On 14 October 2020, the government introduced the draft budget law 2021. Even if, in the current framework, no major tax reform is planned, the draft law presents several tax measures that should impact companies and individuals as of 2021.

The draft law will follow the usual legislative procedure. We will inform you of the final measures following the final vote.

Tax measures for companies

The new measures, if voted, would enter into force on 1^st January 2021 (excepting for SPF measures which would enter into force on 1^st July 2021).

Measures related to investment funds

The most emblematic measure consists in the introduction of a new tax of 20%, known as the real estate levy tax, for investment funds under the SIF regime / RAIF regime / UCIs falling under Part II of the law of December 17, 2010, investing directly or indirectly in Luxembourg real estate. This would mean that Luxembourg investment funds holding real estate abroad, as well as Luxembourg tax transparent funds (incorporated as SCS / SCSp) would not be affected. Investment funds without legal personality (FCP/ mutual funds) would also be out of the scope of the real estate levy tax.

The capital gain on the sale of shares in partnerships, or of units in FCP/mutual funds, holding real estate located in Luxembourg (share deal), and held directly or indirectly by the Luxembourg opaque investment fund, would also be subject to the real estate levy tax of 20%. The same would apply to the capital gain on the sale of a Luxembourg building (asset deal), carried out by a partnership or a FCP / mutual fund, directly or indirectly held by the Luxembourg opaque fund.

The real estate levy tax return should be filed no later than May 31 of the following year (i.e. a first declaration occurring no later than May 31, 2022). The tax should be paid no later than June 10 of the following year (first payment occurring no later than June 10, 2022).

This anti-abuse measure mainly targets the property development sector in Luxembourg. This measure would not impact tax-opaque investment funds (i.e. incorporated as private limited company, public limited company or partnership limited by shares) holding Luxembourg real estate indirectly through tax opaque capital companies (typical private equity real estate structure with HoldCos / PropCos).

A second measure, aimed at developing the attractiveness of Luxembourg’s place for green / sustainable finance, would consist in the introduction of reduced subscription tax rates for UCIs investing in sustainable economic activities (depending on the level of assets invested in sustainable economic activities, the standard rate of the subscription tax of 0.05% on the net assets of the UCI would be reduced up to a rate of 0.01%).

Restrictions for indirect real estate holding by Family Wealth Management Companies (“SPF”)

SPF are not allowed to directly hold real estate, but may hold real estate indirectly, through partnerships or tax opaque companies. For the sake of consistency with the real estate levy tax, the new measures would prohibit SPFs (submitted to 0.25% subscription tax on share capital and share premium) from investing in tax transparent partnerships or in a FCP/mutual fund holding real estate.

Indirect ownership of real estate via a shareholding in a tax-opaque capital company would remain allowed.

The subscription tax return of a SPF would have to be filed electronically (like it is already the case for corporate tax returns of fully taxable companies or for the declaration of the subscription tax of UCIs and investment funds).

Increase of the transfer tax in case of contribution of real estate

The transfer tax due in case of contribution of Luxembourg real estate to a company, in exchange for shares, would be increased from 1.1% to 3.4% (increase from 1.4% to 4.6% in case commercial building located in Luxembourg city due to city surtax). The goal is to decrease the taxation gap between share deal and asset deal.

We draw your attention to the fact that this increased transfer tax would only apply in case of contribution of a Luxembourg building to a company (Luxembourg or foreign company, civil or commercial company) in exchange for shares – and not in case of real estate rich company sale of shares (share deal).

The 5-year timeframe provided for the anti-abuse measure, aiming at applying the transfer tax in case of Luxembourg building allocated – further to a dissolution, liquidation or share capital reduction – to a shareholder other than the one having contributed said property, would be increased to 10 years.

Introduction of a new excise duty: CO₂ tax

A new CO₂ tax (excise duty) would apply on energetic products (fuel / petrol / fuel oil / liquid and natural gas). This tax is introduced in the context of the fight against climatic change and should increase gradually during the 3 coming years. More practical details would be awaited through coming grand ducal regulation.

Based on government communication, to be concrete, fuel and diesel should increase on average by 5 cents per litre.

Tax unity

Further to ECJ case law (C-749/18, B e.a. against Administration des Contributions Directes, dated 14 May 2020), the possibility has been introduced to switch (under conditions) from vertical tax unity to horizontal tax unity, without tax impact.

These conditions are : the extension of the number of companies under tax consolidation, to maintain the same company as head of the vertical and then horizontal tax unity, to introduce the request at the latest for tax year 2022, that the newly consolidated companies would opt to maintain this regime for at least 5 years (for companies that have already been part of the initial vertical tax unity, the years already completed under vertical tax unity would be taken into account for the calculation of this duration).

VAT franchise regime

The franchise regime threshold (threshold below which a registration to the normal VAT regime is not required / below which no VAT should be billed) would increase from €30,000 to €35,000.

Tax measures for individuals

Abolition of the tax regime for stock options and warrants

The current flat rate tax regime currently applied for certain stock options and warrants foreseen by the circular L.I.R. n°104/2 of November 29, 2017 should be abolished at the end of 2020.

Employee profit-sharing bonus

The draft law foresees that the employers will be allowed to allocate profit-sharing bonuses to their employees (or a category of employees) under the following conditions:

• Maximum amount of the profit-sharing bonus (to be distributed among eligible employees): 5% of the positive result of the financial year preceding the year of payment;
• Bonus deductible as an operating expense for the company;
• Bonus (limited to 25% of the gross amount of the fixed annual salary of the year during which the bonus is granted – excluding benefits in kind and cash and excluding profit-sharing bonus) exempted up to 50% for beneficiaries duly registered as employees with the social security scheme in Luxembourg or abroad;
• The granting of this profit-sharing bonus will have to be notified in detail to the officer of the competent RTS office (format not yet determined).

Adaptation of the tax regime for impatriates

The tax regime for impatriates, currently governed by circular L.I.R. n°95/2 of 27.01.2014, will have a legal basis as from 1^st January 2021. As a reminder, the aim of this favorable regime is to help companies to attract foreign high-skilled employees by exempting, fully or partially, certain benefits granted to the them (expenses borne by the employer for moving, travel, housing, school, cost of living differential, tax equalization).

The main changes to the regime are expected to be as follows:

• To be eligible for the scheme, the employee will have to receive a fixed remuneration of at least €100,000 per year – excluding benefits in kind and in cash (instead of €50,000 at present);
• The scheme will be applicable until the end of the 8^th tax year following the employee’s entry into service in Luxembourg (instead of the 5^th year currently);
• The condition for the employee to establish his fiscal residence in Luxembourg will be verified, without regard to the provisions of a double taxation treaty which would apply;
• At company level, the condition of medium-term employment of at least 20 employees working full-time, etc.) will be abolished;
• The current exemption of the indemnity intended to cover the cost of living differential between the home country and Luxembourg will be replaced by an exemption up to 50% of the lump-sum impatriation premium defined in a less restrictive manner (provided that its amount is limited to 30% of the employee’s fixed annual remuneration).

Withholding tax cards

For the sake of administrative simplification, the annual withholding tax card should be replaced by a multi-year withholding tax card (potentially valid beyond its date of issue) which will be issued under an electronic form.

As from 1^st January 2022, employers will have to consult the tax withholding cards of their employees via a secure platform that will be set up by the tax authorities during the year 2021 (transitional year). During the year 2021, the use of the new solution will be optional.

Increase in the tax credit for employees (CIS), pensioners (CIP), and selfemployed (CII)

The 3 tax credits should be increased to a maximum of €696 (instead of €600 currently).

Abolition of sustainable mobility tax rebates

The sustainable mobility tax rebates introduced in 2017 (€5,000 for zero-emission cars / €2,500 for hybrid cars / €300 for electric bikes) should be abolished considering that they are lower than the direct financial subsidy for the purchase of the same type of eco-transportation means available since 2019.

Allowance for rent reductions granted

Owners of buildings located in Luxembourg and leased under a commercial lease who have, in the context of the COVID-19 crisis, renounced definitively and no later than December 31, 2020, all or part of the rent due for the year 2020 should be able to benefit from a tax rebate corresponding to twice the amount of rent renounced. The allowance is capped at €15,000 per building and per commercial lease agreement.

Measures related to rental housing

^* On purchase price (excluding the land portion) of the new building and investment expenses when they exceed 20% of the purchase price of the building.
^** As long as the accelerated depreciation rate of 4% is applicable.