Credit: MFIN

On Wednesday 17 July 2024, Luxembourg’s Ministry of Finance announced the new tax package entitled "Recovery package. Solidarity. Future. For everyone."

Luxembourg’s Minister of Finance, Gilles Roth, added: “With our 'Recovery package', we are strengthening the purchasing power of households and consolidating the competitiveness of companies. By promoting social cohesion and increasing the attractiveness of our economy and our financial centre, we are sending a strong political signal to emerge from the polycrisis.”

The tax package "Entlaaschtungs-Pak" (recovery package) consists of sixteen measures aiming to better prepare the country for the future.

The government has implemented a policy to reduce taxes for households by adjusting the personal income tax scale to account for inflation. By adding 2.5 additional index brackets, it announced it has neutralised 6.5 index brackets in the tax rate, resulting in a substantial reduction in the tax burden for all households, particularly those with low incomes. For example, a family with two children in tax class 2, earning a gross annual salary of €75,000, will pay €4,024 in taxes in 2025 instead of €4,718 in 2023, resulting in a saving of €694 or down 14.7% compared to 2023, and €444 or down 9.9% compared to 2024.

The same family with a gross annual salary of €125,000 will pay €16,358 in taxes in 2025. In total, €2,793 or down 14.6% less taxes than in 2023, respectively €1,460 or down 8.2% less taxes than in 2024.

A single person with a gross annual salary of €50,000 will pay €5,208 in taxes in 2025 instead of €6,135 in 2023. In other words, €927 or down 15.1% less taxes than in 2023. Compared to 2024, it saves €502 (down 8.8%) in taxes.

The government has focused on supporting single-parent families and unskilled social minimum wage earners by adjusting the tax scale for inflation and revising the tax class 1A formula. Additionally, the single-parent tax credits (CIM) and the social minimum wage (CISSM) have been significantly increased. As a result, a single-parent household with an annual gross salary of up to €52,400 and receiving the full CIM will not pay any taxes for the 2025 tax year. Moreover, a single-parent household with an annual gross salary of €50,000 will receive a tax credit of €614 in 2025, instead of owing €2,888 in taxes in 2023 and €2,179 in 2024.

Similarly, all people earning the unqualified social minimum wage, including those belonging to tax class 1, will no longer pay taxes on 1 January 2025.

Other measures to support households include increasing the allowance for extraordinary expenses for children not residing in the household from €4,422 to €5,424 per child per year starting in 2025. Additionally, starting from the 2024 tax year, all interest on mortgage loans for acquiring existing homes, including those involving bridging loans, will be tax deductible.

Minister Roth stated: "I am particularly proud that we have succeeded in substantially reducing the tax burden on households by adjusting the personal income tax scale to inflation by 6.5 index brackets since 1 January 2024. With the tax exemption of the unskilled social minimum wage and single-parent families up to an annual gross salary of more than €50,000, the government also underlines the importance it attaches to the fight against poverty. A proactive approach to strengthen social cohesion in our country."

Strengthening the attractiveness of Luxembourg

The tax environment for different categories of employees is being reformed to strengthen the attractiveness of Luxembourg.

Aiming to support employees, the conditions for qualifying for the participatory bonus have been enhanced to better aid companies in retaining their workforce. The revised rules allow companies to allocate up to 7.5% of the positive result from the preceding operational year towards the participatory bonus for employees. Moreover, the maximum amount of the bonus eligible for partial tax exemption has been raised from 25% to 30% of the gross annual remuneration, before the inclusion of cash and non-cash benefits.

A new “more favourable expatriate system” is set to replace the current regime in Luxembourg. It will simplify matters by offering a 50% exemption on gross annual remuneration, capped at €400,000. This measure aims to enhance Luxembourg's appeal for skilled professionals and highly specialised individuals, aligning with competitive regimes established in other European Union countries.

Additionally, a new bonus for young employees under 30 years of age who benefit from a first permanent employment contract in Luxembourg will be introduced.

75% of this bonus, ranging from €2,500 to €5,000 depending on the level of remuneration of the young employee, will be tax-exempt. This comes in addition to the rental premium introduced by the law of 22 May 2024 introducing a package of measures to revive the housing market.

A tax credit of up to €700 annually is proposed for cross-border workers in Luxembourg who meet specified conditions and engage in paid overtime. This initiative aims to provide financial relief and incentives for these workers.

In alignment with the government's programme, the corporate income tax (IRC) will undergo targeted 1% reductions effective from 2025. Companies with taxable income exceeding €200,000 will see their IRC rate decrease from 17% to 16%, while entrepreneurs and small businesses with taxable income up to €175,000 will benefit from a reduction from 15% to 14%, with a gradual adjustment between these thresholds. This adjustment aims to streamline the tax burden across different income brackets, ensuring competitiveness and support for small enterprises. The overall corporate tax rate will be 23.87% in 2025, down from 24.94% in 2024, while small businesses will experience a reduction from 22.80% to 21.73% during the same period.

Actively managed Exchange-Traded Funds (ETFs) are slated for exemption from subscription tax starting in 2025, a move designed to enhance Luxembourg's financial sector by promoting diversification and fostering new avenues of activity. Additional measures include adaptations to rules governing borrowing costs and updates to the legal framework of family wealth management companies to mitigate potential misuse.

Minister Roth explained: "In order to consolidate the attractiveness of Luxembourg and its financial centre, the 'Entlaaschtungs-Pak' reduces the income tax of the communities and provides an exemption from the subscription tax for actively managed ETFs. Our package also includes a tax toolbox available to employers to further retain talent and attract the profiles that Luxembourg needs. In this way, we are creating a dynamic that stimulates our growth. In short, the 'Entlaaschtungs-Pak' wants to open up new perspectives for our citizens and our businesses. To better prepare the future of the country."