LUXEMBOURG
INDEX
Tax Tip 1: Introduction and Deadlines
Tax Tip 2: Completion of Tax Return
Tax Tip 3: Notion of residence and Tax Implications
Tax Tip 4: Income - Salary
Tax Tip 5: Income - Salary Earned Abroad
Tax Tip 6: Income - Redundancy Payment
Tax Tip 7: Income - Pension
Tax Tip 8: Income - Commercial Profit / Liberal Profession
Tax Tip 9: Income - Investment Income
Tax Tip 10: Income - Capital Gains
Tax Tip 11: Income - Real Estate - Capital Gain
Tax Tip 12: Income - Real Estate - Rental Income
Tax Tip 13: Real Estate - Building VAT
Tax Tip 14: Tax Deduction - Insurance
Tax Tip 15: Tax Deduction - Pension Insurance
Tax Tip 16: Tax Deduction - Building Society
Tax Tip 17: Tax Deduction - Interest
Tax Tip 18: Tax Deduction - Maintenance Payments
Tax Tip 19: Tax Deduction - Cleaner / Child Minder & Other Extraordinary Charges
Tax Tip 20: Claiming the Deductions
Tax Tip 21: Inheritance Tax
Tax Tip 22: AGN Tax Surveys
TAX TIP 2: COMPLETION OF TAX RETURN
Just because the taxman did not send you a blank tax return does not mean that you do not have to complete one. It is your legal obligation to submit a tax return if you exceed the following limits:
· If you are single and have total annual salaried income of more than €100,000 or you are married but only one spouse is working
· If you are married and your family is earning more than one salary and your taxable income is more than €36,000
· If you are self-employed or have any other income on which there is no withholding tax and which exceeds €600
· If you have a mortgage interest claim.
In all these cases you must submit a tax return.
If you have arrived or are leaving
Luxembourg during the year and have allowable expenses to deduct, you can submit
a tax equalization form.
If you are not sure which category you fall into contact
us so that we can do a calculation for you.
TAX TIP 1: INTRODUCTION AND DEADLINES
Your annual tax return should be handed in by 31 March of each year.
If you are late
the tax office can charge you an extra 10% of the tax you owe.
If you do not know
what supporting documents you need contact us to get your documents checklist.
TAX TIP 3: NOTION OF RESIDENCE AND TAX IMPLICATIONS
If you live across the border and work in Luxembourg you still have to submit a tax
return in Luxembourg because this is where you earn.
If you earn more than 50% of
your family income in Luxembourg, your tax class is in accordance with your family
situation. If, in addition, you earn more than 90% of your income in Luxembourg
you are entitled to all the tax deductions.
If you only live in Luxembourg during
the week you are a non-resident. If you earn more than 90% of your family income
in Luxembourg you can claim all the same tax deductions. If you earn less than 50%
of your income in Luxembourg you will be treated as a single non-resident person
with limited deductions. Remember, the tax office will check.
If you have doubts
as to which category you are, and what is the most advantageous, contact us so that
we we can do a simulation for you.
TAX TIP 4: INCOME - SALARY
By February you should receive a certificate of remuneration from your employer.
This
certificate should contain all the information you require for your tax return. It
shows your fixed allowance for travelling between home and work and other entitlements.
In addition, you can also claim for the following expenses:
· Professional subscriptions
· Professional literature
· Courses
· Legal fees defending your employment and earning capacity
· Costs of moving to Luxembourg (if it can be considered as a professional expense)
If you need help in claiming any of these expenses, contact us and we will point you in the right direction.
TAX TIP 5: INCOME - SALARY EARNED ABROAD
If you have not been in Luxembourg all year you can choose between doing a tax return
only for the period you were here or for the whole year.
If you choose to declare
your foreign earnings you may be entitled to a tax reimbursement.
This means you also
have to declare the salary and any other income you earned abroad.
But don't worry,
the Luxembourg tax authorities will not ask you to pay tax again on the income you
earned abroad.
Do not forget that accepted languages are French and German; therefore
if necessary get a translator.
If you need any help or further advice, just contact us .
TAX TIP 8: INCOME - COMMERCIAL PROFIT / LIBERAL PROFESSION
If you are self-employed your tax and social security are calculated on your net
profit.
You must also:
· Request a trading permit
· Register for VAT
· Register for social security
· Maintain proper accounts
· Keep all invoices and receipts
We can ensure that you claim all the expenses to which you are entitled.
We can save
you taxes and social security, and take the time and hassle out of the paperwork.
TAX TIP 14: TAX DEDUCTION - INSURANCE
Insurance premiums you pay to a European Union insurance company are tax deductible
if the policy is:
- A life insurance policy that runs for at least 10 years.
- A third
party liability insurance on your house or car.
- Medical or any form of health insurance.
The
taxman allows you a deduction of €672 for each member of your family. So, if you
are married with two children you can deduct 4 times the of €672, ie. €2,688 and
your tax rebate could be €1,090.
We work with an insurance company that can provide
you with the relevant policies.
TAX TIP 15: TAX DEDUCTION - PENSION INSURANCE
Payments into an authorised personal pension scheme are tax deductible if the policy
runs for more than ten years.
You can deduct from €1,500 to €3,200 per annum depending
on your age when you subscribe for the policy. In addition, your spouse can deduct
the same amount for his or her own pension insurance.
If your employer has organised
a complimentary pension scheme you can also contribute personally and deduct up to
€1,200 personal contributions per annum. Your spouse can also deduct this amount.
We
work together with an insurance company that can provide you with the authorised
pension policy or help your employer to introduce a complimentary pension scheme
for their employees.
TAX TIP 16: TAX DEDUCTION - BUILDING SOCIETY
The amount you save in a Luxembourg building society, "Caisse d'Epargne Logement",
is deductible from your taxable income and they pay you up to 2% interest.
To be entitled
to a cheap loan you must have saved 50% of the amount you need. Then the building
society will give you a fixed interest loan at an interest rate of 3.75%.
If you want
to buy something before you have saved the 50% then the building society can organise
interim financing for you with a local bank.
If you want to withdraw the money before
10 years you can use the money for redecoration or renovation otherwise you need
to reimburse the tax benefits. After 10 years you can take out the money and use
it for any purpose.
You can deduct up to €672 for each member of your family. For
example, a married couple with two children can deduct €2,688 and get a tax rebate
of €1,090. That is a return of 40.56% in the first year. Where do you get that
in today's market?
We work together with a building society and can assist you in
opening an account and apply for a home loan.
TAX TIP 17: TAX DEDUCTION - INTEREST
Interest that you pay to anybody on any type of loan, credit or overdraft is tax
deductible.
You can deduct the interest you pay on a credit card, overdraft or personal
loan received from a bank, your parents, a relative or anyone who lends you money.
The
money can be used for any purpose.
All you have to do is include in you tax return
a certificate or letter from your bank, or whoever lends you money, stating the amount
of interest paid and the amount outstanding on your loan as at 31 December.
The maximum
amount you can deduct is €672 per family member. Therefore, a married person with
two children can deduct €2,688 and get tax relief at 40.56% giving you a tax rebate
of €1,090.
So the real cost of your loan is 59.44% of the interest rate you pay.
Mortgage
interest is treated differently.
If you buy a house that needs renovating before you
can move in then the mortgage interest you pay is deductible without limit. You
can also deduct other expenses such as bank commissions or notary fees paid in relation
to the mortgage.
From the day you move in the amount of mortgage interest you can
deduct is limited and the other expenses such as bank commissions or notary fees
paid in relation to the mortgage are not deductible. The mortgage interest limit
for the first five years is €1,500 per family member.
TAX TIP 18: TAX DEDUCTION - MAINTENANCE PAYMENTS
If you are divorced and your children do not live with you the maintenance payments
you make are tax deductible.
For the children you can deduct up to a maximum of €3,480
per child per year.
For the ex-spouse the limit is €21,600 per year.
Evidence of payment
must be provided to the tax office.
In addition, if your divorce was granted before
1 January 1998, a joint request for the deduction should be signed with your ex-spouse
and must be attached. The deduction will only be allowed if your ex-spouse declares
the maintenance received as income in his or her own tax return.
TAX TIP 19: TAX DEDUCTION - CLEANER / CHILD MINDER & OTHER CHARGES
If you have a cleaner or a child minder, or use a crèche, the costs might be deductible.
The
standard deduction is €3,600 per year. However, of your cost is higher this can
be increased depending on your level of income.
These are extraordinary charges and
are tax deductible if they are effectively extraordinary. Firstly, they must exceed
a certain percentage of your income and the expenses must be considered as unusual
and unavoidable.
Examples of extraordinary expenses are: unusual medical expenses
not reimbursed by medical insurance; parent or family financial support; funeral
expenses; expenses in relation to a lawsuit if you were innocent; divorce expenses. The
tax office decides what is extraordinary or not.
It is important how you word your
claim and the evidence you provide. We can improve your chances to get the deduction.
TAX TIP 20: CLAIMING THE DEDUCTIONS
If you prefer a tax rebate now instead of a tax reimbursement later, we can help
you fill in the claim forms to get them added to your tax card.
The tax card arrives
from your commune after you have filled in the annual census in October each year.
It
gives you the amount of travel expenses you are allowed between work and home and
your tax code showing whether you are single, married, divorced or separated.
If you
fill in the correct forms the tax office will add your deductible expenses onto your
card.
The information on your tax card will affect the monthly tax deductions from
your salary.
Be aware, if the employer does not receive your tax card, he is supposed
to charge you the maximum amount of tax at 33%.
TAX TIP 21: INHERITANCE TAX
Inheritance tax, in general, is due in the country where the deceased was resident
at the time of death and where the deceased is to be buried.
Inheritance tax is paid
in the country where the house or land is situated.
It is important that you have
written a will either privately or through a Luxembourg notary to ensure that your
estate is divided up amongst your heirs as you wish. Otherwise the court could cause
a significant delay in distributing your assets.
In Luxembourg, no inheritance tax
is due if the deceased left surviving spouse and children. The surviving spouse
and each of the dependents should inherit an equal part of the estate of the deceased.
If
the surviving spouse chooses to keep the use of the family home and furniture she
renounces her part of the other assets.
If the surviving spouse is not the parent
of the deceased's children then inheritance tax is due.
The base tax rate for a spouse
without surviving children is 5% and 6% between brothers and sisters. The rate varies
from 5% to 15% if the heirs are not related to the deceased.
For example, on the inheritance
of €300,000 a spouse with surviving children will not pay any tax, a spouse with
no surviving children would pay €21,695, a brother or sister would pay €31,050 and
a third party would pay €77,625.
Inheritance tax can be avoided or reduced by writing
a will and creating a holding company and/or discretionary trust, or setting up a
marriage settlement contract. We can help you on all of this.
TAX TIP 7: INCOME - PENSION
If you have retired you should receive a certificate of remuneration every year. You
need this to fill in your tax return.
If you also receive a complementary company
pension and your employer has deducted tax at source then the pension payments you
receive from the employer's scheme are tax free.
If you left the company before retirement
and you cashed in your company pension scheme, you may be subject to tax. However,
this can also be tax free. This needs to be checked out on a case-by-case basis.
If
you invested in a private pension scheme and have reached the age of 60 or 65, a
lump sum payment is taxed at a maximum of 20.28%. On monthly payments 50% of it
is tax exempt.
TAX TIP 9: INCOME - INVESTMENT INCOME
Interest from bank deposits or bonds, or interest from lending money to a friend
or family, dividends earned on shares must all be declared.
Since 2006, interest earned
on Luxembourg bank accounts do not need to be declared if your Luxembourg bank has
withheld tax at source. For Luxembourg residents the tax rate is 10%.
However, you
still have to declare interest earned on foreign bank accounts.
If you are a Luxembourg
resident and have deposits in any of the other 27 European countries, except Austria
and Belgium, the banks are obliged to inform your tax office of the amount of interest
you have earned. Austria, Belgium, Switzerland and the Channel Islands deduct tax
at source of 35% and pay it over to the Luxembourg authorities. This does not mean
you do not have to declare it.
Luxembourg has also abolished wealth tax for Luxembourg
residents. This means that you do not have to tell anyone how much money you have.
In order to avoid paying tax at the marginal rate on your European source interest,
you can also submit a separate tax declaration by 31 March and pay 10% as on your
Luxembourg interest income.
Only 50% of the gross dividends received from European
companies are taxable. If the paying bank or company has withheld some tax at source
you will get a tax credit.
The first €1,500 (€3,000 if you are married) of investment
income is tax free.
Finally, you can deduct all bank charges, dealers' commissions
and interest on borrowings to invest, or a standard deduction per annum of €25 or
€50 if you are married.
With all these rules on tax at source it is important that
you plan and structure your savings properly. There are ways of minimizing taxes
on savings and investments.
TAX TIP 10: INCOME - CAPITAL GAINS
If you own less then 10% of the total share capital of a company and you have held
these shares for more than six months, any capital gain you make is tax-free.
However,
you cannot deduct any loss you make.
If you own more than 10% of the total share capital
of a company, any capital gain made is taxable at a maximum rate of 20.28%.
Finally,
if you buy and sell any amount of shares within a six month period, the capital gain
you make is fully taxable. However, losses can be off-set.
There is also a tax-free
allowance of €50,000 for a single person and €100,000 for a married couple against
capital gains made on shares held for more than 6 months.
TAX TIP 11: INCOME - REAL ESTATE - CAPITAL GAIN
If you own a house in Luxembourg and it is your principal private residence and you
decide to sell it, there is no tax on any gain you make. This is valid for two years
after you have moved out, to give you time to sell (as long as you do not rent it
out during this period). After this period any gain will be taxed.
The tax authorities
must be informed.
Any other properties you have in Luxembourg, which you have owned
for more than 2 years, the gain is taxable with a maximum tax rate of 20.28%.
Any
gains made on property sales within two years is taxed at rates up to 40.56%.
If you
owned a property for more than two years, a tax-free allowance is granted of €50,000
for a single person and €100,000 for a married couple.
In addition, a house inherited
from your parents gets another tax-free allowance of €75,000
TAX TIP 12: INCOME - REAL ESTATE - RENTAL INCOME
If you own a piece of land or a house in Luxembourg which you rent out, you will
pay tax on the profit made.
The profit is the difference between the rent received
and the costs. The costs can include depreciation, mortgage interest, agent's fees,
property taxes and repairs and maintenance.
Depreciation is a percentage of the purchase
price of your property and the rates are between 1.5% and 6% during the first five
years.
Capital gains made and rental income earned on property owned in other countries
are taxed in that country, except in the UK where capital gains made by non UK residents
on the sale of UK based real estate is not taxed.
Any profit or loss made on rentals
must be shown in your tax return in Luxembourg.
TAX TIP 13: REAL ESTATE - BUILDING VAT
Did you know that when buying a new house, or renovating an older property, you can
recover 80% of the VAT?
Most renovation work is eligible for a VAT reduction but not
all.
You can request companies carrying out the work to apply a lower VAT rate to
their invoices. To do this they must apply to the VAT office who must answer within
six months of application. Otherwise, you can apply to reclaim the VAT.
TAX TIP 22: AGN TAX SURVEYS
We are the Luxembourg member of AGN international, an association of independent
accounting and consulting forms with members in 86 countries. AGN conducts tax surveys
covering Personal Income Tax, Company Tax, Inheritance Tax, VAT and the use of Parent
Companies.
The surveys show the amount of income that is left in the pockets of an
employee or shareholder of a company after all taxes have been paid and attempts
to rank the European countries in order od the most money in the pockets of the employee
or shareholder.
For the Personal Income Tax survey we use the example of a married
person with two children who has a company car and a mortgage. The country that
leaves most net salary in the pocket of such an employee is Russia. Luxembourg ranks
7th from a list of 21 countries, with Switzerland in 5th place and France in 6th. Germany
is in 10th place, the UK 15th, Holland 18th and Sweden, Finland and Slovenia making
up the last three. If you look at what an employee costs an employer you find that
employers' charges are highest in France at over 40% followed closely by Sweden. Luxembourg
employers' costs are around 13% of the gross salary.
In the Company Tax survey we
use the example of a manufacturing company with a predefined balance sheet and profit
and loss account. We establish how much in dividend will be paid out by the company
to a non-resident, non-European Union shareholder. The highest dividend after corporate
tax and dividend withholding tax is paid is in Malta, then comes Cyprus and in third
place is Greece. Luxembourg is in 11th place, the UK 6th, Holland 8th, Switzerland
17th and last is Germany.
The Inheritance Tax survey is based on a deceased person
leaving a spouse with surviving children. His estate consists of a house, some cash
and some shares. In 11 countries in Europe (including Luxembourg and Switzerland,
but not the UK) there is no inheritance tax to pay if you leave your assets to your
spouse and children. The highest inheritance tact is paid in Greece. Three countries
(not including Luxembourg or the UK) charge no inheritance tax on houses and four
(not including Luxembourg or the UK) charge no inheritance tax on cash and shares.
The
VAT survey shows that the lowest VAT rates are charged in Cyprus and Luxembourg at
15% and the highest are in Denmark and Sweden who charge 25%. Also, the VAT registration
limits vary greatly amongst the European countries.
Tax Tip 6: Income - Redundancy Payment
If you have been made redundant for economic reasons an amount of €21,090.72 (12
x minimum social salary) of the redundancy settlement is tax exempt. If your indemnity
is more, some of it will be taxed at a lower rate as extraordinary income.
If your
employer requested an advance agreement from the tax office and therefore deducted
the right amount of tax, great! If not, you could be entitled to tax reimbursement. To
claim this you have to do a tax return.
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