LUXEMBOURG Law and Practice Contributed by: Michiel Boeren, Jeronimo Charvarria, Maxime Grosjean and Gauthier Mary, Tiberghien
• A stay exceeding six months – this applies from the date of arrival in Luxembourg. Once this threshold of 183 days is exceeded, the individual is deemed a tax resident with retroactive effect, starting from the first day of their presence in Luxembourg. 2.3 Taxation of Resident Individuals Individuals who are considered tax residents of Lux - embourg are generally subject to personal income tax on their worldwide taxable income. The system is based on a progressive tax schedule, with current effective rates reaching up to 45.78% (including the solidarity surcharge for the employment fund), and the top rate being applicable when income reaches EUR234,870 (for a single taxpayer in tax class 1). Taxable income is determined by aggregating net income from eight distinct categories: • trade and business income; • income from agriculture and forestry; • income from self-employment; • employment income; • pensions and annuities; • income from movable capital; • rental income; and • miscellaneous income. Taxpayers are categorised into three tax classes (1, 1a, and 2), based primarily on their marital and family status. A reform is currently under discussion to mod - ernise the system through the introduction of a uni - fied tax class, which would particularly benefit single taxpayers and single-parent households. Luxembourg offers targeted relief through various mechanisms that reduce either the taxable base or the final tax due, as follows. • Residents may significantly reduce their taxable income by claiming “special expenses”. These include mandatory social security contributions, insurance premiums, interest on personal loans, and charitable donations. • Specific credits exist to increase purchasing power, notably for employees, pensioners and single parents.
Residents benefit from Luxembourg’s vast network of double taxation treaties. Foreign income that is exempt under a treaty (eg, foreign rental income) is excluded from the tax base but is considered when determining the applicable tax rate on remaining Lux - embourg income (exemption with progression). For passive income such as foreign dividends and interest that are subject to withholding tax at source, Luxembourg usually uses the credit method. This means that the foreign tax paid can be credited against the Luxembourg tax due on that income. In Luxembourg, tax on employment and pension income sourced domestically is generally withheld at source each month via wage tax. Even when it is not mandatory to file an income tax return, residents may choose to regularise their tax position by submitting a voluntary tax return or requesting an annual tax adjustment. This enables them to claim eligible deductions and allowances, determine their final tax liability and potentially receive a tax refund. 2.4 Taxation of Non-Resident Individuals Individuals who are not tax residents of Luxembourg are subject to limited tax liability, and are only subject to tax on specific categories of Luxembourg-sourced income. Certain income streams, such as dividends, directors’ fees and salaries, are subject to initial tax withhold - ing at source. For non-residents, this withholding tax is usually final. However, they may still be required to file an annual tax return if their salary or directors’ fee exceeds a certain statutory threshold (such as EUR100,000), or they may choose to file in order to claim specific tax deductions. Non-residents must file an income tax return for other types of income (eg, business profits or rental income). This income is subject to tax at the same progressive rates as for residents, but often with a minimum tax rate of 15%. Non-residents may opt to be treated as residents for tax purposes, allowing them to access the same deductions (eg, interest and insurance) and
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