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Tax modifications in Luxembourg


Mid-December 2017, the Luxembourg parliament approved Act 7200 relative to the 2018 budget. The 2018 budget voted by the Luxembourg parliament at the end of last year includes a series of tax measures, among them the extension of the investment tax credit to the acquisition of software/hybrid cars as well as the confirmation of the deductibility of certain expenses incurred by companies. It also provides for increased flexibility for tax non-residents.

Investment tax credit for the acquisition of software

The scope of tax credits for investments is extended to the acquisition of software. It’s important that the software is not purchased by a “connected unit” or developed internally but acquired from third parties. If a taxpayer decides to benefit from the new IP regime on the income  generated by such software, the investment tax credit cannot be claimed  for the acquisition of this software so that only one tax advantage could be claimed at a time.

The tax credit for software amounts to 8% of the total investment cost, up to €150,000 during a tax period, and 2% of the investments exceeding €150,000. Unlike the existing wider overall tax credit for investment, the tax credit for software may not exceed 10% of the tax due for the relevant tax year and atransfer to following years is not authorised.

Clean car tax credit

The supplementary incentives in favour of sustainable mobility include tax credit for investment for the acquisition of “clean” cars. Only the cars in the category “zero emission” (i.e. equipped with electric motors or powered by hydrogen) are concerned. The cars must be designed as vehicles used exclusively for the transport of passengers. The vehicle may not have more than nine seats (driver’s seat included) and must be registered after 31 December 2017.


Investment tax credit for the acquisition of software

The scope of tax credits for investments is extended to the acquisition of software. It’s important that the software is not purchased by a “connected unit” or developed internally but acquired from third parties. If a taxpayer decides to benefit from the new IP regime on the income  generated by such software, the investment tax credit cannot be claimed for the acquisition of this software so that only one tax advantage could be claimed at a time..

The tax credit for software amounts to 8% of the total investment cost, up to €150,000 during a tax period, and 2% of the investments exceeding €150,000. Unlike the existing wider overall tax credit for investment, the tax credit for software may not exceed 10% of the tax due for the relevant tax year and atransfer to following years is not authorised.

Clean car tax credit

The supplementary incentives in favour of sustainable mobility include tax credit for investment for the acquisition of “clean” cars. Only cars in the category “zero emission” (i.e. equipped with electric motors or powered by hydrogen) are concerned. The cars must be designed as vehicles used exclusively for the transport of passengers. The vehicle may not have more than nine seats (driver’s seat included) and must be registered after 31 December 2017.

Deductibility of operational costs for R&D activities and set-up costs

The rules on deductibility of costs incurred by companies or individual entrepreneurs are clarified to confirm deductibility of r R&D expenses  and the initial costs of start-up. More precisely, starting with tax year 2018, certain types of costs are automatically deductible (unless capitalised), such as creation and set-up costs, R&D costs and those linked to concessions, patents or licences.

Taxation of newly created corporate forms

The Luxembourg commercial law has recently been amended to foresee the creation of new types of companies: the Simplified Corporation (“SAS”) and the Simplified Private Limited Liability Company (“Sàrl-S”). They are both automatically considered as resident taxpayers and subject to Luxembourg corporate tax to the extent they have either their central administration or their statutory seats located in Luxembourg.

The municipal business tax law, the law on wealth tax and the valuation have been modified as well accordingly.

 

Cancellation of participation

A reorganisation of a company, such as an upstream merger, may lead to the cancellation by the shareholder of its investment into its subsidiary. The profit generated by the cancellation of such participation is subject to tax. This profit is determined by reference to the going concern of the shares held into the subsidiary at the time of the transaction. This profit realised by the shareholder on the cancellation of shares may however be exempt under the conditions of the Luxembourg participation exemption regime for dividends The new legislation clarifies though that there is no need to meet the 12 months minimum holding period but that the other conditions for the application of the Luxembourg

Married taxpayers and individual taxation

Resident and non-resident married taxpayers may opt for individual taxation of their revenue starting from tax year 2018. This measure is the result of a modification of the law dated December 2016.


The request for individual taxation must have been presented by both spouses at the latest by 31st March of the year following the tax year in question. As a general rule, the demand is irrevocable. It triggers the obligation for each spouse to submit a tax return, the taxation of revenue being calculated on the basis of tax class I. If the request was made before or during the tax year in question, the taxpayers can modify or cancel (exceptionally) the request before 31 March of the following year.

 

Foreign taxpayers

New measures have been put in place for married non-resident taxpayers since the beginning of the year 2018. Prior to that, the non-resident married taxpayers (mainly cross-border workers) could benefit from the tax class 2, on the condition that more than 50% of the professional revenue had been taxed in Luxembourg.

Starting with the tax year 2018, non-resident married taxpayers are automatically included in tax class 1. However, they may opt for the taxation of the global revenues of the household in Luxembourg (as a result, being considered as resident Luxembourg taxpayers), on the condition that at least 90% of the revenue of that year was generated in Luxembourg.

Other new measure: the establishment of a flexibility rule that fixes this limit of 90%. The revenue linked to the first 50 working days worked abroad (for which taxing rights are attributed to a foreign state based on relevant provision foreseen in double tax treaties) may for example be considered as taxable income in the Grand-Duchy of Luxembourg going forward.


The same system also applies to non-resident individual taxable persons. In order for a taxable person resident abroad to be taxed according to the same rules as a resident, he must either meet the 90% threshold or have earned less than EUR 13,000 in taxable income abroad.

Electronic tax card

The non-resident married taxpayers also now have possibility of being considered as tax residents going forward, even if the threshold of 90% has not been reached provided that the taxable income of the taxpayer in question generated abroad does not exceed €13,000. The same rule is applied to non-resident individual taxpayers. The individual taxpayer must as a result reach the threshold of 90% or have realised less than €13,000 of taxable income in a foreign country.