Income tax in Luxembourg

Income tax in Luxembourg

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The tax rate for individuals is one of the lowest in Europe. Here's a guide to income taxes in Luxembourg.

Based on average income statistics and the income tax rate, the standard of living in Luxembourg is relatively high but taxes in Luxembourg are comparatively low compared to neighbouring European countries. For individuals, the basic types of tax and social security costs are income tax (impôt sur le revenu des personnes physiques), social security (sécurité sociale), investment income and capital gains.

What is taxable personal income in Luxembourg?

There are eight categories of taxable income which, added together over the year, determine the total taxable income:

  • Commercial/business profits: if you own a business
  • Profits from agriculture and forestry: if you own farmland in use for commercial activity
  • Profits derived from self-employed professions 
  • Net income from employment: for employers who work in Luxembourg
  • Net income from pensions and/or annuities: tax on any monthly pension income
  • Net income from investments (movable capital)
  • Net income from rental of property
  • Other net income (including capital gains)

Tax Classes
Luxembourg income tax liability is based on the individual's personal situation (e.g. family status). For this purpose, individuals are granted a tax class. Three tax classes have been defined as:

Class 1
For single persons.

Class 2
For married persons as well as civil partners, married non-resident taxpayers who are not separated, and non-resident civil partners.

Class 1a
For single persons with children as well as single taxpayers aged at least 65 on 1 January of the tax year.

Tax is calculated in accordance with a sliding increase table (see below), ranging from zero percent to 40 percent depending on your income. A solidarity tax of 7 percent of taxes must also be paid (9 percent for those earning more than EUR 150,000 in tax class 1 and 1a, or more than EUR 300,000 in tax class 2). Here are examples below for income tax owed from 2016 from Pricewaterhouse Coopers:

Single taxpayer (Class 1/Class 1a) 

Taxable salaried income: less than EUR 20,000
Income tax Class 1: EUR 1,087 Class 1a: EUR 0

Taxable salaried income: EUR 38,700
Income tax Class 1: EUR 6,279 Class 1a: EUR 4,946

Taxable salaried income: EUR 58,700
Income tax Class 1: EUR 14,275 Class 1a: EUR 13,207

Taxable salaried income: EUR 77,400
Income tax Class 1: EUR 22,371 Class 1a: EUR 21,510

Taxable salaried income: EUR 96,700
Income tax Class 1: EUR 30,425 Class 1a: EUR 29,770

Taxable salaried income: EUR 116,000
Income tax Class 1: EUR 38,650 Class 1a: EUR 38,031

Taxable salaried income: EUR 135,500
Income tax Class 1: EUR 46,996 Class 1a: EUR 46,377

Taxable salaried income: EUR 155,000
Income tax Class 1: 55,382 Class 1a: 54,763

Married taxpayer (Class 2)
Taxable salaried income: less than EUR 20,000
Income tax Class 2: 0

Taxable salaried income: EUR 38,700
Income tax Class 2: EUR 1,951

Taxable salaried income: EUR 58,000
Income tax Class 2: EUR 6,192

Taxable salaried income: EUR 77,400
Income tax Class 2: EUR 12,560

Taxable salaried income: EUR 96,700
Income tax Class 2: EUR 20,497

Taxable salaried income: EUR 116,000
Income tax Class 2: EUR 28,551

Taxable salaried income: EUR 135,500
Income tax Class 2: EUR 36,689

Taxable salaried income: EUR 155,000
Income tax Class 2: EUR 44,826

Taxes in Luxembourg

How many brackets and when to file
Residents in Luxembourg are taxable on their income in 19 brackets up to a maximum rate of 40 percent in excess of EUR 36,570 for a single person and EUR 73,140 for a married couple. All taxpayers must make an annual tax declaration to the relevant tax office, depending on your area of residence.

You must file a tax return by 31 March every year. To check which your area you come under, see the ‘Administration des Contributions’ website and look under Profil de l'Administration/ Adresses et Competences/ Section des Personnes Physiques. They also include a summary of direct taxes in English. If you disagree with your tax assessment, you can appeal — within 3 months — to the tax office or Directorate for direct taxes.

Employee Income Tax Exemptions
Taxable employment income usually includes all gains and benefits in cash earned as an employee, however there are a few exemptions:

Company car
Tax benefits for company cars is based on the mileage multiplied by the kilometre cost of the car. A mileage logbook will determine the numbers, otherwise a lump-sum method is an option.

Free accommodation
A 25 percent reduction can be applied to the total amounts that equal monthly rent and other rental charges, and 17.5 percent if accommodation is furnished.

Employment related expenses
Expenses relate to your job can be tax deductible. There is a yearly lump sum of EUR 540 to deduct, as well as commuting expenses (at a maximum of EUR 2574).

Any gifts by seniority can be tax exempt at a maximum of EUR 4500.

Overtime pay
Overtime pay, working night shifts, Sundays or public holidays have tax exempt benefits.

Severence pay
Depending on the conditions, severance pay also has tax exemptions.

Occupation pension schemes
Any employer's contributions to their pension scheme are subject to a flat tax rate of 20 percent, and benefits received are tax-exempt in Luxembourg.

Lunch vouchers 
A lunch voucher from work that is for exmaple EUR 8.40 has a tax benefit of EUR 2.80

Interest subsidies
If you have a loan granted by the employer at an interst rate lower than 1.5 percent there are tax breaks -- up to EUR 3000 for mortgage loans toward a main residence, and up to EUR 500 for personal loans.

Social Security Rates
The social security rates can be a maximum of EUR 98,504.40 per year or EUR 8,208.70 per month. They apply to employees and employers and are based on the gross salary including benefits in kind. They are also tax deductible. All those who earn a salary must submit an 'Assurance-Dépendance’. It is calculated at a rate of 1.4 percent on net taxable income and is not tax deductible. An annual contribution is calculated on the net taxable income declared on the annual tax return.

For a single person, EUR 1,500 of investment income is tax free and for a married person, EUR 3,000 is tax free. Half of the dividends from European Companies are exempted. Capital gains are mostly taxable at the marginal rate, with a tax exemption of EUR 50,000 for a single person and EUR 100,000 for a married couple.

Company Tax Rates
For companies, Luxembourg has a tax base of 30.36 percent. This rate is composed of 22 percent income tax, a five percent unemployment fund added to the income tax rate and a 7.5 percent municipal trade tax for Luxembourg City. Companies can benefit from several tax exemptions, for example to finance investments.

VAT rates are as follows:
The maximum VAT rate is 15 percent, the lowest in the EU. 

  • Super-reduced rate: three percent (e.g. foodstuffs, pharmaceuticals, restaurants);
  • Reduced rate: six percent;
  • Intermediate rate: 12 percent (e.g. adult clothing, wine);
  • Standard rate: 15 percent (e.g. alcohol, beer, adult shoes).

Tax terms (French – German)
Standard of living: niveau de vie – lebensstandard
Income tax: impôt sur le revenue – einkommenssteuer
Tax declaration: déclaration fiscale – steuererklärung
VAT: TVA (Taxe sur la Valeur Ajoutée) – MwSt. (Mehrwertsteuer)

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