Expatriate tax ebook - Luxembourg

What taxes?

Capital Gains
Inheritance & Gift Tax
Investment Income
Real Estate Property Tax
Social Security Taxes
Stock options
Payment of the Luxembourg Tax

Capital Gains
Short term capital gains (ownership of less than two years for real estate and six months for other assets) are included in normal taxable income.

Long term capital gains (LTCG) derived from disposal of a shareholding of more than 10% (owned more than 6 months) and of real estate (owned more than two years) are taxed at half the average global tax rate of the taxpayer (max = 19.475%). Other LTCG are exempt.

Two measures reduce the LTCG:

1. Acquisition cost is multiplied by a coefficient reflecting inflation;
2. The first € 50,000 (€ 100,000 if spouses are taxed jointly) of cumulative capital gains realised over a 10-year period are tax exempt.

Inheritance & Gift Tax
Inheritance tax
In direct line or between spouses having children, there is a full exemption on the disposal of shares which does not exceed the legal portion (i.e. percentage attributed by law to the different heirs).

Otherwise, the tax rate depends on the degree of family relationship and varies from 2.5% to 15% (for unrelated parties). This does not include properties abroad.

Non-residents are only taxed on the gross value of properties located in Luxembourg

Gift tax
Rates vary according to the degree of family relationship from 1.8% to 14.4% for unrelated parties.

Investment Income
Income tax on investment income paid to individual taxpayers is withheld in the case of a Luxembourg resident payer of such income, and paid on behalf of the taxpayer receiving dividends, interest on certain late payments, and interest on bonds participating in the distribution of benefits.

The withholding tax rate is set at 20% of gross dividend income.

Dividend income is included in normal taxable income. When the tax is calculated after completion of a tax return, tax previously withheld is taken into account and deducted from the total amount of tax to pay.

Both resident and non-resident taxpayers may benefit from a tax exemption of 50% of the dividends received, when they derive from Luxembourg, EU Member States or treaty countries companies.

Real Estate Property Tax
Owners (resident or not) of immovable property are responsible for the payment of property tax.

Property tax is calculated on a unitary value attributed to the property which is far lower than its real value (as a rough indication, may be +/-1% of the real value). The amount of tax is established annually and no return is required. The rate of assessment varies in relation to the type of property and is dependant on the municipal authority where the property is located. Again as a very rough indication, the effective property tax may represent approximately 1/1000 of the real value of the building.

Social Security Taxes
Contribution rates applied to remuneration:

The maximum annual remuneration ceiling on which contributions are calculated is € 105,453.72 (as from 01/01/11)

An additional withholding of 1.4% called “Dependency Contribution” is applied to gross professional income and to income derived from assets (rent, interest…) with no ceiling applicable.

Introduction in 2011 of a 0.8% crisis contribution payable by individuals on all their income (professional, dividend, rent...).

Some bilateral and multilateral social security agreements protect the interests of temporarily resident employees.

Stock options
Stock option plans are considered as benefit in kind and as such taxed as employment income. A distinction is made between traded and non-traded share options. If options are traded, tax is levied when the option is granted. The benefit is - either the difference between the price paid for the option and its market value calculated according to classical models (Scholes/Black) - or a lump-sum basis of 7.5% of the value of the underlying shares. If options are non-traded, the tax is levied at the time of exercising the option. The profit is the difference between the price paid by the employee for the shares and their market value at the date of exercise. A depreciation of 5% is granted for each year of unavailability of the shares with a maximum of 20%.

Payment of the Luxembourg Tax 
Employers are responsible for the withholding of the Luxembourg taxes from the salary payment to their employees.

Taxpayers not subject to withholding on salaries have to pay quarterly advances based on their last tax assessment.

Information about Luxembourg:

• introduction
• facts and figures
• basis of taxation
• what taxes?
• tax planning opportunities