On 29 February 2016, the Luxembourg government announced their measures for the 2017 tax reform. The upcoming reform was discussed extensively during 2015, as well as over the last few months and is designed to ensure that Luxembourg remains an attractive location for international business. . Below is an overview of the Government’s plans, which still have to be voted by the Luxembourg Parliament. The tax measures will take effect progressively from 1 January 2017, and the finalized tax reform plan will be released during the annual speech of the Luxembourg Prime Minister on 26 April 2016.
Reduction of the corporate income tax rate
In order to boost competitiveness, there will be a progressive reduction of the corporate income tax rate over the next two years. At the moment the rate is 21%, resulting in a current effective corporate income tax rate of 29.22%, including the 6.75% municipal business tax for Luxembourg city and the 7% contribution to the unemployment fund. This rate will be reduced to 19% in 2017 and to 18% in 2018. Consequently, the effective corporate income tax rate will decrease to 27.08% in 2017 and to 26.01% in 2018. For small companies, i.e. corporations whose annual taxable income amount does not exceed €25.000, the corporate income tax rate will be reduced to 15% taking effect in 2017. This single-step reduction aims to attract young innovative start-ups.
Restrictions on the utilization of carried-forward losses
The government will restrict the utilization of carried-forward losses to 10 years. Such losses will only be available to offset taxable profits of subsequent periods up to a maximum of 80% of the taxable profits of each period. These restrictions will not apply on any losses that arose before 1 January 2017.
Increase of the minimum wealth tax
In 2016, Luxembourg introduced a minimum net wealth tax by way of replacement of the minimum corporate income tax, applicable to all legal entities having their head office or central administration in Luxembourg. For SOPARFIs, this minimum net wealth tax will be increased from €3,210 to €4,815. For all other legal entities with their head office or central administration in Luxembourg, i.e. other than holdings and financial companies, the minimum net wealth tax remains unchanged.
Reforms of the individual income tax regime
Both resident and non-resident married couples will be able to opt for separate taxation. Until now, married couples have to declare one taxable base for the individual income tax, thereby being subject to higher progressive rates.
The government will also revise the individual income tax brackets and introduce new scales. Luxembourg aims to reduce the overall average tax rate. Nevertheless, for individuals with personal income exceeding €150,000 and €200,000, the rates will increase respectively to 41% and 42%.
Withholding tax on interest income
The final withholding tax on qualifying interest income derived by a Luxembourg resident that enters into the scope of the RELIBI Law (“Retenue à la source libératoire”) will increase from a flat rate of 10% to a flat rate of 20%.
The Luxembourg RELIBI Law of 23 December 2005 introduced a 10% withholding tax, in full discharge of income tax, on interest payments made by Luxembourg paying agents to Luxembourg resident individuals. This 10% withholding tax satisfied in full the tax liability on interest for Luxembourg resident individuals receiving the payment in connection with their private wealth. A by-law of 17 July 2008 amended the RELIBI Law.
As from 1 January 2008, Luxembourg resident individuals receiving certain interest payments from paying agents established in a Member State of the European Union other than Luxembourg, or in a Member State of the European Economic Area, or in a State having concluded a treaty directly linked to the European Union Savings Directive, may opt for a 10% final tax on such payments, to be declared and paid by the beneficial owner of the interest.
These amendments were designed to provide a satisfactory reply to the European Commission, which found the RELIBI Law to be in breach of the European Community Treaty. The provisions of the RELIBI Law were not applicable to interest paid by paying agents established in other Member States of the European Union.