US Tax Advice for US Expatriate Living and Working in Luxembourg.
Tax Guide for US Expats Living and Working in Luxembourg
Who Is Liable For Income Taxes in Luxembourg
Residents of Luxembourg are subject to tax on their worldwide income. Nonresidents are subject to tax on their Luxembourg-source income only.
Individuals are considered resident if their accommodation indicates that they do not intend to reside only temporarily in Luxembourg or if they spend more than six months in Luxembourg
Married individuals are jointly taxable. Under certain conditions, registered partners are entitled to claim joint taxation through the filing of a joint income tax return.
Income subject to tax. Luxembourg income tax law distinguishes among several categories of income, including income from employment, self-employment, trade and business, and agriculture.
Employment income. Resident and nonresident employees are subject to income tax on remuneration received from employment. Employment income includes wages, salaries, bonuses, employer-provided pension contributions and all other compensation for services rendered. Wage tax is withheld at source.
Self-employment and business income. Individuals who act independently in their own name and at their own risk are taxed on income derived from self-employment or business activities.
Nonresidents are taxable only to the extent they operate through either a permanent establishment or a fixed place of activity located in Luxembourg.
In general, taxable income includes all income and capital gains attributable to self-employment or business activities, at the rates.
Investment income. Dividends received by a resident taxpayer from a resident or nonresident company are generally subject to personal income tax. A 50% exemption is granted for dividends received from the following:
- A taxable resident company
- A taxable European Union (EU) resident company
- A taxable company resident in a country that has entered into a double tax treaty with Luxembourg
A 15% tax is withheld by a Luxembourg distributing company and can be offset against Luxembourg tax or refunded under certain circumstances. Only 50% of the expenses related to such dividends is deductible.
Under the EU Savings Directive (2003/48/EC) and the Luxembourg law implementing the directive, Luxembourg paying agents are required to withhold tax on interest paid to beneficial owners (individuals or residual entities residing in other EU member states as well as in some non-EU countries), unless these individuals choose exchange of information or provide the paying agent with a certificate issued by the tax authorities of their home country. The withholding tax rate is 15%, effective from 1 July 2005, 20%, effective from 1 July 2008, and 35%, effective from 1 July 2011.
A final withholding tax of 10% is imposed on interest income paid by a paying agent established in Luxembourg to beneficial owners resident in Luxembourg. Interest income subject to this final withholding tax is no longer required to be reported into the annual tax return. The 10% tax applies to income accrued since 1 July 2005, but paid after 1 January 2006. The withholding tax is not considered a final withholding tax if the income derives from business assets (assets used in self-employment or business activities) of the investor rather than from private assets. The definition of interest payment subject to a final withholding tax is the same as the definition contained in Article 6 of the law implementing the EU Savings Directive with certain exclusions (for example, dividends or capital gains derived from investment funds). In addition, the law provides that for certain savings deposits, interest under a threshold of €250 per person per paying agent is not taxable.
Individuals resident in Luxembourg may opt for a final tax of 10% on eligible interest income received after 31 December 2007 from paying agents located in the following jurisdictions:
- EU member states
- European Economic Area (EEA) states
- Jurisdictions that have entered into an agreement with Luxembourg that includes measures equivalent to those of the EU Savings Directive (2003/48/EC) (that is, dependent and associated territories and third countries)
The option for a final withholding tax of 10% applies to the same eligible interest income (deriving from private assets only) as defined by Luxembourg law (see above). The annual tax-free ceiling of €250 per individual and per paying agent also applies to eligible interest income paid outside Luxembourg. The option for a final withholding tax of 10% is requested through a specific form that must be filed before 31 March of the year following the year of payment.
If the taxpayer is a Luxembourg resident, income excluded from the 10% final withholding tax must be reported in the annual tax return and is taxed at the progressive rates.
A lump-sum deduction of €25 is granted for expenses related to both dividend and interest income (excluded from the 10% final withholding tax), unless actual expenses are higher. This lump-sum deduction is €50 for spouses/partners subject to joint taxation. In addition, both dividend and interest income (excluded from the 10% final withholding tax) are exempt up to €1,500 (the exemption is doubled for spouses/partners jointly taxable). Expense deductions may not create a loss that could be offset against other sources of income, except in certain limited cases.
Royalties and income from the rental of real estate are aggregated with other income and taxed at the rates set forth in Rates.
Nonresidents are subject to the 15% withholding tax on dividends received from Luxembourg companies. However, if an applicable double tax treaty provides a lower tax rate, nonresidents can claim a refund of the excess tax withheld. Most of the double tax treaties entered into by Luxembourg provide for a maximum tax rate of 15% on gross dividends.
Nonresidents are not subject to withholding tax on royalties.
Directors’ fees. Payments to managing directors of Luxembourg companies for day-to-day management are considered to be employment income and are taxed at the rates. Otherwise directors’ fees are subject to withholding tax at a rate of 20%. If a nonresident director’s only income in Luxembourg amounts to a gross fee of less than €100,000 per year, the 20% withholding tax is a final tax and an individual income tax return does not need to be filed. However, the nonresident director may file a tax return at his or her discretion. Individuals who are required to or elect to file an income tax return may credit the 20% withholding tax against their Luxembourg tax liability. If the company bears the tax on directors’ fees, then the tax rate applicable to the net fees is 25%.
Special tax regime for expatriate highly skilled employees. A beneficial income tax regime has been introduced for expatriate highly skilled employees. This regime provides tax relief for certain costs linked to expatriation and is subject to several conditions. The tax regime, which entered into force on 1 January 2011, applies to employees who are sent to work temporarily in Luxembourg on an assignment between intragroup entities. It also applies to employees who are directly recruited abroad by a Luxembourg company to work temporarily in Luxembourg.
Under certain conditions, various costs directly related to the expatriation are not considered taxable employment income. Under the special tax regime, the following expatriate benefits and allowances are not taxable.
- Moving costs (transportation of goods, transfer travel expenses, furnishing costs and similar expenses).
- Costs related to housing in Luxembourg and expatriation (rent and utilities if the former accommodation is maintained in the home country or the housing differential if the former accommodation is not maintained), one home-leave trip and tax-equalization costs. However, these costs are limited to €50,000 per year (€80,000 for married couples or partners sharing accommodation) or 30% of the fixed total annual remuneration, whichever is less.
- School fees for children in primary and secondary education.
- Cost-of-living allowance and miscellaneous expenses (not specifically provided for) linked to the expatriation. However, these costs are limited to €1,500 per month or 8% of the fixed monthly remuneration (€3,000 and 16%, respectively, for married couples or partners sharing accommodation provided that they are not performing a professional activity), whichever is less.
The tax regime applies for the duration of the assignment with a maximum of five years. To benefit from the tax regime, the Luxembourg company must file a written motivated application with the competent tax office within two months after the start of the expatriate’s employment. The employer must present the professional qualifications and fulfill conditions by precise and consistent evidence. In addition, the company must operate a Luxembourg payroll and withhold tax on salaries for each eligible employee.
Taxation of employer-provided stock options. If a stock option is freely tradable or transferable, the employee is taxed on the date the option is granted. If the option is not tradable or transferable, the employee is taxed on the date the option is exercised. The taxable benefit is subject to income tax and to social security contributions by both the employer and the employee.
Capital gains
Movable property. Substantial shareholdings (more than 10%) in resident or nonresident corporations are fully subject to tax on capital gains in the hands of resident taxpayers. However, half of the average tax rate (a maximum rate of either 20.28% or 20.67% and an additional temporary crisis contribution of 0.8%) and tax relief of €50,000 (€100,000 for spouses or partners jointly taxable) apply to capital gains if substantial shareholders sell the shares after a six-month holding period. For the disposal of substantial shareholdings, an adjustment for inflation applies to the acquisition price. Capital gains on non-substantial shareholdings (10% or less) and other securities, such as shares in investment funds, are tax-free only if they are realized more than six months after acquisition. Otherwise, the gains are fully taxable at the rates.
Capital gains derived from the disposal of substantial shareholdings in corporations are taxable in the hands of a nonresident taxpayer if either of the following applies:
- The taxpayer was previously resident in Luxembourg for more than 15 years and became nonresident less than 5 years before the disposal.
- The taxpayer sold his or her shares in Luxembourg companies within six months following the acquisition.
The above rules regarding nonresidents do not apply if an applicable tax treaty does not give Luxembourg the right to tax the gains.
Real estate. Capital gains on sales of privately owned buildings and land realized within two years after purchase are taxable as ordinary income. Gains on real estate sold more than two years after purchase are taxable after adjustment for inflation and application of a standard exemption of €50,000. This allowance is €100,000 for spouses/partners subject to joint taxation. The exemption is renewed every 10 years (for example, if the exemption is completely used up in one year, the individual must wait 10 years to claim another exemption). In addition, the capital gain is taxed at half of the normal rate (a maximum rate of either 20.28% or 20.67% and an additional temporary crisis contribution of 0.8%). An additional allowance of €75,000 for each spouse/partner is available for the sale of a home inherited by a direct descendant that was the principal residence of the taxpayer’s parents or spouse.
Under certain conditions, gains on the sale of privately owned real estate may be deferred for tax purposes if the proceeds are reinvested in newly built leasehold properties located in Luxembourg.
Gains derived from the sale of a principal residence are exempt from tax.
Nonresident taxpayers are taxed on capital gains derived from real estate located in Luxembourg in the same manner as residents.
Realized by a business. Capital gains derived from investments and from the disposal of real estate that forms part of the net asset value of a privately owned business are taxable.
Deductions
Deductible expenses. Non-reimbursed expenses incurred by an employee to create, protect or preserve employment income are generally deductible. A standard deduction of €540 for employment-related expenses is granted. The standard deduction is doubled for a married couple if both spouses earn employment income.
The following expenses are deductible for tax purposes:
- Alimony paid to a divorced spouse and other specified periodic payments
- Social security contributions levied on salary (however, care insurance is not deductible; see social security)
In addition, interest on loans contracted to purchase owner occupied housing is deductible up to a ceiling that decreases with the length of time the housing is occupied.
Rates. Tax rates are progressive with a maximum rate of either 40.56% or 41.34% for 2011 (4% or 6% unemployment fund contribution included) and an additional temporary crisis contribution of 0.8%. The marginal tax rate is 41.34% for income exceeding €150,000 for taxpayers in Tax Class 1 (single individuals) and Tax Class 1a (single, separated or divorced individuals with children) and €300,000 for taxpayers in Tax Class 2 (married couples or partners jointly taxable).
Effective from 1 January 2008, the tax classes for dependent children were abolished. This tax relief was replaced by a monthly tax bonus of €76.88 per child, which is paid by the Luxembourg Family Allowance Authority (Caisse Nationale des Prestations Familiales, or CNPF) for children qualifying for Luxembourg family allowances. However, the tax bonus is already included in the state financial aid granted to resident students in higher education. If the bonus is not paid by the CNPF or not included in the state financial aid, the tax relief needs to be requested through the filing of a tax return or refund application (décompte annuel).
Relief for losses. Business losses may be carried forward without limitation if accounts are kept in accordance with generally accepted accounting principles. Losses may not be carried back.
They may not be deducted by a successor except under certain circumstances.
Losses derived from investments in securities may only offset positive investment income, and not positive income from other categories. However, an exception to this rule may apply if the taxpayer holds a significant shareholding in a company and derives his or her main professional earnings from activities in that company.
B. Other taxes
Net worth tax. The wealth tax for resident and nonresident individuals was abolished, effective from 1 January 2006.
Inheritance and gift taxes. The tax base for inheritance tax is the market value at the time of death of the entire net estate inherited from a person domiciled in Luxembourg. Exemptions apply to real estate located abroad and, under certain conditions, to movable assets held outside Luxembourg. If the decedent was a nonresident at the time of his or her death, death tax is levied only on real estate located in Luxembourg. The inheritance tax rates range from 0% to 48%. The rate applicable to heirs in direct line (for example, a son or daughter, or grandson or granddaughter) is 0%. A 0% rate also applies to any inheritance between spouses or registered partners of more than three years with at least one common child. Death taxes are imposed on real estate located in Luxembourg that is left by a person who was not an inhabitant of Luxembourg, even a person in direct line, at rates that range from 2% to 48%. Gifts and donations that are required to be registered with the Administration de l’Enregistrement (and therefore subject to registration tax) are subject to gift tax. Gift tax is payable by the resident or nonresident donee on the gross market value of the assets received. The rates range from 1.8% to 14.4%, depending on the relationship between the donor and the donee. Gifts that are not required to be made in writing (for example, gifts of movable assets transferred by delivery [dons manuels]) are generally accepted without registration. However, such gifts may be subject to registration tax if another registered deed refers to them.
In addition, gifts made by the decedent within the year preceding his or her death are aggregated with the taxable asset base, unless they were subject to gift duties.
C. Social security
Contributions. Social security contributions apply to wages and salaries and must be withheld by the employer. These contributions cover old-age pension and health insurance. Only employers pay contributions for professional accident coverage.
Totalization agreements. As an EU member state, Luxembourg applies new EC Regulation No. 883/2004 on the coordination of social security systems as well as EEC Regulation No 1408/71. In addition, Luxembourg has entered into bilateral social security totalization agreements with the following jurisdictions.
Brazil
Macedonia
Turkey
Canada Quebec
United States
Cape Verde
Serbia
Yugoslavia
Chile
Montenegro (former)* Croatia
Tunisia
A bilateral social security totalization agreement with Morocco has not yet entered into force. A bilateral social security totalization agreement with India entered into force on 1 June 2011.
Tax treaties
Most of Luxembourg’s tax treaties provide double tax relief through the exemption-with-progression method. Interest, dividends and royalty income, however, are subject to tax credit rules. Luxembourg has entered into double tax treaties with the following countries.
Armenia
Ireland
Russian
Austria
Israel Federation
Azerbaijan
Italy
San Marino
Bahrain
Japan
Singapore
Belgium
Korea (South)
Slovak Republic
Brazil
Latvia
Slovenia
Bulgaria
Liechtenstein
South Africa
Canada
Lithuania
Spain
China
Malaysia
Sweden
Czech Republic
Malta
Switzerland
Denmark
Mauritius
Thailand
Estonia
Mexico
Trinidad and
Finland
Moldova
Tobago
France
Monaco
Tunisia
Georgia
Mongolia
Turkey
Germany
Morocco
United Arab Emirates
Greece
Netherlands
Hong Kong
Norway
United Kingdom
Hungary
Poland
United States
Iceland
Portugal
Uzbekistan
India
Qatar
Vietnam
Indonesia
Romania
Luxembourg has voted for the ratification of tax treaties with Argentina and Ukraine. These treaties will enter into force after the ratification process is completed by both parties to the treaties.
Luxembourg has signed tax treaties with Albania, Barbados, Kazakhstan, Kuwait and Panama, but these treaties have not yet been ratified.
Tax treaty negotiations with Cyprus, Kyrgyzstan, Lebanon, Macedonia, Montenegro, Pakistan, Serbia, Syria and Uruguay have been announced.
Residents deriving income in non-treaty countries are in principle entitled to a credit for foreign taxes paid, up to the amount of tax imposed by Luxembourg on the foreign-source income.
To learn more about the history, culture, economy and other information about Luxembourg
We have been preparing US income tax returns for US Citizens and permanent residents living in Luxembourg for over 15 years. As a US Citizen or permanent resident (green card holder) you are required to file a US return each year regardless of the fact that you file and pay taxes in your residence country. The expatriate earned income exemption ($100,800 for 2015) can only be claimed if you file a timely tax return. It is not automatic if you fail to file.
We have scores of clients located in Luxembourg and know how to integrate your US taxes into the local income taxes you pay. Any income tax you pay there can be claimed as a dollar for dollar credit against the tax on your US return on the same income.
As an expat living abroad you get an automatic extension to file until June 15th following the calendar year end. (You cannot file using the tax fiscal year for US tax purposes). You must pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.
There are other forms which must be filed if you have foreign bank or financial accounts; foreign investment company; or own 10% or more of a foreign corporation or foreign partnership. If you do not file these forms or file them late, the IRS can impose penalties of $10,000 or more per form. These penalties are due regardless of whether you owe income taxes or not.
There are certain times you may wish to make elections with respect to your Corporation or Investment Company which will give you US tax benefits. There are other situations where forming a US corporation to receive your business income may be more advantageous than using a corporation in your resident country. We can help you with these decisions.
If you are self-employed while working, you will have to pay US self-employment taxes (social security). If you are a bona-fide employee you do not have to worry about paying US social security on your wages earned in Luxembourg.
We have helped hundreds of expats around the world catch up because they have failed to file US returns for many years. Unfortunately, unlike India, Canada, UK, etc. you must also file so long as you are a US citizen or resident. You can if you follow proper IRS and State Department procedures surrender your US Citizenship and therefore cut off your obligation to pay US taxes in the future. You must surrender that Citizenship for non-tax avoidance reasons and then can usually not return to the US for more than 30 days per year for the subsequent ten years.
Let us help you with your US tax returns, US tax planning and other US tax and legal concerns. Download our expat tax questionnaire or request a request a consultation by phone, skype or email