Luxembourg Tax Incentives for Corporations and Individuals

On July 17, 2024, the Luxembourg government introduced draft law n°8414, which aims to enhance the country's competitiveness by implementing favourable tax measures for both corporations and individuals (the "Draft Law"). This follows the general policy statement made by the government earlier this year.

Additionally, some proposed tax measures seek to clarify and further structure the existing tax regime for specific entities, such as the SPFs ("Sociétés de Gestion de Patrimoine Familial").

On July 22, 2024, the Luxembourg direct tax authorities released a newsletter confirming that most of these tax measures will come into effect starting from the fiscal year 2025, except for certain exceptions that are detailed below.

Tax Measures for Corporations

Reduction of the Corporate Income Tax Rate

• The standard corporate income tax rate will decrease by one percentage point to 16%.
• For income up to €175,000, the lower corporate income tax rate will drop from 15% to 14%.
• For companies in Luxembourg City, the combined corporate tax rate (including the solidarity surcharge and municipal business tax) will therefore be reduced from 24.94% to 23.87%.

These changes aim to align Luxembourg's tax rates with the EU average (21.2%) and the OECD average (23.6%).

Modernization of the SPF Tax Regime

The Draft Law proposes several modifications to the SPF regime:

• The minimum annual subscription tax will increase from €100 to €1,000.
• Compliance certificates must be filed electronically.
• The subscription tax amount will be based on the debt existing on the first day of the financial year.

Additionally, administrative fines will be introduced for breaches of the SPF regime:

• For minor breaches (e.g., not including the correct reference to the SPF regime or failing to file required documents), fines could be up to half the annual subscription tax due or €10,000 if such a subscription tax amount cannot be determined.
• For severe breaches (e.g., failing to meet SPF regime requirements), fines could be up to €250,000, with the possibility of corrective measures within six months. Persistent non-compliance may lead to withdrawal of SPF status, subjecting the entity to ordinary tax rules.

Subscription Tax Exemption for Actively Managed ETFs

Actively managed Exchange Traded Funds (ETFs) will be exempt from subscription tax starting from the first day of the quarter following the Draft Law's entry into force. This measure aims to diversify Luxembourg's financial centre and encourage new business development.

Tax Measures for Individuals

The proposed tax measures for individuals focus on two main areas:

Reducing Household Tax Burden

• Adjusting the income tax scale to account for inflation for all taxpayers.
• Increasing tax credits for single parents.
• Eliminating tax liability for unskilled minimum wage earners.

Attracting Talent

• Implementing a tax credit for cross-border workers.
• Enhancing the existing profit-sharing bonus.
• Modernizing the inpatriate tax regime by allowing a 50% tax exemption on annual gross remuneration up to €400,000.
• Introducing a partial tax exemption on bonuses for young employees under 30 who have entered their first permanent employment contract.

These measures are designed to make Luxembourg more attractive to talent and promote economic growth.