Do you have to pay tax in Luxembourg? What are the different types of taxes and rates that apply? Find out in this article.
If you are going to work in Luxembourg, you will probably have queries on the tax system. In fact, the country has set up two major categories of taxpayers, one applying to residents and the other applying to non-residents. Residents have to pay income tax according to their global earnings. Non-residents, on the other hand, will pay income tax only according to income received in Luxembourg.
Therefore, you are considered as a resident taxpayer when you have your tax residency or habitual residency in the country. Otherwise, you are considered as a non-resident when you neither have your tax residency in Luxembourg, nor your habitual residency, and also when you receive taxable income in Luxembourg while having your vital interests abroad.
Finally, a community or company is considered as a resident taxpayer if its registered office or central administrative office is located in Luxembourg. Otherwise, it is considered as a non-resident taxpayer.
There are three categories of taxpayers in Luxembourg. For instance, Class 1a consists of widows and those who benefit from a tax reduction for children. Class 2 includes spouses and partners who pay joint taxes, widows whose partners have died during the last three years preceding the current tax year and, finally, separated and divorced persons according to a legal dispensation or judicial authority during the last three years preceding the current tax year. Class 1, for its part, includes taxpayers who are neither in Class 1a nor in Class 2.
Collective income tax
Class 2 income tax applies to the following:
- spouses who are Luxembourg residents and who are not separated in accordance with a legal dispensation or judicial authority at the beginning of the current tax year
- to resident taxpayers who have got married during the current tax year
- spouses who have become resident taxpayers during the current tax year and who are not separated in accordance with a legal dispensation or judicial authority
- spouses who are not separated, one of them being a resident taxpayer and the other being a non-resident, upon joint request, provided the resident spouse has received at least 90% of the household's income during the current tax year.
Civil partners have to pay collective taxes according to the Class 2 rates, upon joint request, following the end of the fiscal year, through assessment by filing an income tax declaration Modèle 100 form provided they have been living at the same address throughout the fiscal year. Joint taxation applies mainly to resident partners or those who have recently got married and whereby their partnership has lasted throughout the fiscal year. Note, however, that in the case of direct taxes, civil partners cannot request for joint taxation as part of the monthly deduction at source. Moreover, at source tax declaration forms are not affected by the partnership.
Finally, taxpayers who are eligible to a tax moderation for their children in case they have less than 18 years old children on the 1st of January of the tax year and who are part of their household will pay tax jointly. This joint taxation applies only to residents taxpayers, as well as to taxable spouses upon joint request provided one of them is a resident taxpayer. However, their children's income will not be considered.
Non-resident taxpayers receiving at least 90% of their income in Luxembourg are considered as resident taxpayers upon request. Thus, Belgian residents have to pay tax in Luxembourg at a rate of more than 50% of their household's professional income. They can also request for assimilation to resident taxpayers.
To apply for tax assimilation, you have to tick the 313 box on page 3 of the Modèle 100 form. The tax rate is then assessed, taking into account indigenous and foreign income, so as to determine the applicable tax rate, the deduction of special expenses, loss of rent regarding their personal home and tax allowances for extraordinary expenses.
Non-residents taxpayers who are married or committed in a civil partnership can also request for joint taxes according to Class 2 tax rates. In this case, their native and foreign income is taken into account while fixing the taxation.
Taxable income is calculated according to the deduction of special expenses from total gross income which, in turn, consists of the total net income determined for each income category: business, agriculture and forestry profits, profits generated by a liberal profession, employment, pensions or annuities, movable capital, leasing property and finally various net revenues.
Pensions arrears and permanent charges due under a particular obligation can be deducted from net income (provided these are not economically related to exempted income), debit interests, certain contributions and insurance premiums, received donations that do not amount to more than 20% of the total net income or a million euros.
Adjusted taxable income, for its part, consists of the total of different net income, minus special expenses. It can be adjusted by tax allowances for extraordinary expenses, for children who are not part of the taxpayer's household, or by non-professional tax allowances.
There are two types of taxation in Luxembourg: assessment taxation and deduction at source. In the case of tax assessment, income tax is levied according to the taxpayer's declaration which will be used by the Administration des contributions directes to determine the annual tax rate. The tax base is equal to the taxable income, that is all revenues that have been removed from deductible expenses for individuals or net income for a company. Deduction at source applied to employment revenue and pensions.
Tax assessment occurs after the end of the fiscal year according to the taxpayer's tax declaration. Income tax then applies when the taxable income is over € 100,000, when it consists of net income which is not subject to a withholding of more than € 600, and when it includes for more than € 1,500 of income subject to income tax withholding from movable capital/royalties. It also applies to spouses (husbands) who have opted for joint taxation (a resident taxpayer and a non-resident), and to partners who have jointly requested for collective taxation.
Declaration of income
To be eligible to taxation by assessment, taxpayers are required to file a Modèle 100 form. In case they are eligible to the restitution of tax deducted at source, employees and pensioners whose incomes are found below these limits have to apply for tax regularization according to their personal situation. This can be done every year through the model R 163 form, or by assessment through the Modèle 100 form.
Deduction at source
Taxpayers must make quarterly advance payments and are entitled to a tax deduction at source on their wages, pensions and annuities, indigenous movable capital at a rate of 15% and on royalties and similar remuneration paid to directors and auditors of Luxembourg companies as compensation for their supervisory functions at a rate of 20%.
As regards non-resident taxpayers, income tax deduction from royalties involves definitive deduction in case their indigenous income consists primarily of royalties whose gross amount does not exceed € 100,000 per fiscal year.
Wealth tax applies to communities or companies that are subject to corporate income tax. Trade tax relates to commercial, industrial and craft companies which are located in Luxembourg. This includes partnerships, single or special sponsorships, economic interest groups, European economic interest groups, momentary corporations, participation communities, and other general joint ventures, if the partners are considered as cooperators. It also applies to capital and cooperative companies.
The tax card is an essential document for the employer or the pension fund so that they can perform the tax deduction at source on income received. To obtain this card, you have to register at the Administration des contributions directes. Note that this card is compulsory for all employees and pensioners as it contains information regarding the employee or pensioner's tax class. As regards the additional sheet, it contains information on the tax rate applied and allows employers or the pension fund to proceed with the income tax deduction at source.
Residents have to submit this form to the RTS Office at the Administration des contributions directes in the beginning of the year. In the case of non-residents, the form will be filled in by the non-residents RTS Office. In both cases, your tax card will be delivered to you by post. Hence, you are not likely to receive it at the RTS Office.
Border workers who are living in neighboring countries such as France, Germany and Belgium also have to file an annual tax return, regardless of their family situation. They must declare all their global revenue, as well as those of their spouses or partners. Income received in Luxembourg will not be subject to taxation in their home country. However, it will be taken into account during the calculation of a progressive tax rate in case they are earning in their home country as well.
Note that border workers are required to declare their global revenue at the latest on the 30th of June of the calendar year. In the case of income received from both countries, only the taxpayer will be subject to the calculation of two incomes so as to determine the progressive tax rate applicable to the portion of taxable income Belgian. The Belgian tax is then likely to be increased.
Luxembourg's taxation system includes a variety of exceptions and tax conditions. For more information, you are advised to refer to the tax Memento of the Grand Duchy of Luxembourg.
Administration des Contributions Directes www.impotsdirects.public.lu
Administration des Contributions Directes – Download tax forms www.impotsdirects.public.lu/formulaires
Administration des Contributions Directes – Income tax form models www.impotsdirects.public.lu/formulaires/pers_physiques
Administration des Contributions Directes – RTS Offices www.impotsdirects.public.lu/profil
Administration des Contributions Directes – Who has to pay tax by assessment www.impotsdirects.public.lu/az/i
Administration des Contributions Directes – Tax Memento www.impotsdirects.public.lu/legislation
Tax Guide 2014 for border workers s3-eu-west-1.amazonaws.com