Discover how income tax in Luxembourg works, including the tax classes and brackets, exemptions, filing dates, and the fines for late payment.
As an expat working in Luxembourg, you’ll need to pay income tax on your earnings. The system, however, can be complex, with three tax classes and 23 different income tax brackets.
This guide explains all you need to know about income taxes in Luxembourg, including advice on the following topics:
- Income tax in Luxembourg
- Earnings subject to income tax in Luxembourg
- How to file your tax return in Luxembourg
- Income tax rates in Luxembourg
- Tax refunds in Luxembourg
- Tax fines in Luxembourg
- Income tax advice in Luxembourg
Income tax in Luxembourg
The income tax system in Luxembourg
Expats must pay income tax on their earnings, whether they work for a company or are self-employed in Luxembourg. Residents need to pay the tax on their worldwide income, while non-residents must only pay on income generated in Luxembourg.
Workers are given a tax class based on their marital and residency status, which along with their earnings determines how much income tax they pay.
Regular taxpayers in Luxembourg usually have their income tax contributions taken from their salaries, though they must still file an income tax return to the Luxembourg Inland Revenue (Administration des contributions directes – ACD) to ensure they are paying the correct amount. This is known as taxation by assessment.
Some self-employed taxpayers are required to make quarterly payments in advance. These payments are made in March, June, September, and December of the tax year.
Since 2018, married couples have been able to decide whether to opt for separate or joint taxation.
Who pays income tax in Luxembourg?
Workers in Luxembourg are granted a tax class based on their personal situation. The three tax classes are the following:
- 1: married taxpayers who’ve opted for separate taxation; single people; some married non-resident taxpayers.
- 1a: people aged at least 65; single parents with a dependent child.
- 2: married taxpayers; widowed taxpayers (for first three years after the death of the spouse); divorced or separated people (for first three years); civil partners; some married non-resident taxpayers.
The classification system means that residents and non-residents can face different income tax bills, as non-residents are not entitled to the same deductions as resident taxpayers.
Non-residents who earn more than 90% of their worldwide income in Luxembourg or earn less than €13,000 outside of Luxembourg can opt to be treated as residents. Belgian citizens, however, only need to earn 50% of their professional income in Luxembourg to qualify.
Earnings subject to income tax in Luxembourg
Taxes on income and salary in Luxembourg
The following types of earnings are subject to income tax in Luxembourg:
- Net income from employment or self-employment
- Commercial or business profits
- Profits from agriculture and forestry
- Net income from pensions and/or annuities (tax on any monthly pension income)
- Income from investments
- Net income from the rental of property
- Other net income (such as capital gains)
Taxes on employment benefits
Employment benefits such as healthcare schemes or salary sacrifice schemes are generally taxable. Benefits in kind are usually assessed at their market value, but some are instead given a lump-sum valuation.
For the 2021 tax year, the Luxembourg government introduced a tax measure allowing employees to participate in corporate profits. The bonus is eligible for a 50% individual income tax exemption as long as it does not exceed 25% of the employee’s gross basic annual salary.
Another new tax reform that went into effect on 1 January 2021 applies to highly-skilled workers who are recruited from abroad. In order to benefit from Luxembourg’s impatriate scheme, an employee must earn a minimum annual basic salary of €100,000 (up from €50,000). The worker must also be a Luxembourg resident and their employment must be based on skills that are not replacing another local employee. If these stipulations are met, they can benefit from a 50% tax exemption of an amount not exceeding 30% of the impatriate’s annual basic salary.
Taxes on rental income
People letting out a home must pay tax on their net rental income. This is determined by deducting allowable expenses from the rent taken in each month.
Expenses can include insurance, property taxes, rental costs, depreciation in value (if applicable), and debt interest on a mortgage.
How to file your tax return in Luxembourg
Income tax deadlines and forms in Luxembourg
The tax year in Luxembourg runs from 1 January to 31 December and income tax returns must be filed by 31 March the following year.
You should receive an invitation in February to download and electronically complete your form on the Inland Revenue website or receive the paper form (form 100).
If you require an extension, you must apply in writing to your local tax office.
Income tax rates in Luxembourg
Income tax in Luxembourg is charged on a progressive scale with 23 brackets, which range from 0% to 42%. Workers must also pay between 7% and 9% as an additional contribution to the employment fund.
The first €11,265 is offered tax-free, with the lowest rate of 8% kicking in thereafter. The top rate of 42% is charged on earnings above €200,004.
The brackets are the following:
How much will you pay in income tax?
The following table from PwC offers guidance on how much you can expect to spend on income tax, depending on your tax class and salary. These figures also include the additional tax contribution.
Personal tax allowance and deductions in Luxembourg
All employees are allowed a yearly lump sum deduction of €540 for their professional expenses. The following deductions can also apply:
- Commuting expenses: how much you’ll be able to deduct depends on how far you live from your workplace, but the maximum is €2,574.
- Company car: tax benefits for company cars are based on the mileage multiplied by the kilometer cost of the car. A mileage logbook determines the numbers; otherwise, a lump-sum method is an option.
- Free accommodation: a 25% reduction can be applied, or 17.5% if the accommodation is furnished.
- Gifts: any gifts from seniority can be tax-exempt up to a maximum of €4,500.
- Overtime and severance pay: overtime pay, working night shifts, Sundays, or public holidays have tax benefits. Depending on the conditions, severance pay is also exempt from tax.
- Occupational pensions: any employer’s contributions to their pension scheme are subject to a flat tax rate of 20%. Benefits are tax-exempt.
- Loan interest: if you have a loan granted by the employer at an interest rate lower than 1.5%, there are tax breaks up to €3,000 for mortgage loans toward the main residence and up to €500 for personal loans.
Tax refunds in Luxembourg
If your tax return shows you’ve been overcharged income tax during the year, you can request reimbursement of what you’re owed.
This will either be done automatically if you’ve submitted your return online or through form 100. If this isn’t processed automatically, you can request an annual adjustment using form 163R.
Tax fines in Luxembourg
Income tax fines are set at 0.6% of the outstanding payment per month, starting in the month following the payment’s due date.
If you successfully request an extension to the deadline, this fee will be waived for the next four months and a payment schedule will be agreed. After that, you’ll be charged interest at the following rates:
- 0.1% per month between months five and 12
- 0.2% per month for payments between one and three years overdue
- rising to 0.6% per month for payments more than three years overdue
In principle, the tax office can deny the request for an extension if it believes you can easily pay the debt based on your current earnings.
Income tax advice in Luxembourg
Luxembourg’s government provides a series of guides on how tax matters work in French, English, and German.
For American expats in Luxembourg, Taxes For Expats provides expert advice on tax filing for US citizens around the globe.