The draft law n°8080  concerning the State revenue and expenditure budget for the year 2023 was submitted by the government on 12 October 2022 (the PL8080).
PL8080 does not introduce any major tax reform, but provides some clarifications and tries to strengthen the attractiveness of Luxembourg for (expatriate) employees. Most of the tax measures should apply from 1 January 2023.
1. MEASURES IMPACTING ON ENTITIES
1.1. Hybrid entities
Article 168quater of the amended Income Tax Act of 4 December 1967 (the ITA) sets out the conditions under which a fiscally transparent body (or arrangement) incorporated or established in Luxembourg is considered a resident taxpayer and taxed on its net income (the so-called “hybridity” rules). One of the conditions that must be fulfilled for this article to apply is that one (or more) of the unit holders of the scheme under analysis considers it to be fiscally opaque.
PL8080 clarifies that this article should only apply in cases where the qualification of the organisation itself causes the non-taxation of the income concerned. Thus, if the holder of the shares of the transparent undertaking benefits from a subjective exemption, this exemption should not trigger Article 168quater ITA.
This clarification is particularly relevant for (Luxembourg) investment funds, and often fiscally transparent bodies such as an SCS or SCSp, which have among their investors foreign pension funds, sovereign wealth funds or other entities that are established in jurisdictions that do not levy a tax similar to corporate income tax.
This clarification should apply retroactively to 1 January 2022.
1.2. Extension of the deadline for filing tax returns
The deadline for filing tax returns will be extended to 31 December. Currently, this deadline is 31 May for companies.
2. MEASURES AFFECTING INDIVIDUALS
2.1. Extension of the deadline for filing tax returns
The deadline for filing tax returns will be extended to 31 December. Currently, this date is 31 March for individuals. In itself, this change merely confirms by law an administrative tolerance already in use.
2.2. Participation premium
The system of the participation premium (introduced in 2021) has been modified. This bonus, which may not exceed 5% of the company’s after-tax profit for the previous year , has been amended to provide greater flexibility.
PL8080 proposes that companies belonging to a tax consolidation group may choose to assess this 5% limit by adding the after-tax profit of the members of this consolidation group.
2.3. Benefits for expatriate employees
In order to attract more talent from abroad, certain tax rules allow that costs in relation to the relocation of the expatriate borne by the employer do not constitute a taxable benefit for the employee.
One of the conditions to benefit from this regime is that the expatriate employee earns at least EUR 100,000 per year. This threshold has been lowered to EUR 75,000, thus widening the scope of application.
2.4. Increase of certain tax credits and tax deduction thresholds
The following measures have been proposed to support low-income households:
The single-parent tax credit (currently EUR 1,500 per year for an income not exceeding EUR 35,000) would be increased to EUR 2,505 per year for an income not exceeding EUR 60,000.
The tax credit of EUR 70 per month currently only applies to employees with a gross monthly income between EUR 1,500 and EUR 2,500. Considering that the minimum social wage will increase in 2023, this range would be increased to between EUR 1,800 and EUR 3,000.
The maximum tax-deductible amount of maintenance payments (when the child is not part of the taxpayer’s household) will be increased from EUR 4,020 to EUR 4,422.
 Other conditions also apply.
3. TEMPORARY MEASURES CONCERNING VAT
As foreseen by the tripartite, and following the draft law n°8083, VAT rates will be reduced by one point each, except for the super-reduced rate (of 3%). This reduction should only apply in 2023. Thus, the new rates, as from 1 January 2023, will be
- Standard rate: 16%.
- Intermediate rate: 13
- Reduced rate: 7%.
4.MEASURES CONCERNING REAL ESTATE
In order to combat the housing crisis in Luxembourg, a specific additional depreciation of one percent will be introduced and will apply to taxpayers receiving only rental income.
Furthermore, in order to limit speculation, the depreciation of buildings will also be modified. Thus, the depreciation rate (varying between 2% and 4%, depending on the year of construction) will only apply to two buildings (or parts of buildings) used for housing purposes.