It’s March. In Luxembourg that is equivalent to: tax return! Although, in light of the pandemic, the tax administration grants a bit more time to turn it in, if you haven’t started yet, make sure you add it to your calendar. And if it’s your first time, make sure you remember these basics:
Residents and Non-Residents
First of all, the taxation of individuals in Luxembourg is based entirely on the concept of residence, regardless of nationality. Individuals are considered to be resident taxpayers if they have their fiscal residence in Luxembourg and have been living in the country for longer than six months consecutively. Non-resident taxpayers refers to people who cross the border to work and to newcomers in Luxembourg within the first six months. Residents have to pay income tax according to their global earnings while non-residents are taxable on their Luxembourg income source only. There are, however, a number of situations where resident foreigners may be granted a special status, allowing them to be taxed as non-residents on certain categories of income.
The Grand Duchy of Luxembourg has double tax treaties with more than 80 countries designed to ensure that income already taxed in one country is not taxed again in another. You can check the list of the Luxembourg double tax treaties in force on the direct tax administration’s website. If you are subject to double taxation, consult with a tax expert to optimise your taxation.
Three Different Tax Classes
Income tax rates are progressive in Luxembourg. They vary from 0% up to 42%. There are five categories of taxable income in Luxembourg: income from trade or business, employment income, pensions and annuities, investment income and taxable capital gains. The calculation of Luxembourg income taxes depends on the applicable tax class, established according to the individual’s personal civic status (married, widowed, single…). There are three tax classes: class 2, class 1a and class 1. Resident and non-resident taxpayers are eligible to a tax moderation for their children, provided they are part of the household and younger than 18 years old on 1 January of the fiscal year.
Highly Skilled Workers Tax Regime
If you live in Luxembourg as a highly skilled worker recruited abroad by your company, you are entitled to the impatriate tax regime. Several conditions must be met, such as being a Luxembourg resident, having been employed based on skills that are not replacing another local employee and earning a minimum annual salary of €100,000. This tax regime’s main advantage is that you can obtain tax relief for certain expenses such as relocation, school fees, rent and utilities and even home trips (one trip per year per family member). If you think you might be eligible for the impatriate tax regime, talk to your employer about applying.
Tax Card and Tax Return
Soon after your arrival, you will be issued a tax card (fiche de retenue d’impôt) from the direct tax administration (Administration des Contributions Directes). The card contains personal details and the details of any deductions you are entitled to, such as dependent children, and indicates the tax category to which you belong. This information is issued to calculate the amount of tax payable per month and should be given to your employer. If there are changes to your personal circumstances that may affect the amount you need to pay, you have to notify them to the tax office.
Completing an income tax return (déclaration pour l’impôt sur le revenu) can be very complicated. Do not hesitate to engage the services of a professional accountant (even an online one!). It will cost you money but it will make the whole process easier.
This is an extract from an article published in the ING blog www.ing.lu/mymoney.