Law introducing long awaited 2017 tax reform enacted on 23 December 2016
After a very intense debate, the law on the 2017 tax reform (the "Law") was adopted on 14 December 2016 by a rather slim majority of the Luxembourg Parliament. Subsequently, on 23 December 2016, the Council of State provided its exemption of the second vote in order to enable the Grand Duke to sign the Law before it got published on 27 December 2016. A profound and fundamental tax reform in 2017 was already announced a couple of years ago when the new government was installed. According to the decision makers, the tax reform is necessary to enhance social equity and strengthen employment without jeopardizing the competitiveness of Luxembourg as a main centre of finance. Some of the firstly announced measures were very promising but unfortunately did not all make their way, others have evolved over the years and new initiatives were introduced.
The below first outlines the most remarkable changes in the field of direct taxation for corporate and individual taxpayers, followed by changes from an indirect tax perspective. Finally, some important compliance and procedural innovations are highlighted.
Most of the new legal provisions will enter into force from 1 January 2017, with some exceptions to certain measures that will apply already in fiscal year 2016 and others only as of fiscal year 2018.
Direct Tax Measures for Corporate Taxpayers
Decrease corporate income tax (CIT) rate
The CIT rate will decrease from 21% to 19% (18% as from 2018) for companies with an annual taxable income above € 30,000. If established in Luxembourg-City (municipal business tax rate of 6.75%), the company's profits will be subject to an aggregate income tax rate of 27.08% (26.01% in 2018), including the solidarity surcharge on CIT of 7%.
Companies with an annual taxable Income of less than € 25,000 will benefit from a decreased CIT rate of 15%, resulting in an aggregate income tax rate of 22.80% if established in Luxembourg-City. For companies realizing an annual taxable income between € 25,000 and € 30,000, the CIT will be equal to € 3,750 plus 39% (33% as from 2018) on the portion of income exceeding € 25,000.
Limitation of tax losses carry forward in time
Although initially announced to be limited also in quantity, tax losses incurred as of 2017 will be available for carry forward during a maximum period of 17 years only. Previously accumulated tax losses will therefore continue to be indefinitely available for utilization, it being understood that the oldest tax losses need to be utilized first.
Changes to the rules governing the net wealth tax (NWT)
The minimum NWT for Soparfis (companies having total gross assets consisting of more than 90% of financial assets) will be increased to € 4,815 per annum as of 2017.
The Law further clarifies that the so-called NWT reserve (aiming to reduce the NWT liability up to the amount of CIT due for the preceding year) will be deemed to be kept for five years in case it is transferred into another entity further to a merger or migration of the company.
Increase of investment tax credits
The global investment tax credit will be increased from 7% to 8% whereas the additional investment tax credit will increase from 12% to 13%. The existing investment tax credit of 2% for investments exceeding € 150,000 will remain unchanged. Moreover, the tax credit for investment in assets falling under the special depreciation regime will increase from 8% to 9% whilst the investment tax credit of 4% for assets beyond € 150,000 will also remain unchanged.
Moreover the scope of qualifying investments has been formally extended to investments made anywhere in the European Economic Area.
Extension of tax deferral regime for currency gains or losses
The temporary currency exchange gains neutralization regime which existed so far only for certain entities (financial institutions, (re-)insurance companies, professional custodians) will be available to any other company having a share capital in a foreign currency. The latter may apply retroactively as of 1 January 2016 and will be subject to a written request.
Deferral of deduction of deprecations
Companies will be able to defer the deduction of an annual depreciation amount with respect to an asset provided the deduction occurs before the end of the useful period of the relevant asset. The measure, which results in a higher CIT liability, may enable a company to benefit from a (higher) NWT reduction through the constitution of a NWT reserve or from tax investment credits, which could otherwise have been denied should the company have ended up in a loss position.
Direct Tax Measures for individual taxpayers
Increase of withholding tax on savings income derived by Luxembourg residents
The final withholding tax of 10% has been increased to 20%.
Abolishment temporary budget balancing tax
The Law abolishes the temporary budget balancing tax of 0.5% levied on gross professional income.
Introduction of new tax brackets
New tax brackets of 41% and 42% have been introduced for income exceeding € 150,000 respectively € 200,004. The tax free minimum amount is up to € 11,265.
Separate or joint taxation for married couples
Resident and non-resident married couples can opt to file separate or joint tax returns (as from tax year 2018 only).
Indirect Taxes Measures
Abolishment of the 0.24% registration duty
The 0.24% ad valorem registration duty that applied upon the registration of agreements evidencing the existence of a debt claim (loan agreements, assignment of receivables, etc.) concluded under private seal has been removed following the so-called "théorie de l'usage". According to the latter, the registration duty is only due in case the deed should mandatorily be registered.
Personal and joint liability of managers of Luxembourg VAT taxable persons
Delegated administrators and directors of Luxembourg VAT-taxable persons, including de jure or de facto directors or managers charged with the daily management of such persons, will be jointly and personally liable for the VAT due by the taxpayer in case the VAT obligations of the latter have not been complied with. The Luxembourg VAT administration will be entitled to issue a call in guarantee decision (appel en garantie). Initially the list of personal and jointly liable persons also included successors, liquidators, and curators, but they have finally been removed.
Electronic filing of corporate tax returns
The electronic filing of direct tax returns will be mandatory for companies as of 2017.
Penalties for direct tax compliance (corporate and individuals)
The filing of incomplete or incorrect tax returns as well as the non-filing of tax returns, will be subject to administrative fines that may vary between 5% and 25% of the amount of evaded or wrongfully reimbursed tax.
Moreover late filing penalties are up to a maximum amount of € 25,000 and can be imposed every three months.
Penalties in the field of VAT compliance and payment obligations
The fines applicable to the breach of VAT compliance rules as well as the to the absence or delay of providing documents and/or information to the VAT administration, will be increased. In case the aim of breaching the VAT compliance rules or the VAT payment obligations is to evade the payment of VAT or to recover VAT in an irregular manner, the penalty may be up to 50% of the VAT avoided or improperly reclaimed.
Following the enactment of the Law, three forms of tax fraud will exist in the area of both direct and indirect tax (incl. inheritance tax):
- Simple tax fraud;
- Aggravated tax fraud when the amount of tax evaded is substantial; and
- Tax swindle (escroquerie fiscal)
Whereas simple tax fraud is subject to administrative sanctions to be imposed by the tax authorities, the other two offences are criminally prosecuted. Moreover, the offense of money laundering will be extended to criminal tax offenses (2 and 3 above). The latter will therefore become primary offenses as meant by article 506-1 of the Luxembourg Criminal Code. As a result, committing such offences may be penalized by imprisonment and substantial fines which amount to minimum € 25,000 and may be up to 10 times the tax avoided.
The above will apply to offences committed after 1 January 2017 due to the principle of non-retroactivity of the criminal law.