On 14 October 2020, the Luxembourg Government published the 2021 Budget bill n°7666 (the “2021 Budget”) which puts forth various tax measures. It notably focuses on increasing the taxation of the domestic real estate funds market and enlarging access to employees incentive plans while maintaining standard corporate tax and progressive income tax rates.
The salient measures of the 2021 Budget, which puts forth a range of tax measures, can be described as follows:
- The 2021 Budget replaces the favorable tax regime which currently exists in relation to stock option and warrant lump sum valuation (covered by the Circular letter 104/2 of November 29, 2017) by a new participating premium scheme. The latter entitles, within certain limits (5 percent of the employer’s profits from the prior year and 25 percent of the beneficiary’s gross annual remuneration), employers to deduct such expenses for tax purposes and employees to benefit from a 50 percent tax exemption. Similar to the current regime, employers will need to provide the Luxembourg tax authorities with information on the participating premium plans implemented.
- The 2021 Budget also aims to adapt the favorable ‘impatriates’ tax regime currently provided for in the Circular letter n°95/2 of January 27, 2014 while simplifying the conditions of access to this regime. The impatriates regime would now be open for nine years (instead of the current six-year term) and to all employees (without need for the specific knowledge for which the person would be hired) with a reference base salary of at least €50,000 per year (instead of €100,000) and to employers with less than 20 employees. Going forward, the main tax relief would consist of a lump sum cost of living allowance, 50 percent of which would be tax-exempt for the beneficiary. This allowance would, however, be limited to 20 percent of the annual base salary of the lump sum beneficiary.
- The 2021 Budget also proposes a 20 percent lump sum taxation of income and gain deriving from Luxembourg real estate investments held by specialized investment funds (SIFs), reserved alternative investment funds (RAIFs) and undertakings for collective investments part II funds, unless it is formed as a special limited partnership (SCSp), a mutual fund (FCP) or a limited partnership (SCS). This does not, however, impact Luxembourg funds which own real estate located abroad. Specific reporting obligations would apply no later than May 31 of the following calendar year for all relevant funds (including those that have converted their legal status at any time during 2020 or 2021 from a corporate form to one of the exempted forms listed above, while holding a Luxembourg real estate at that time). The reporting obligations apply irrespective of whether the relevant funds have a qualifying real estate income or gain to report. A fine of up to €10,000 may apply in case of failure to comply with these reporting obligations.
- For family asset management companies (sociétés de gestion de patrimoine familial), the 2021 Budget aims to specify that they are not permitted to hold real estate investments directly or indirectly via a tax-transparent entity or mutual fund. Such indirect investments are, however, still permissible via joint-stock companies.
- In the same vein, the 2021 Budget plans to significantly increase (more than double) the rate of registration duties applicable to the contribution of Luxembourg real estate to a company (from 1.1 percent to 3.4 percent and from 1.4 percent to 4.6 percent for real estate established in the City of Luxembourg). The objective of this change is to bring the tax treatment of share deals closer to that of asset deals.
- At the same time, the 2021 Budget reduces the accelerated depreciation rate and relevant period for income tax purposes on real estate investments generating rental income acquired (or whose construction is terminated) after January 1, 2021. The same reductions apply to costs incurred in renovating an old property to the extent that the investment costs exceed 20 percent of the acquisition price.
- In addition, the 2021 Budget encourages sustainable investments (as defined by EU Regulation 2020/852) performed by Luxembourg funds (covered by the law of December 17, 2010 relating to undertakings for collective investments Part I and II) by applying graduated reduced subscription tax rates ranging from 0.01 percent to 0.04 percent (compared to the standard rate of 0.05 percent). The 2021 Budget also introduces a CO2 tax.
- The 2021 Budget is also an opportunity for the government to align the fiscal unity regime to the latest CJUE ruling, dated May 14, 2020 (C-749/18), allowing for the conversion of a vertical fiscal unity group into a horizontal fiscal unity group without the need to dissolve the initial group prior to such conversion.
- As per the authorization granted by the EU Council in December 2019, the 2021 Budget increases the threshold under which small enterprises are exempt from VAT registration to an annual turnover of €35,000. Last but not least, the 2021 Budget further proposes an extension of the super-reduced VAT rate (three percent) to renovation of properties which are at least 10 years-old (instead of 20 years-old).
Once voted on, and subject to any amendment of the bill, all the above should be applicable with effect as from January 1, 2021.