Income tax in Luxembourg
Taxation Researcher | March 20, 2022
Luxembourg residents are liable to tax on their worldwide income. Married couples can file jointly or separately.
There are several categories of income: (1) trade or business income, (2) income from agriculture and forestry, (3) income from self-employment, (4) income from employment, (5) income from pensions and annuities, (6) income from movable property, (7) rental income, and (8) miscellaneous income.
There are two ways by which the taxes are levied: withholding at source and assessment. Income is generally taxed at progressive rates.
Taxpayers are classified into three main classes.
|Class 1||single individuals, separated individuals or divorced individuals without children|
|Class 1a||individuals 65 years old or older, widowed o living along with dependants in their household|
|Class 3||married couples jointly assessed and for partners having concluded a partnership contract and who asks for joint taxation|
|Source: Global Property Guide|
INCOME TAX FOR CLASS 1
|Taxable Income (€)||Tax Rate (%)||Tax Rate including Surcharge (%)|
|Balance over 200,004||42||45.78|
|Source: Global Property Guide|
For Class 1a taxpayers, the 42% (45.78%) rate of income tax applies on taxable incomes of €200 004 and above.
For Class 2 taxpayers, the tax payable is twice the total tax payable on one-half of the taxable income.
Residents are entitles to the following allowances and deductions:
- contributions of up to €1,200 to an occupational pension scheme
- gifts made to recognised charitable institutions (if total annual gifts amount at least to €120). The maximum deductible amount is the smaller of €1 million and 20% of the taxable income
- mortgage interest on the taxpayer’s principal residence, limited to between €1,000 to €2,000 per member of the household, depending on the period of occupation
- alimony paid to a divorced spouse, subject to a maximum €24,000
- maintenance paid to children, subject to a maximum of €4,020 per child
- debit interest on private loans, credit cards, overdrafts
- insurance premiums for life insurance, death cover, accident, sickness, third-party liability, subject to a maximum of €672 per member of the household
- contributions to private pension schemes, subject to a maximum of €3,200 per taxpayer
- contributions to home savings plans, subject to a maximum of €1,344 per member of household if subscriber age is between 18 and 40 years , €672 otherwise.
Taxable rental income realized from leasing properties may be computed in either of the two ways:
- Itemized Deduction. All expenses related to property such as management agent´s commission, maintenance and repair costs, insurance, mortgage and interest payments, property tax, and insurance premiums are deducted from the gross rent. Straight-line depreciation is also deductible, though land is not depreciable. Rates of depreciation are between 2% to 6%.
- Standard Deduction. A standard deduction of 35% of the gross annual rental income with a maximum of €2,700 is available instead. This deduction includes maintenance and repair costs, insurance premiums, and depreciation (not including debt interest on loans used to finance the property).
Property owners living on their own property are still liable to pay tax. For private properties, the tax is levied on the "rental value" of the property which is based on the property´s "unit value" (generally 1% to 2% of the property´s market value).
The only deduction allowable in relation to this "rental income" is interest on loan used to acquire property. The maximum deduction varies between €750 and €1,500, which depends on how long the owner has owned the property.
Capital gains realized through selling the real property within two years of acquisition are considered speculative gains and taxed at the standard income tax rate or 45.78%. The taxable gain is computed by deducting the acquisition price and incidental costs (agents’ commissions, fees to notaries, surveyors, advisers, etc.) from the selling price. No other deductions are allowed.
If the property is held for more than two years, capital gains are taxed at 50% of the overall tax rate or 22.89%. The taxable gain is computed by deducting the acquisition price and incidental costs from the selling price. In this case, the purchase price is adjusted by official coefficients to account for inflation during the period of ownership.
Furthermore, a single taxpayer will be entitled to a deduction of €50,000 for non-speculative capital gains. The amount is doubled if the property is owned by a married couple filing jointly. This allowance is available every ten years.
If the property was obtained by inheritance (direct line), the tax deduction can be increased by €75,000. The taxpayers can also defer the payment of capital gains tax if they decide to re-invest the money in a new property that will be rented out.
Capital gains realized from the sale of a resident taxpayer´s primary residence are exempt from taxation.
Municipal Ground Tax
A property in Luxembourg is subject to municipal ground tax which is levied annually at 0.7% to 1% of its assessed unit value (usually lower than its actual market value). The tax amount based from the preceding computation is further multiplied by a municipal coefficient that is between 120% and 900% depending on the municipality. The property´s unit value, basic tax rate and the municipal coefficients depend on the property´s classification such as size, age, site, and economic use.
Income and capital gains earned by companies are subject to corporate income tax at a flat rate of 19%, if taxable income exceeds €30,000. Companies with taxable income less than €25,000 are subject to corporate income tax at a flat rate of 15%. Income-generating expenses are deductible when calculating taxable income.
Municipal Business Tax
Companies are liable to pay municipal business tax at varying rates, depending on the company´s location. The municipal business tax is levied at 6.75% in the city of Luxembourg.