Personal income tax is levied on the worldwide income of individuals resident in Luxembourg as well as on the Luxembourg-origin income of non-residents.

Taxation of individuals

Luxembourg income tax is based on the personal situation of the individual (e.g. family status). To this end, individuals are assigned a tax class.

Three taxation classes have been defined:

• Class 1 for singles.

• Class 2 for married persons and civil partners (under certain conditions).

• Class 1a for single persons with children and single taxpayers aged 65 or over as of January 1 of the tax year.

From 1 January 2018, non-resident and non-separated married taxpayers are recognized tax class 1. However, under certain conditions, they can apply to be considered tax resident in Luxembourg to obtain the application of tax class 2 (generally , the tax class for resident non-separated spouses). The application of tax class 2 implies a joint assessment of the taxes of the spouses / partners.

Non-resident taxpayers can apply for joint taxation in tax class 2 (i.e. as for married resident taxpayers), provided that at least one of the following conditions is met:

• 90% of a spouse's worldwide income is taxable in Luxembourg. 

• The income of a taxable taxpayer outside of Luxembourg does not exceed € 13,000.

For Belgian residents, the rules are less restrictive. Only 50% of the family's professional income must be taxable in Luxembourg.
The application of this option can be requested through the pay slip or with the individual tax return. Non-resident married taxpayers will have to declare their non-Luxembourg origin income (for example, their spouse's professional income). Such non-Luxembourg origin income will be exempt for Luxembourg tax purposes, but will be taken into account in determining the applicable tax rate for Luxembourg origin income ("exemption with progression").

In practice, non-resident married taxpayers where one of the spouses works outside Luxembourg and / or where the individual has a high income outside the Luxembourg employment income will be adversely affected by this provision, as it will increase their effective tax rate.

The tax is calculated according to a progressive rate, ranging from 8% on taxable income above € 11,265 to 42% on income above € 200,004 from 2018, plus a solidarity tax of 7% (9% for the highest incomes).

Social contributions

The mandatory social security contributions for employees are listed below:

• For illness: 3.05% of the gross periodic salary, which is limited to a monthly ceiling of € 11,009.65 (estimated annual maximum of € 132,115.80 as of January 1, 2021).

• For pension: 8% of the gross salary, which is limited to a monthly ceiling of 11,009.65 euros (estimated annual maximum of 131,115.80 euros as of 1 January 2021).

Social security contributions must be withheld by the employer from the worker's gross wages.

Some multilateral and bilateral social security agreements protect the interests of temporarily resident employees.

Employees (residents and non-residents) who pay Luxembourg social security contributions are subject to the so-called dependency contribution on gross professional income, reduced by € 550.48 per month (i.e. estimated at € 6,605.76 as of January 1, 2021). The net capital income and taxable capital gains of taxpayers resident in Luxembourg are also subject to the dependency contribution, with the exception of interest subject to a withholding tax of 20% fully deductible from income tax . 

Taxation of legal persons

Business income of Luxembourg legal persons is taxed in Luxembourg wherever it is generated, while non-resident companies are taxed in Luxembourg only for income of Luxembourg origin.

Businesses with taxable income of less than 175,000 euros (EUR) are subject to corporate income tax at a rate of 15%. Businesses with taxable income between € 175,000 and € 200,001 are subject to tax as follows: € 26,250 plus 31% of the tax base above € 175,000. The tax rate is 17% for companies with taxable income exceeding EUR 200,001 which leads to an overall tax rate of 24.94% in Luxembourg City (taking into account the 7% solidarity surcharge on ordinary rate and including the municipal tax of 6.75%).

The tax does not apply to fiscally transparent entities (e.g. general partnerships or limited partnerships or European economic interest groups).

 
Value Added Tax - VAT

Supplies of goods and services, which are considered to have been made in Luxembourg, are subject to VAT at the standard rate of 17% (the lowest standard VAT rate in the European Union) or, on certain transactions, 14% (e.g. some wines, advertising brochures, management and custody of valuables), 8% (e.g. supply of gas or electricity), or 3% (e.g. food - except most alcoholic beverages -; pharmaceutical products; books - including e-book from the issue of Circular No. 793 by the Luxembourg VAT authorities of May 17, 2019 -; radio and television broadcasting services - excluding entertainment for adults -; shoes, accessories and clothing for children under the age of 14.

Banking, financial, insurance and reinsurance transactions are generally exempt activities. VAT paid on goods and services that have a direct and immediate connection with such transactions cannot be recovered except for services provided to subjects established outside the European Union. Other VAT-exempt transactions, such as exports and related transport, allow the supplier to recover the input VAT on their purchases.

Taxable persons resident in Luxembourg must, in principle, be registered for VAT purposes. However, taxable persons who exclusively carry out activities exempt from VAT and who have no right to recovery of input VAT are not required to register for VAT purposes unless they are subject to self-certification of VAT on goods/services required from abroad. In this case, they may be subject to simplified obligations.

Taxpayers whose activities are subject to VAT have the right to offset against the VAT due the amount of that tax charged to them by their suppliers or accounted for on imports or purchases of goods or services from abroad.

Net Wealth Tax (NWT)

Both Luxembourg-resident companies and Luxembourg branches of non-resident companies are subject to NWT on their net assets, at variable rates:

For a tax base of up to 500 million euros, the rate is 0.5%.
For tax bases exceeding 500 million euros: 2.5 million euros, plus 0.05% on the tax base component exceeding 500 million euros . 
In general, assets are considered at market value (with the exception of properties, which are subject to a special regime).

There is also a minimum NWT which applies to all companies having their registered office or central administration in Luxembourg.

Entities with aggregate financial fixed assets, transferable securities, intercompany receivables and cash in excess of both 90% of their total gross assets and € 350,000 are subject to a minimum NWT of € 4,815.

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Declarations, instrumental obligations

Companies must file the tax return by May 31 of each year following the calendar year during which the income was earned. Starting from the 2017 financial year, the tax returns for companies subject to income tax must be submitted in electronic format.

The assessments are issued after the end of the tax year and can usually be defined within five years, even if the term can be extended to ten years if the return is incomplete or inaccurate, with or without intent. Once issued, the assessment notice is, in principle, final (barring new facts).

Tax assessments are issued by the tax authorities immediately upon receipt of the tax return, based on the taxable income declared by the company. The tax administration can then re-evaluate or request more information on the tax return within five years following receipt of the tax return.

Luxembourg companies are free to choose the currency in which they wish to keep their accounting records to the extent that it is a freely negotiable currency. Therefore, Luxembourg companies that plan to conduct most of their business in a currency other than the euro will generally choose to use that "foreign" functional currency to prepare their financial statements. In particular, this will prevent such companies from having to recognize, for accounting purposes, foreign exchange gains and losses that do not reflect the economic reality of their business.

However, as a general rule, Luxembourg taxpayers in this situation have hitherto been required to file their tax returns in euro, based on euro-denominated tax balance sheets. Luxembourg taxpayers are allowed, upon request, to determine their tax base exclusively in a 'foreign' functional currency, and therefore only have to convert the final amount of the tax base into euros. This avoided the need to draw up a fiscal balance sheet in euros simply for the purposes of the tax return.

Circular LG-A No. 60, issued by the Luxembourg tax authorities on 21 June 2016, formalizes this consolidated practice.