This guide to self-employed tax in Luxembourg explains who must pay income and corporate tax, how to file your return and Luxembourg’s tax rules.
Self-employed workers in Luxembourg usually pay income tax on their profits, though those who own limited companies must instead pay corporate tax.
This guide includes advice on the following:
- Self-employed tax system in Luxembourg
- Self-employed income tax in Luxembourg
- Registering for self-employed tax in Luxembourg
- Self-employed tax deductions and credits in Luxembourg
- Corporate tax in Luxembourg
- How to file self-employed tax in Luxembourg
- VAT in Luxembourg for self-employed people
- Social security for self-employed workers in Luxembourg
- How to find an accountant or financial adviser in Luxembourg
Self-employed tax system in Luxembourg
The self-employed sector in Luxembourg is relatively small, with a report by the World Bank finding that just 9.6% of the country’s residents classified themselves as self-employed in 2019.
The good news for those going it alone is that the taxation rules aren’t dramatically different than for other workers in Luxembourg. Freelancers and self-employed people must pay income tax at the same rates as employed people, as well as social security contributions and VAT (depending on their income).
When setting up your own business in Luxembourg, you will need to get your head around what classifies as taxable income and the various expenses you can deduct from your tax bill, which we’ll explain in this guide.
Self-employed income tax in Luxembourg
The income tax rules in Luxembourg depend on what type of company you’re running. The three main types are sole trader, partnership and limited company.
Tax for self-employed sole traders and freelancers
Freelancers and sole traders rarely need to pay corporate tax in Luxembourg, as their profits are instead classified and taxed as personal income.
Self-employed freelancers or sole traders must submit a personal tax return once a year. They must then pay any tax owed to the Luxembourg Inland Revenue (Administration des contributions directes or ACD).
Income tax rates in Luxembourg are split into 23 brackets. These range from 0% to 42%, with the top bracket reserved for earnings over €200,000. We’ll explain more about the rates later in this guide.
Although sole traders do not pay corporate income tax in Luxembourg, they can be liable to pay communal business tax, as well as property tax on any premises they own.
Tax for partnerships
People with a stake in a partnership, like sole traders, do not usually have to pay corporate tax.
This applies to both standard partnerships (societe em nom collectif – SENC) and limited partnerships (societe em commandite simple – SECS), where profits are taxed as personal income of the partners involved.
If the partnership is limited by shares, then corporate tax will apply to any shareholder profits.
Partnerships in Luxembourg must pay communal business tax, VAT, property tax, net wealth tax (if applicable), and a tax registration fee.
Tax on limited companies
Limited companies, where the business has been incorporated and exists as a legal entity in its own right, must pay corporate tax.
Owners of limited companies will pay personal income tax on their salaries (and bonuses), and any additional profits must be declared for corporate tax.
This applies to public limited companies (société anonyme – SA) and limited liability companies (société à responsabilité limitée – SARL). Cooperative companies (société coopérative) also pay corporate tax.
Limited companies in Luxembourg must also pay communal business tax, net wealth tax, VAT, property tax, and the tax registration fee.
Registering for self-employed tax in Luxembourg
When you register with the Luxembourg tax office and social security, you will be asked to categorize your business.
The first step is to decide which of the following three business categories you fit in to: commercial activities, skilled craft trades and specific professions.
Your business or self (if the business is your name) must register under the Luxembourg Chamber of Commerce, although this is usually done automatically by tax authorities.
Self-employed tax deductions and credits in Luxembourg
Self-employed people can deduct the costs of running their business when filing their tax returns. This includes any expenses incurred directly for business-related activities, such as the cost of renting property, buying stock and travel expenses.
Other professional expenses can include the likes of IT equipment, work instruments and membership fees to industry organisations. What you’ll be able to deduct depends on the nature of your business, so take advice from an accountant on your options.
Self-employed workers and freelancers are also entitled to a credit of €300 a year on their income tax bills.
General expense deductions for workers
Luxembourg residents can deduct a certain number of expenses from their taxable income when filing a personal tax return:
- Pension income of €300;
- Social security contributions;
- Insurance premiums such as life insurance, third-party liability, death, accident, illness, or disability insurance contracted with another insurance company in the EU;
- Home savings and home loans;
- Debt interest on private loans, credit cards or debit bank account (€336 limit per person);
- Mortgage interest (€2,000 limit for the first six years, €1,500 for the next five years, and €1,000 for the remaining);
- Private old age pension in Luxembourg schemes not before the age of 60 and at the latest 75 years old. Certain conditions apply to time length, age, and monthly annuities;
- Charitable contributions (maximum €1 million or 20% taxable income);
- Alimonies to divorced spouse (up to €24,000);
- Lump sum of €480 (€960 for married couples)
Allowances and credits for taxpayers
There are a few different areas where Luxembourg residents can benefit from a few tax reliefs and allowances:
- Pension earners receive a tax credit of €300 a year;
- Parents receive a family allowance of €265 a month per child (born after 1 August 2016);
- A single parent can also receive a tax credit of €750–€1,500. There are also rebates of taxable income for expenses covering childcare costs for children under 14, and housekeeping costs for domestic work inside the dwelling of the taxpayer;
- If joint taxed couples realizes their own professional income they are entitled to a joint abatement of €4,500
Corporate tax in Luxembourg
Businesses that make more than €200,000 a year in Luxembourg must pay corporate tax at a rate of 17%. This decreased from 18% in 2019.
Companies must also pay an additional solidarity tax – this is charged at 7%. There’s also a municipal business tax in Luxembourg City, which is charged at 6.75%. This means that the effective corporate tax rate for higher-earning businesses in 2019 is 24.94%.
Companies with an annual incomes of less than €175,000 pay a lower corporate tax rate of 15% – resulting in an overall effective 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.
Businesses usually pay their corporate tax in advance every quarter, with installments in March, June, September and December.
As these payments are made in advance, companies who are found to have overpaid can claim the money back or have it deducted from future bills.
How to file self-employed tax 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.
When filing your income tax return as a self-employed worker, you’ll need to fill out a tax return. You should receive an invitation in February to download and electronically complete your form on the Inland Revenue Website, or receive the paper form 100 (in French).
If you require an extension, you must apply in writing to your local tax office.
Income tax bands in Luxembourg
Income tax in Luxembourg is charged on a progressive scale with 23 brackets ranging 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 provided 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 as follows:
VAT in Luxembourg for self-employed people
VAT (value added tax) is a tax on transactions in the EU. However, businesses pass it on to customers in the form of a price increase.
Businesses must pay VAT in Luxembourg based on their overall turnover. VAT registration in Luxembourg is compulsory for businesses and self-employed traders with an annual turnover of more than €30,000.
There are four VAT rates in Luxembourg:
- Normal rate of 17%;
- Intermediary rate of 14% on alcohol, fuel and petrol;
- Reduced rate of 8% on heating, lighting, clothes, hairdressing, cycles, cleaning related to private households;
- Super-reduced rate of 3% on food, soft drinks, children’s clothes, books, medical products, water, and rental costs.
Social security for self-employed workers in Luxembourg
Self-employed workers in Luxembourg must make social security contributions, the sum of which varies depending on a couple of factors.
Newly registered self-employed people have their contributions calculated based on the social minimum wage for unskilled workers. Once the business is established, the social security contributions are then determined based on the income declared in the most recent tax return.
Self-employed people should receive a letter once a year which lays out the calculation of their contributions, and gives them an opportunity to request a recalculation if anything is incorrect.
According to Deloitte, self-employed social security contributions ranged from around 24.63% to 27.49% in 2019.
If your business expands to include employees, you will be responsible for a paying a percentage of your staff member’s social security at a rate of 3.05% for sickness and 8% for pension.
How to find an accountant or financial adviser in Luxembourg
Luxembourg’s government provides a series of guides on how tax matters work in French, English and German.
If you’re looking for a tax advisor or accountants in Luxembourg, there are several accountancy trade associations through which you might be able to find a regulated specialist, 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, US expats in Luxembourg can get help with meeting their American tax obligations as a non-resident from Taxes For Expats.