since the writing of this article.
For any questions, or if you are looking to invest as an expat, you can contact me using this form, or use the WhatsApp function below.
Table of Contents
Luxembourg, a country in northwestern Europe. One of the smallest countries in the world, it borders Belgium to the west and north, France to the south, and Germany to the northeast and east.
Throughout its long history, Luxembourg has been under the control of many states and ruling houses, but since the 10th century it has been a separate, if not always autonomous, political entity.
The ancient Saxon name of its capital, Lucilinburhuc (“Little Fortress”), symbolized its strategic position as “northern Gibraltar”, located on the main military route connecting the Germanic and Frankish territories.
Luxembourg is the point of contact between the Germanic and Romance-speaking communities of Europe, and in the Grand Duchy itself, three languages are regularly used: Luxembourgish, German and French.
The peoples of Luxembourg and their languages reflect the common interests of the Grand Duchy and close historical relations with its neighbors. In the 20th century, Luxembourg became one of the founders of several international economic organizations.
Perhaps most importantly, the Grand Duchy was the original member of the Benelux Economic Union (1944), which linked its economic life with that of the Netherlands and Belgium and subsequently formed the core of the European Economic Community (EEC; European Union).
Anyways, Luxembourg is the second richest country in the world. Ranking by GDP (Gross Domestic Product) per capita at US $ 92,049 (2014).
Luxembourg overtook Qatar to become the richest country in the world with a GDP per capita of USD 96,269. It has the highest minimum wage in the EU, minimum EUR 1923 per month.
In addition, Luxembourg is one of the safest countries in the world for both locals and expats. According to a UN poll, you are less likely to be shot in Luxembourg than in any other country in the world.
Here is one of the most eloquent facts about Luxembourg’s security: Luxembourg has around 1,300 police officers and only two prisons.
So Luxembourg is a great place for everyone, high salaries, low crime statistics, strong and rich country. Now let’s see this small but forceful country’s tax system, its rates and dive into every detail that each expat must know and be prepared.
Tax system in Luxembourg
Luxembourg has one of the most sophisticated income tax systems in Europe with three tax classes and 23 different categories ranging from 0% to 42%. While this maximum rate may seem high, it remains lower than in neighboring countries such as Belgium.
If you are a foreigner living in Luxembourg, you are generally required to pay income tax and file a tax return. Meanwhile, business owners in Luxembourg can be subject to both corporate tax and VAT.
If you are a highly qualified expatriate who has been hired by your company from abroad, you may be eligible for the import tax regime.
To qualify, you must be a resident of Luxembourg (or live no more than 150 kilometers from the border with Luxembourg), have a job based on skills that do not replace another local employee, and have a minimum annual salary of € 50,000.
The advantage of being eligible for this scheme is that you can pay expenses such as relocation, tuition fees, rent and utilities, and even home leave from one trip per year.
Who should pay tax in Luxembourg?
- Resident vs non-resident
Your financial eligibility in Luxembourg depends on your status of residence.
Residents are required to declare their worldwide income, but non-residents are taxed only on their income in Luxembourg.
To be classified as a resident taxpayer, you must have lived in Luxembourg for more than six consecutive months. If you have lived in Luxembourg for less than six months, you will be considered a non-resident taxpayer.
Luxembourg has a large non-resident base, primarily due to people coming to the country from neighboring countries such as France, Germany and Belgium.
- Taxes for families in Luxembourg
If you move to Luxembourg with your spouse, your income will usually be taxed jointly. This may be preferable as the income tax rates for married couples are generally lower.
If one of the spouses is resident and the other is not, they will be taxed separately. If you are in a partnership but not married, you can choose coverage as a joint income if one of the partners (or a non-resident partner) generates 90% or more of their total income in Luxembourg.
Couples must reside in the same location in Luxembourg for at least one full year before applying for joint taxation.
Income tax system in Luxembourg
Expatriates must pay income tax on their earnings, whether they work for a company or are self-employed in Luxembourg. Residents must pay tax on their global income, while non-residents must pay only on income earned in Luxembourg.
Employees are assigned a tax class based on their marital status and resident status, which, together with their earnings, determines the amount of income tax they will need to pay.
Ordinary taxpayers in Luxembourg usually pay income tax on wages, although they are still required to file a tax return with the Luxembourg Tax Office (Contributions Office – ACD) to make sure they are paying the correct amount. This is called assessment taxation.
Some self-employed taxpayers are required to prepay quarterly. These payments are made in March, June, September and December of the tax year. Since 2018, married couples can decide on separate or joint taxation.
The amount of income tax depends on your marital status and taxable income.
Taxable income is classified as income from employment, self-employment, pensions, investments, rental property and various other items such as private assets and capital gains.
Workers in Luxembourg fall into one of three tax classes that determine the amount of your tax-free benefit. In addition, there are 23 different income tax ranges, from 0% to 42% for income over 200,000 euros.
Property tax in Luxembourg
Real estate taxes are levied on the ownership of residential, commercial or mixed-use real estate. Property tax rates range from 0.7% to 1% depending on the nature of the property and its location. Contact your local municipal office to find out more.
Capital gains tax
You do not need to pay Capital Gains Tax on the sale of your primary residence, but any additional homes are tax deductible.
If the sale takes place within two years of the purchase of the property, you will be required to pay tax as part of your income under the applicable tax scale. If the sale takes place more than two years after the purchase, you can pay a reduced rate.
Tax cuts of up to 50,000 euros can be claimed every 10 years for capital gains. For an inherited property, you can get a € 75,000 discount.
Inheritance tax in Luxembourg
Inheritance tax in Luxembourg is levied on the property of all residents, and the amount you will need to pay depends on the value of the property and your relationship with the deceased.
For inheritances above and below € 10,000, different tax categories apply, although there is a tax-free discount on small inheritances up to € 1,250.
Expats from the EU can choose to follow their country’s inheritance laws by expressing their desire in a will.
Gift tax depends on the relationship between the donor and the donee, and its rates range from 1.8% to 14.4%. You can find out more in the Luxembourg government directory of gifts and donations.
Companies that earn more than € 200,000 a year in Luxembourg must pay corporate tax at a rate of 17%. This figure has dropped from 18% in 2019.
Companies must also pay an additional solidarity tax of 7% and a municipal business tax in Luxembourg City of 6.75%.
This means that the effective corporate tax rate for high-yield companies in 2019 is 24.94%.
Companies with annual income of less than € 175,000 pay a lower corporate tax rate of 15%, resulting in a total rate of 22.8%.
Those with earnings ranging from 175,001 to 200,000 euros must pay 26,250 euros plus 31% of profits over 175,000 euros.
Companies usually pay corporate tax in advance every quarter with payment in installments in March, June, September and December.
Taxes on goods and services (VAT) in Luxembourg
VAT (Taxe sur la Valeur Ajoutée or TVA) is an EU tax payable on business transactions. While in theory this is paid for by companies, the cost is passed on to customers in the form of a price increase.
Companies and private entrepreneurs with an annual turnover of more than EUR 30,000 in Luxembourg must register as a VAT payer by law.
The current VAT rates in Luxembourg vary as follows depending on the type of product sold:
- Super Reduced Rate: 3% (e.g. food, pharmaceutical, restaurants);
- Reduced rate: 8% (eg cleaning, renovation, heating);
- Average rate: 14% (e.g. adult clothing, wine);
- Standard rate: 17% (e.g. alcohol, beer, adult shoes).
Personal tax credits and deductions in Luxembourg
All employees are allowed an annual lump-sum deduction of € 540 for professional expenses. The following deductions may also apply:
- Community expenses: the amount deducted depends on how far you live from your place of work, but the maximum amount is 2,574 euros.
- Company car: Tax credits for company vehicles are calculated based on the mileage multiplied by the vehicle’s mileage. The mileage log will determine the numbers, otherwise a lump sum option.
- Free Accommodation: 25% discount may apply or 17.5% if furnished.
- Gifts: Any gifts received as a result of seniority may be tax-exempt up to € 4,500.
- Overtime and Severance Pay: Overtime, work night shifts, Sundays or holidays are tax credited. Depending on the conditions, severance pay is also exempt from tax.
- Occupational Pensions: Any employer’s contributions to their retirement plan are taxed at a flat rate of 20%, and benefits received are tax deductible.
- Loan interest: if you have a loan provided by an employer at an interest rate below 1.5%, there are tax breaks of up to € 3,000 for mortgage loans in favor of a primary residence and up to € 500 for personal loans.
How to file a tax return in Luxembourg?
The tax year in Luxembourg runs from January 1st to December 31st and returns must be submitted by March 31st of the following year.
Income tax returns can be filed online or by mail, and late returns are subject to penalties of up to 0.6% of the tax bill.
Most workers pay income tax on their paycheck, but they still need to file a tax return to make sure they are paying the correct amount.
If you overpaid the tax, you can get the refund either to your bank account or in the form of a loan to return the next year.
What tax return do you need to file?
When filing your tax return, you will need to complete Form 100 (standard full tax return) or Form 163 (annual statement or décompte annuel).
If you are unmarried and earning a salary of less than € 100,000 (excluding income from other sources), you will be able to file a more simplified annual return rather than a full tax return.
However, if your family’s taxable income exceeds € 100,000, or if someone in your household has income from more than one source, you will need to file a full return.
Self-employed income tax
Self-employed workers and freelancers are taxed at the same rates as workers and must file an annual tax return.
While sole proprietors and partnerships are subject to income tax, directors of limited liability companies must pay corporate tax instead.
Terms and forms of income tax in Luxembourg
The tax year in Luxembourg runs from January 1 to December 31 and income tax returns must be filed by March 31 of the following year.
In February, you must receive an invitation to download and complete the form electronically from the IRS website or receive a paper form (Form 100).
If you require an extension, you must submit a written application to your local tax office.
Tax fines in Luxembourg
Income tax penalties are set at 0.6% of the unpaid payment amount per month, starting from the month following the payment date.
If you successfully request an extension of the deadline, this fee will be canceled for the next four months and a payment schedule will be agreed. You will then be charged interest at the following rates:
- 0.1% per month between 5 and 12 months;
- 0.2% per month for payments with a delay of one to three years;
- increase to 0.6% per month for payments overdue for more than three years
In principle, the IRS can deny an extension request if it thinks you can easily pay off the debt based on your current income.
Luxembourg taxes for US expats
It has been estimated that several thousand Americans live in Luxembourg.
Living in Luxembourg is an incredible experience for a number of reasons, including the friendliness of the locals, charming architecture, and easy access to the rest of Europe.
All US citizens and green card holders who earn at least about $ 10,000 anywhere in the world must file a US federal tax return and pay taxes to the IRS, no matter where in the world they live or what their income is.
The good news is that if you pay income tax in Luxembourg, there are various exceptions and benefits that prevent you from paying tax on the same income to the IRS.
Do expats file taxes in the US? More on Social Security Payments?
The United States is unique in requiring US citizens and overseas residents to report income to the IRS. American expatriates in Luxembourg are required to file an annual tax return.
However, the normal April 15 deadline can be automatically extended to June 15, and the June 15 deadline can be extended again to October 15 by completing Form 4868 (Application for Automatic Extension of the United States Income Tax Return Deadline).
Social Security taxes, also known as FICA taxes, originated with the entry into force of the Federal Insurance Contributions Act in 1935.
FICA taxes have two to three components: a 6.2% Social Security tax, 1.45% health care tax, and a 0.9% Medicare surcharge, which is only levied on people who earn more than $ 200,000.
FATCA Requirements: Who Should File FBAR?
In 2010, Congress passed a federal law known as FATCA, or the Foreign Account Tax Compliance Act.
In the years since FATCA came into force, the IRS has taken increasingly aggressive steps to enforce international regulations and to recommend federal prosecutions for those who willfully fail to comply. According to the IRS, “The purpose of FATCA is to report foreign financial assets.”
In some cases, the Department of Justice has even prosecuted foreign financial institutions (FFIs) that assist foreigners and residents overseas with tax evasion, asset hiding, and other crimes against the US government.
Depending on your unique financial circumstances, you may:
- Be required to file a FBAR
- Be a suitable candidate to participate in the simplified procedure
FBAR refers to Foreign Banks and Financial Accounts Statement. You must file an FBAR if both of the following statements describe you:
You “have a financial interest or signatory power in a foreign financial account.” It includes:
- Bank accounts
- Broker accounts
- Mutual investment funds
The total value of your account (s) was in excess of $ 10,000 at any time during the year, although this period may not be long.
Willful failure to provide FBAR will incur a maximum penalty of (1) $ 100,000 for violation or (2) 50% of the account value.
Whichever number turns out to be higher, a fine will be imposed. Even unintentional FBAR violations can result in fines of up to $ 10,000 per violation.
Is salary earned abroad taxable in Luxembourg? If so, how?
Residents of Luxembourg are subject to Luxembourgish tax on their worldwide income, including wages earned abroad.
The taxable salary of residents cannot be reduced by distributing income for business trips abroad, except in cases where there are exceptions in accordance with treaties for the avoidance of double taxation. In such cases, tax incentives are provided to avoid double taxation.
The principle of a split pay structure is to diversify the geographical sources of income and the location of the professional activity in order to distribute the right to tax global income among several countries / jurisdictions.
There are two possibilities to consider regarding wage sharing.
- There is no double taxation treaty between Luxembourg and the country / jurisdiction concerned, so foreign income will be taxed by Luxembourg with a potential tax deduction for foreign taxes. As a result, an individual is unlikely to benefit from any tax savings, as the total tax burden incurred is at least equal to Luxembourg’s taxes on their global income.
- There is a double taxation agreement between Luxembourg and the country / jurisdiction concerned, which provides for the exemption (with a gradual increase) of income from employment from Luxembourg taxes. However, income is taken into account when determining the global tax rate applicable to the total taxable household income in Luxembourg.
Here it is, all the needed information for expats living in Luxembourg. Certainly, there is a lot of things to remember, many things to consider before moving to Luxembourg, but anyways the high salaries, good life level and great conditions will make you believe it’s the best place to live.
Luxembourg can be a very tax-efficient place to be as an expat, but it does depend on many factors, including where your income is derived from and your nationality.
If you are from a nationality which charges tax based on citizenship (for example as an American) Luxembourg isn’t as tax-efficient as you might imagine, at least if you are a high earner.
Are properties in big cities like New York, London, Hong Kong and Singapore likely to crash due to trends such as working from home?
That is the topic of the article below.