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.
Freelance 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
- Combining freelance work and paid employment
- Self-employed tax fines
- Associations for entrepreneurs
- How to find an accountant or financial adviser in Luxembourg
Freelance tax system in Luxembourg
The self-employed sector in Luxembourg is relatively small. Data from the Organization for Economic Cooperation and Development (OECD) shows Luxembourg’s self-employment rate is 9.4%, one of the lowest rates in the European Union.
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 in Luxembourg must pay income tax at the same rates as employed people, as well as Luxembourgish 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 three main types of self-employment in Luxembourg are sole proprietorship, partnership, and limited company. Consequently, income tax rules for self-employed people in Luxembourg depend on the type of company.
Tax for self-employed sole traders and freelancers
Self-employed freelancers or sole proprietors must submit a personal tax return in Luxembourg once a year. They must then pay any tax owed to the Luxembourg Inland Revenue (Administration des contributions directes or ACD).
Freelance 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. They also must register for social security insurance.
The ACD may require entrepreneurs to make quarterly advance payments on their tax bills.
Tax for partnerships
As is the case with sole proprietors, people with a stake in a partnership do not usually have to pay corporate tax.
This applies to both standard partnerships (société em nom collectif – SENC) and limited partnerships (société em commandite simple – SECS), where profits are taxed as the personal income of the partners involved.
If the partnership is limited by shares, then corporate tax will apply to any shareholder profits. However, 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 in Luxembourg.
Furthermore, owners of limited companies pay personal income tax on their salaries (and bonuses). 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 freelance 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 into: commercial activities, skilled craft trades, or 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
Freelance workers can deduct the costs of running their business when filing their tax returns in Luxembourg. This includes any expenses incurred directly for business-related activities, such as the cost of renting property, buying stock, and travel expenses.
Additionally, professional expenses can include IT equipment, work instruments, and membership fees to industry organizations. 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 a 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 a joint-taxed couple 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%.
Companies must pay an additional solidarity tax; this is charged at 7%. There’s also a municipal business tax to factor in, which is charged at 6.75% in Luxembourg City. This means that the effective corporate tax rate for higher-earning businesses in 2021 was 24.94%, according to PwC.
Companies with an annual income 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. These payments are made in advance. Consequently, companies that 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. Then, 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.
Freelance 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 in 2022 are as follows:
VAT in Luxembourg for self-employed people
VAT (value-added tax) is a tax on transactions in the European Union. 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 €35,000.
There are four VAT rates in Luxembourg:
- Normal rate of 17%
- Intermediary rate of 14% on alcohol and fuel
- Reduced rate of 8% on heating, lighting, clothes, hairdressing, cycles, and 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
Freelance workers in Luxembourg must make social security contributions, the sum of which varies depending on a couple of factors.
First of all, newly registered self-employed people have their contributions calculated based on the social minimum wage for unskilled workers. Next, 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. The letter gives them an opportunity to request a recalculation if anything is incorrect.
According to Deloitte, self-employed social security contributions ranged from around 24.99% to 27.37% in 2021. Above all, the system covers the risk of sickness, maternity, disability, death, old-age, and occupational and commuting accidents. It can also include benefits such as family allowances and unemployment payments. Members of a self-employed worker’s family may also be eligible for health insurance coverage as co-insured persons.
Furthermore, if your business expands to include employees, you are responsible for paying a percentage of your staff member’s social security at a rate of 3.05% for sickness and 8% for a Luxembourgish pension.
Combining freelance work and paid employment in Luxembourg
You can hold as many jobs as you like in Luxembourg, but you should not exceed the normal legal working time of 40 hours a week. If you do, you’ll first need to notify the Inspectorate of Labor and Mines (French and German) or you could face fines. Each income stream is taxed based on the category to which it belongs.
On the other hand, your supplementary self-employed activity may be exempt from health, pension, and accident insurance contributions. You will need to request this exemption from the Centre Commune de la Sécurité Sociale (in French).
Freelance tax fines in Luxembourg
Self-employed (sole proprietor and partnership) taxpayers must pay their tax bill within one month of receiving notice of their tax assessment or face late payment penalties. A penalty of 0.6 % for each month after the payment date is calculated on the amount of tax due.
Taxpayers who are required to make quarterly advance tax payments must comply with the following payment dates: 10 March, 10 June, 10 September, and 10 December of the tax year. If the advance payments are not made by these scheduled dates, it can incur late payment penalties of 0.6% per month, starting with the month following the payment date.
Limited companies, however, are penalized according to the rules that apply to corporations in Luxembourg.
Associations for entrepreneurs in Luxembourg
- Cellule Développement économique et commercial (in French) – the Economic and Commercial Development Unit is the main point of contact between the capital’s entrepreneurs and the municipal administration of Luxembourg City.
- House of Entrepreneurship (in French) – a one-stop-shop for entrepreneurs, powered by the Chamber of Commerce.
- Luxinnovation – a national agency for the promotion of innovation and research offering free integrated and customized services for companies of all sizes, innovative start-ups, and researchers in public sector institutions.
- Women in Business Luxembourg – an independent national professional association bringing together businesswomen in all stages of their careers.
How to find an accountant or financial advisor 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.