Luxembourg has a complex taxation system that includes both direct and indirect taxes. The Luxembourgish taxation system is administered by the Luxembourgish Tax Administration.
Double Taxation Agreements
Luxembourg has signed double taxation agreements with several countries, including the United States, Canada, and most of the EU member states. These agreements aim to avoid double taxation on income earned in both Luxembourg and the other country. They also provide relief from withholding taxes on dividends, interest, and royalties.
Main Taxes for Expats
Expats in Luxembourg are subject to the same income tax rules as Luxembourgish residents. Income tax is calculated based on the amount of taxable income earned during the tax year, which runs from January 1st to December 31st. The income tax rates for 2023 are as follows:
- Up to EUR 11,265 is taxed at 0%.
- The amount between EUR 11,266 and EUR 13,265 is taxed at 8%.
- The amount between EUR 13,266 and EUR 15,265 is taxed at 10%.
- The amount between EUR 15,266 and EUR 200,004 is taxed at 12%.
- The amount above EUR 200,004 is taxed at 42%.
Expats may also be entitled to claim certain tax deductions and credits, such as the Personal Allowance and the Dependent Allowance. These deductions and credits reduce the amount of income tax payable.
Social Security Tax
Social Security Tax is a tax on earnings paid to the Social Security Administration. The Social Security Tax rate is 11% for employees and 27.09% for employers.
Wealth Tax is a tax on net worth. The Wealth Tax rate in Luxembourg is 0.5%. However, there are certain exemptions and deductions available, such as a deduction for primary residences and certain investments.
Value Added Tax
Value Added Tax (VAT) is a tax on the sale of goods and services in Luxembourg. The standard rate of VAT is 17%. However, there are reduced rates of VAT for certain goods and services, such as food, medicines, and books.
Special Tax Breaks for Expats
Special Tax Regimes
Luxembourg offers several special tax regimes for expats who meet certain conditions. These regimes aim to attract highly skilled workers and encourage investment in Luxembourg. The most well-known special tax regimes are the “impatriate” regime and the “non-habitual resident” regime.
The “impatriate” regime is designed for expats who move to Luxembourg to work for a Luxembourgish company. Under this regime, a portion of the expat’s income is exempt from income tax for the first five years of their employment.
The “non-habitual resident” regime is designed for expats who move to Luxembourg to retire or live there permanently. Under this regime, qualifying expats are exempt from income tax on certain types of foreign income, such as pensions and capital gains.
Filing a Tax Return in Luxembourg
Expats who are considered resident in Luxembourg for tax purposes are required to file a tax return each year. The tax return must be filed by May 31st of the following year.
Expats can file their tax returns online using the Luxembourgish Tax Administration’s website. To do so, they need to obtain a username and password, which can be obtained by visiting one of the tax department offices in person.
When filing a tax return, expats need to provide details of their income, deductions, and credits for the relevant tax year. If they have any foreign income or assets, they may also need to declare them on their tax return. It’s important to note that Luxembourg operates on a self-assessment system, which means that taxpayers are responsible for accurately reporting their income and paying the correct amount of tax.
Tax Exit Procedures
Expats who are leaving Luxembourg to move abroad need to follow certain tax exit procedures. Firstly, they need to notify the Luxembourgish Tax Administration of their departure and provide details of their new address abroad. They should also settle any outstanding tax liabilities before leaving Luxembourg.
If an expat is considered non-resident for tax purposes, they are only liable for Luxembourgish income tax on income earned in Luxembourg. However, they may still be liable for Luxembourgish tax on any income or gains that arise from Luxembourgish sources, such as rental income or capital gains from the sale of a Luxembourgish property.
Expats who have paid tax in Luxembourg may be entitled to claim a refund of some of the tax they have paid. To do so, they need to file a tax return for the relevant tax year and claim the refund through the normal tax refund process.
The taxation system in Luxembourg is complex compared to other countries in the region. Expats in Luxembourg need to be aware of the main taxes that apply to them, such as income tax, Social Security Tax, Wealth Tax, and VAT, as well as any special tax breaks that may be available. They also need to ensure they file their tax returns on time and follow the tax exit procedures if they are leaving Luxembourg to move abroad. By understanding the Luxembourgish tax system, expats can ensure they are complying with their tax obligations and maximizing any tax benefits available to them.