Luxembourg's Tax Reforms: Enhancing Economy and Tax-Breaks for Expats

On July 17, 2024, Luxembourg's Ministry of Finance unveiled a comprehensive tax reform package titled "Recovery package. Solidarity. Future. For everyone." This initiative aims to strengthen household purchasing power and enhance the competitiveness of businesses in the face of ongoing economic challenges. The reform includes 16 measures designed to combat poverty and stimulate growth, reflecting the government's commitment to improving the financial well-being of its citizens.

One of the key features of the tax reform is the adjustment of the personal income tax scale to account for inflation. The government plans to add 2.5 additional index brackets, effectively neutralizing 6.5 index brackets in the tax rate. This adjustment will significantly reduce the tax burden on households, particularly benefiting low-income families. For instance, a family with two children in tax class 2 earning €75,000 annually will see their taxes reduced by 14.7% in 2025 compared to 2023. Similarly, a single individual earning €50,000 will experience a 15.1% decrease in their tax obligations.

In a move to attract skilled professionals, the reform introduces a more favorable expatriate tax system. Under this new system, expatriates will enjoy a 50% exemption on gross annual remuneration, capped at €400,000. This initiative aims to enhance Luxembourg's appeal as a destination for talent. Additionally, young employees under 30 who secure their first permanent employment contract will benefit from a tax-exempt bonus ranging from €2,500 to €5,000, further incentivizing youth employment.

Corporate taxes will also see significant reductions. The corporate income tax rate for companies with taxable income exceeding €200,000 will decrease from 17% to 16%, while small businesses with income up to €175,000 will see their rate drop from 15% to 14%. These changes are designed to support small enterprises and enhance overall competitiveness in the market.

Moreover, the reform promotes diversification in the financial sector by exempting actively managed Exchange-Traded Funds (ETFs) from subscription tax starting in 2025. This move is expected to encourage investment and growth within the financial services industry.

The tax reform package also simplifies the Minimum Net Wealth Tax (NWT) assessment, significantly reducing the administrative burden on companies. The NWT calculation will now be based solely on a company's total balance sheet amount, lowering the maximum NWT from €32,100 to €4,815. Additionally, the government will implement mandatory electronic filing for withholding tax returns on directors' fees and wages, modernizing the tax administration process.

While the comprehensive tax reform is projected to reduce state revenues by approximately €500 million, the government believes that these measures will stimulate economic growth and foster social cohesion. By addressing the financial challenges faced by households and businesses, Luxembourg aims to create a more resilient and equitable economy for all its residents.