Tax revenue in Luxembourg (officially the Grand Duchy of Luxembourg) was 38.65% of GDP in 2017, which is just above the average OECD in 2017 (34.19% of GDP).

Most important revenue sources for the government

The most important revenue sources for the government are:

  • Corporate income tax
  • Local business tax
  • Net wealth tax
  • Personal income tax
  • Value added tax

Taxes are administrated by government agencies. The Minister of Finance levies the taxes through the director of Taxation, the revenue offices, and the tax collection offices.

Corporate Income Tax (CIT)

There are two possibilities: either the company is a resident or non-resident.

Resident companies: Luxembourg considers a company to be resident if its management headquarter is in the Grand Duchy. Luxembourg resident companies have to pay taxes on their worldwide income once foreign taxes (where the company is present and earns an income) are deducted.

Non-resident companies: Luxembourg considers a company to be non-resident if its principle place of management is located outside the country.

The only companies that are tax-free are:

  • Companies with charitable purposes or which work for the general interest
  • Private-wealth management companies
  • Undertakings for collective investment
Taxable Income Corporate income tax rate

< € 25,000

15%

€ 25,001 - € 30,000

€ 3,750 + 33% of the tax base above € 25,000

> € 30,000

18%

In addition to this, there is a solidarity surtax and a municipality business tax on income.

Solidarity surtax

There is a 7% solidarity surtax amount that is imposed on the corporate income tax. For instance, for companies with a taxable income that exceeds € 30,000, the aggregate corporate income tax rate is 19.26% (18% + 7% × 18%).

Municipal business tax on income

This tax is levied by the municipality and varies within each municipality. For the companies that have their management headquartered in Luxembourg City, the municipal business tax is about 6.75%.

For instance, for the companies that have a taxable income that exceeds € 30,000, the effective combined corporate income tax rate is 26.01% (19.26% + 6.75%).

Other taxes on business

There are additional taxes on business than the corporate income taxes. For example, there is value added tax (VAT), implemented under the framework provided by the VAT Directive (2006/112/EC), with a general rate of 17% (with reduced rates of 14%, 8%, or 3%).

There is also the net wealth tax (IF) which depends on the assets held:

Assets (EUR) Net wealth tax

< 350,001

€500

350,001 – 2,000,000

€1,500

2,000,001 – 10,000,000

€5,000

10,000,001 – 15,000,000

€10,000

15,000,001 – 20,000,000

€15,000

20,000,001 – 30,000,000

€20,000

> 30,000,000

€30,000

Personal Income Tax

Resident individuals:

Luxembourg considers individuals as tax resident if they have their permanent residence (where they are physically present for an uninterrupted period of more than six months) in Luxembourg. Therefore, owning a residence in Luxembourg is not the only condition for tax residence.

People that are resident in Luxembourg are taxed on their worldwide income as though it were earned in Luxembourg. Non-resident individuals are only taxed on their Luxembourg-source income, while part-year residents are taxed at a percentage equivalent to what they would be taxed at if all of their income is earned in Luxembourg. It is possible for non-residents to elect to be treated as though their income is fully from Luxembourg if at least 90% of all income is derived from Luxembourg sources (50% for Belgian-resident individuals).

Structure of income tax

In Luxembourg, the income tax is divided into eight categories:

  • Trade and business income
  • Income from agriculture and forestry
  • Income from self-employment
  • Income from employment
  • Income from pensions and annuities
  • Income from movable property
  • Rental income
  • Miscellaneous income

Taxpayers are classified into three main classes that depends on their personal situation:

  • Class 1: Single individuals without children
  • Class 1a: Individuals aged > 65
  • Class 2: Married couples and for individuals having a partnership contract (joint taxation)

Tax is calculated with a progressive rate table, ranging from 0% to 42% depending on income. A solidarity surcharge of 7% of income tax is added to income tax, which increases to 9% for tax class 1 and tax class 1a earning more than € 150,000 and for tax class 2 taxpayers earning more than € 300,000.

Example for the class 1 taxpayers:

From (€)To (€)Tax rate on income in bracket
011,2650%
11,26613,1388%
13,13915,0119%
15,01216,88410%
16,88518,75711%
18,75820,63012%
20,63122,50314%
22,50424,44816%
24,44926,39318%
26,39428,33820%
28,33930,28322%
30,28432,22824%
32,22934,17326%
34,17436,11828%
36,11938,06330%
38,06440,00832%
40,00941,95334%
41,95443,89836%
43,89945,84338%
45,84499,94939%
99,950149,94840%
149,949200,00341%
200,004-----42%

Deductions are possible for, for example, job-related expenses, commuting allowances, insurance premiums, and loan interest.

Social Security Contributions

In Luxembourg, social security contributions are payable by employers and employees. They are divided into five types of fund:

  • Health insurance
  • Old-age pension insurance
  • Long-term care insurance
  • Accident insurance
  • Employers’ mutual insurance fund

There are different rates that are applicable depending on the type of fund and the employment status.

See an example the rates in 2018:

Type of fundEmployee rate (%)Employer rate (%)Self-employed rate (%)
Health insurance3.053.056.10
Old-age pension8.008.0016.00
Long-term care insurance1.400.001.40
Accident insurance0.000.900.90
Occupation health insurance0.000.110.00
Employers' mutual insurance fund00.46 – 2.950.46 - 2.95
Total12.4512.52 – 15.0124.86 - 27.35


See also

References

  • "Taxation". Guichet.lu. Retrieved 2023-04-18.
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