Learn everything you need to know about taxes in Luxembourg, including income tax rules, corporate tax, property tax, and inheritance tax.
This guide explains everything you need to know about taxes in Luxembourg, from income tax on earnings to company tax, VAT, inheritance, and estate tax.
It includes advice on the following:
- The tax system in Luxembourg
- Taxes on goods and services (VAT)
- Who has to pay tax in Luxembourg?
- Luxembourg tax system for foreigners
- Income tax rates in Luxembourg
- Tax on property in Luxembourg
- Inheritance tax in Luxembourg
- Company taxes and VAT rates
- Tax advice in Luxembourg
The tax system in Luxembourg
Luxembourg has one of the most complicated income tax systems in Europe, with three tax classes and 23 different brackets ranging from 0% up to 42%. While this top rate might sound high, it remains lower than the likes of neighboring countries such as Belgium.
If you’re a foreigner living in Luxembourg, you’re generally liable to pay income tax and file a tax return. Business owners in Luxembourg, meanwhile, may be subject to both corporate tax and VAT.
A range of taxes are levied at federal level in Luxembourg.
These include personal income and company tax, VAT, inheritance, and estate tax.
While most taxes are set at the national level, there are a couple of exceptions. For example, property tax varies depending on which municipality you live in.
Local business tax can also vary. For example, businesses based in Luxembourg City must pay a municipal business tax of 6.75%.
Taxes on goods and services (VAT) in Luxembourg
VAT (Taxe sur la Valeur Ajoutée or TVA) is an EU tax payable on business transactions. While it’s theoretically paid by companies, the cost is passed on to customers in the form of a price increase.
Beginning in 2021, businesses and self-employed traders with an annual turnover of more than €35,000 in Luxembourg must register for TVA by law. This threshold was previously €30,000.
The current TVA rates in Luxembourg vary as follows depending on the type of item sold:
- Super-reduced rate: 3% (e.g., foodstuffs, pharmaceuticals, restaurants)
- Reduced rate: 8% (e.g., cleaning, repairs, heating)
- Intermediate rate: 14% (e.g., adult clothing, wine)
- Standard rate: 17% (e.g., alcohol, beer, adult shoes)
The government has implemented several tax reforms aimed at protecting the environment. A new CO2 tax should increase gas and diesel prices at the pump by about €0.05 per liter. Additionally, the minimum age of residential buildings eligible for the super-reduced 3% TVA rate decreased from 20 to 10 years for sustainable energy restorations.
Who has to pay tax in Luxembourg?
Resident versus non-resident
Your fiscal eligibility in Luxembourg varies depending on your residency status.
Residents must declare their worldwide income, but non-residents are only taxable on their Luxembourg income.
To be classified as a resident taxpayer, you must have been living in Luxembourg for longer than six consecutive months. If you lived in Luxembourg for less than six months, you’ll be considered a non-resident taxpayer.
Luxembourg has a large non-resident base, primarily due to people commuting into the country from bordering countries such as France, Germany, and Belgium.
Taxes for families in Luxembourg
If you move to Luxembourg with your spouse, your income will usually be taxed jointly. This can be preferable as income tax rates are generally lower for married couples.
If one spouse is a resident and the other is not, they are taxed separately. If you are in a partnership but not married, it is possible to elect to be covered as a joint income if one of the partners (or the non-resident partner) generates 90% or more of their total income in Luxembourg.
Couples must share the same residence in Luxembourg for at least one full year before applying for joint taxation.
Luxembourg tax system for foreigners
If you’re a highly-skilled expat recruited from abroad, you could be eligible for the impatriate tax regime.
The government has reformed the regime for the 2021 tax year in an effort to modernize it. The new impatriation premium carries a tax exemption of up to 50% of an amount not exceeding 30% of the impatriate’s annual basic salary. However, from the 2021 tax year, an employee must earn a minimum annual salary of €100,000 (up from €50,000) to qualify. Additionally, you must be a Luxembourg resident (or not live more than 150 kilometers away from the Luxembourgish border) and your employment must be based on skills that are not replacing another local employee.
A further advantage of being eligible for this scheme is that you can expense costs such as relocation, school fees, rent, utilities, and even home leave of one trip per year. You can enjoy this tax benefit for up to eight years. If you think you might be eligible for the impatriate tax regime, talk to your employer about applying.
Income tax rates in Luxembourg
How much you’ll pay in income tax depends on your marital status and taxable income.
Taxable earnings are classified as income from employment, self-employment, pensions, investments, rented property, and other miscellaneous items like private assets and capital gains.
Workers in Luxembourg go in one of the three tax classes, which determine your tax-free allowance. Beyond this, there are 23 different income tax bands, ranging from 0% to 42% on earnings above €200,000.
How to file your tax return in Luxembourg
The tax year in Luxembourg runs from 1 January to 31 December. Returns are due by 31 March the following year.
Taxpayers can submit income tax returns either online or by mail. Fines for late returns are levied at up to 0.6% of the tax bill.
Most workers pay income tax from their salaries, but still need to complete a tax return to ensure they’re paying the correct amount.
If you’ve overpaid tax, you can gain a reimbursement either to your bank account or as a credit towards the next year’s return.
Which tax return do I need to submit?
When filing your return, you’ll either have to fill out form 100 (a standard full tax return) or form 163 (an annual statement, or décompte annuel).
If you’re an unmarried, salaried employee earning less than €100,000 (with no income from other sources), you’ll be able to file the more simplified annual statement, rather than a full tax return.
If, however, your taxable household income is above €100,000 or someone in your household has an income from more than one source, you’ll need to submit a full return.
Self-employed income tax
Self-employed workers and freelancers are taxed at the same rates as workers. They must fill out an annual income tax return.
While sole traders and partnerships are subject to income tax, directors of limited companies must instead pay corporate tax.
Tax on property in Luxembourg
Property taxes are levied on the ownership of residential, commercial or mixed-use properties. Property tax rates vary from 0.7% to 1% depending on the nature of the property and its location. Contact your local municipality office to learn more.
Capital gains tax
You don’t need to pay capital gains tax on the sale of your main residence. However, any additional homes are subject to the tax.
If the sale takes place within two years of buying the property, you’ll need to pay tax as part of your income at the relevant income tax bracket. If the sale takes place more than two years after the purchase, you may be able to pay a reduced rate.
Tax reductions of up to €50,000 may be claimed every 10 years on a capital gain. For inherited properties, you may be able to benefit from a tax reduction of €75,000.
Real estate income
Income from letting out a residential property located in Luxembourg is subject to progressive income tax rates. The maximum marginal tax rate on rental property owned by resident taxpayers is 42.8% or 43.6%, depending on the property owner’s annual taxable income.
Resident taxpayers who own rental properties, whether in Luxembourg or abroad, must report the rental income on their income tax returns.
Inheritance tax in Luxembourg
Inheritance tax in Luxembourg is levied on the estate of all residents. How much you pay depends on the value of the estate and your relationship with the deceased.
Different tax brackets apply for inheritances of above and below €10,000, although there is a tax-free allowance on small inheritances worth up to €1,250.
EU expats can choose to follow the inheritance laws of their home country by expressing their wish in a will.
Gift tax depends on the relationship of the donor and donee, and rates vary between 1.8% to 14.4%. You can find out more in the Luxembourg government guide to gifts and donations.
Company taxes in Luxembourg
Businesses that make more than €200,000 a year in Luxembourg must pay corporate tax at a rate of 17%. This rate decreased from 18% in 2019.
Companies must also pay an additional solidarity tax, charged at 7%, and a municipal business tax in Luxembourg City, charged at 6.75%.
This means that the effective corporate tax rate for higher-earning businesses is 24.94%.
Companies with an annual income of less than €175,000 pay a lower corporate tax rate of 15% – resulting in an overall rate of 22.8%.
Those with earnings of between €175,001 and €200,000 must pay €26,250 plus 31% of the profit above €175,000.
Companies usually pay their corporate tax in advance every quarter, with installments in March, June, September, and December.
Tax advice in Luxembourg
Luxembourg’s government provides a series of guides on how tax matters work in French, English, and German.
There are several accountancy trade associations through which you might be able to find a regulated English-speaking accountant, such as the Association of British and Irish Accountants in Luxembourg, the Order of Chartered Accountants, and the Institute of Auditors.
In addition to this, American expats in Luxembourg can get help and advice on meeting their US tax obligations as non-residents from Taxes for Expats.