Extended business travelers who are not residents of Luxembourg are likely to be taxed on employment income relating to their Luxembourg workdays.
Liability for income tax
Individual liability to Luxembourg tax is determined by residence status. A person can be a resident or a non-resident.
An individual will be considered domiciled in Luxembourg for tax purposes if either of the following circumstances is met, subject to tax treaty provisions.
- The individual maintains a permanent home in Luxembourg. When an individual’s family (spouse and children) resides in Luxembourg, the individual may be considered to have a home in Luxembourg. Special rules may apply, however, for married couples where one of the spouses lives abroad.
- The individual has an abode in Luxembourg. This circumstance is deemed met if the individual remains in Luxembourg for more than 6 months in a given calendar year. However, this is not restricted to 6 months in the same calendar year. If an individual arrives on 1 October in year
N and is still staying in the country on 2 April in year N+1, the 6 months’ stay will be deemed to have been met. The individual will be deemed to have been resident in Luxembourg from 1 October in year N.
Tax trigger points
To consider the start and end dates of residency status, there is no minimum threshold/number of days that would exempt an individual from paying tax in Luxembourg. The determination is essentially based on facts and circumstances. The assignee is considered to be a Luxembourg tax resident as of the first day the individual arrives in Luxembourg (according to Luxembourg domestic tax rules).
Types of taxable income
For extended business travelers, the types of income that are generally taxed are employment income, Luxembourg-sourced income, and gains from taxable Luxembourg assets (such as real estate, fringe benefits, broadly noncash employment). Salaried benefits arising from the allocation of transferable stock options to employees may have a deemed market value according to the "Black-Scholes" method, or fixed at 17.5% of the value of the underlying share (subject to reasonable conditions).
Specific tax regime for impatriate workers
On 27 January 2014, the Luxembourg Tax Authorities published a circular (L.I.R. n° 95/2 of 27 January 2014) regarding the tax regime applicable to impatriate workers ('the Circular'). This Circular applies retroactively as from 1 January 2014 and replaces the circular n° 95/2 of 21 May 2013 (see our newsletter issue 2013-06). Specific tax provisions will apply in Luxembourg to impatriate workers relocating to Luxembourg as of 1 January 2014, to the extent that specific conditions related to employees, employer, and salaried employment in Luxembourg are fulfilled. These provisions aim at exempting part of impatriate workers' costs and expenses in relation with their impatriation to Luxembourg.
Scope of the Circular
The aim of the Circular is to attract foreign workers to Luxembourg to respond to a need for skill and labor.
- employees usually working abroad, assigned by a company located outside of Luxembourg, to perform an employment activity in a Luxembourg company, member of the same international group; and
- employees directly hired abroad by a Luxembourg company, or a company located in the European Economic Area to perform an employment activity in the company.
Application of the regime
Conditions relating to the employee in case of assignment
- The employee must have acquired an in-depth specialization in a sector or a profession suffering recruitment difficulties in Luxembourg.
Conditions relating to the employer
- The number of impatriate workers should be limited to 30% of the total number of employees (working full-time), except for companies which are existing for less than 10 years.
Conditions relating to the new dependent employment in Luxembourg
- The activity performed by the impatriate worker should be his main activity;
- The annual fixed remuneration (excluding benefits in kind and in cash) of the employee should at least amount to EUR50,000 gross;
- The impatriate worker should not replace any employee not covered by the Circular;
- The know-how and specialized knowledge of the impatriate worker should benefit the local employees .
Application of the exemption
Assignment costs typically represent a heavy financial burden to employers. Thus, the principle of the Circular is the exemption of the part of relocation expenses exceeding those, which would have incurred had he remained in his home country. The Circular stipulates that the costs should remain reasonable.
- non-repetitive expenses: removal expenses in respect of the domicile transfer to Luxembourg, housing (furniture, etc.), special travel costs (e.g. birth, wedding, death of a family member), etc.
- repetitive expenses in case of crossborder domicile transfer (limited thresholds): housing costs (e.g. rent, utilities, heating, etc), yearly home travel, tax equalization:These recurring expenses can neither exceed EUR50,000 per year (or EUR80,000 per year if the employee shares a house with his/her spouse or partner), nor 30% of the impatriate worker's total annual fixed remuneration.
- school fees: borne by the employer for the children of the impatriate worker, of his/her spouse or partner, if the children move with their parent(s) and have to change school.
- tax-free lump-sum indemnity for other repetitive expenses (i.e. cost of living adjustment and other relocation-related expenses not covered anywhere else by the Circular): fixed at 8 percent of the employee’s fixed monthly remuneration, capped at EUR1,500. The lump-sum indemnity can be doubled (i.e. 16 percent capped at EUR3,000) to the extent the employee shares a common residence or domicile housing with his spouse or partner, and the latter does not perform any professional activity.
Duration of the specific tax regime
The benefit of the specific tax provisions for impatriate workers is granted for the duration of his impatriation It applies until the end of the 5th tax year following the impatriate’s starting date in Luxembourg.
At the beginning of each year (i.e. by 31 January at the latest), the employer is required to provide the Tax Authorities with a nominative list of employees benefiting of the regime.
Moreover, the circular stipulates that in case the foreign employer has no wage tax withholding obligations in Luxembourg, and did not elect to levy wage tax in Luxembourg on a voluntary basis, then the concerned impatriate workers will have to file an individual income tax return in order to benefit from this regime.
Salaried income received by individuals, employees of managers of alternative investment funds or by management companies of alternative investment funds qualify as other income.
Carried interest not represented by units, shares or other securities
are taxed as extraordinary income at a quarter of the global tax rate (around 11% in 2014) plus 1.4% dependence insurance.
- The tax regime applies to individuals who became tax residents in Luxembourg in 2013 or in the 5 subsequent years (year 2018 included).
- The provisions only apply for income realized within 10 years after the year the individual took his functions in Luxembourg.
- They do, however, not apply to individuals that have been Luxembourg tax residents, or taxed on professional income in Luxembourg anytime in the last 5 years preceding the year 2013.
- Neither do the provisions apply to carried interest where prepayments have been made.
- Carried interest realized upon sale of units, shares or securities covered by the new law are treated as capital gains, and taxed accordingly:
- tax free if held for more than 6 months,
- except if the individual holds, or held a substantial participation, i.e. a shareholding of more than 10%, at any point of time during the 5 years’ period preceding the sale or redemption.
Net taxable income is taxed at graduated rates ranging from 0 percent to 42.80 percent, with a top rate of 43.60 percent for the part of the taxable income exceeding EUR150,000 (EUR300,000 for spouses/partners filing jointly), including a 7 to 9 percent unemployment contribution.
Excludingspecific earned income, Luxembourg source income may be subject to a 15% minimum income tax (increased by the surcharge for unemployment fund) at the level of to non-resident individuals. However they may opt for the application of standard progressive tax rates instead of the 15% taxation. Progressive rates are applied by adding EUR11,265 to the actual income.
Liability for social security
In Luxembourg, registration with the Social Security Authorities is compulsory for all employees. An exemption from paying Luxembourg social security contributions may be granted under a multilateral social security agreement, or a bilateral one concluded between Luxembourg and the individual’s home country. Generally, the benefits might cover:
- old-age pension, disabilities pension, survivors’ pension.
- health and medical expenses
- allowances in cash for children
The employee’s part of social security contributions ranges between 12.2 percent and 12.45 percent. The employer’s part of social security contributions ranges between 12.48 percent and 14.89 percent. Both are capped.
Employee’s part (capped):
- pension (1st pillar): 8 percent
- sickness: 2.8–3.05 percent maximum annual income basis subject to contributions: EUR115,261.56 (cost of living index 775.17)
Non tax-deductible contributions (uncapped):
- dependency insurance: 1.4 percent minus a deduction of EUR480.26 per month on gross salary. No ceiling is applicable.
Employee compliance obligations
Tax returns are due by 31 March of the year following the tax year-end concerned, which is on 31 December. Filing of tax returns may be required from non-residents who derive Luxembourg-sourced income under certain conditions.
Employer reporting and withholding requirements
The Luxembourg employer has the legal obligation to withhold the correct amount of tax on salaries paid to employees.
Advance payments of tax, together with tax withheld at the source, are deductible from the final income tax liability. Any overpayment of tax may be refunded subject to conditions. Tax withheld on wages and pensions is adjusted annually.
If an expatriate establishes residence in Luxembourg during the course of the year, the expatriate will generally be required to provide the Luxembourg tax authorities with evidence of salary earned during the part of the year the expatriate was not resident in Luxembourg. The computation of the expatriate’s salary for the entire year allows the determination of a possible refund of tax withheld in excess.
Generally the amount of tax prepayments is based on the amount of income tax due for the previous year. The income tax withheld monthly on employment orpension income is computed according to tax tables set forth by the government.
Work permit/visa requirements
Visa, work and residence requirements should be checked before the individual enters Luxembourg. The type of documentation required will depend on the purpose of the individual’s entry into Luxembourg.
Double taxation treaties
In addition to Luxembourg’s domestic arrangements that provide relief from international double taxation, Luxembourg has entered into double taxation treaties with 68 countries to prevent double taxation and allow cooperation between Luxembourg and overseas tax authorities in enforcing their respective tax laws.
Permanent establishment implications
There is the potential that a permanent establishment could be created as a result of extended business travels, but this would be dependent on whether the employee has a fixed place of business, the type of services performed and/or the level of authority the employee has (such as the power to negotiate and sign contracts on behalf of the employer). For a complete check of these implications, reference should be made to article 5 of the OECD Model and to available treaty provisions.
Value-added tax (VAT) is applicable to transactions and sales. The standard VAT rate applicable in Luxembourg is 15 percent.
Luxembourg applies the Organisation for Economic Co-operation and Development (OECD) transfer pricing guidelines for multinational enterprises and tax administration. Hence, the Luxembourg tax authorities may raise transfer pricing questions when the employee is being paid by an entity in one jurisdiction but performing services for the benefit of the entity in another jurisdiction and no corresponding recharge is performed, in other words, if a cross-border benefit is being provided. The transfer price would be dependent on the nature and added value of the services performed.
Local data privacy requirements
Luxembourg has data privacy laws.
Luxembourg does not restrict the flow of European or foreign currency into or out of the country.