This brief report provides a summary of the most recent Luxembourg tax developments that currently affect and will be affecting real estate practitioners throughout 2017.
Tax reform proposal 2017 – abolition of lease registration requirement
On 26 July 2016, the Luxembourg government presented to Parliament bill of law n°7020 to implement the 2017 tax reform previously announced in February 2016. Once enacted into law, it will amend two laws in order to abolish the mandatory requirement to register leases, subleases and subrogation of leases. These include the amended law of 13 June 1984 on the review of certain legal provisions on registration, succession and stamp fees, as well as the amended law of 23 December 1913 on the revision of the law on taxes levied by the Luxembourg Registration and Estates Department (Administration de l'Enregistrement et des Domaines).
Although there is a legal requirement to register leases (and subleases) within three months of their signature date, over the past few decades, the registration procedure has sometimes been omitted. Consequently, the government aims to abolish this mandatory requirement. Voluntary registration of leases will, however, still be possible for those who wish to assign a defined record date to a lease.
The abolition of this requirement may put an end to the long and fierce discussions that sometimes arise between sellers and buyers in the case of asset deals.
Sale of immovable property – extraordinary taxation on capital gains
The law dated 29 June 2016 provides that, from 1 July 2016 until 31 December 2017 (i.e. a period of 18 months), the net revenue deriving from the sale of immovable property, which solely occurs two years after its initial acquisition or creation and held in the context of the taxpayer's private wealth management (natural person), shall be considered as extraordinary taxable income in accordance with article 131, 1st paragraph, letter d) of the law on Income Tax.
Capital gains realized on the sale will then be taxed at a reduced rate of 12.8%, which is a quarter of the global rate applicable to natural persons with a taxable base over EUR 150,000 in tax class 1 (EUR 300,000 in tax class 2) in 2016:
[(40% x 1.09) ÷ 4] + 1.4%¹ + 0.5%² = 12.8%
¹ "Contribution dépendance"
² "impôt d'équilibrage"
As of 1 January 2017, if the announced creation of the new income tax scales of 41% (over EUR 150,000 in tax class 1) and 42% (over EUR 200,000 in tax class 2) and the abolition of the impôt d'équilibrage of 0.5% are voted in, the quarter of the maximum global rate would amount to 12.845% for a taxable base over EUR 200,000 in tax class 1 (over 400,000 in tax class 2).
These temporary measures aim to encourage the placement of land and housing on the market. They will be limited to transactions carried out on privately held, built or to be built, immovable property. Taxpayers seeking to benefit from this extraordinary tax regime must ensure that their contemplated transactions meet the requirements defined by the law.
Localization of real estate services and VAT
As from 1 January 2017, the latest provisions of the EU Regulation CE n°1042/2013 shall enter into force. These provisions clarify the notions of "immovable property" and "supply of services connected with immovable property" to ensure their common interpretation and treatment within the European Union.
According to article 47 of the EU Directive 206/112, the supply of services connected with immovable property is deemed to be localized at the location of the immovable property. This is an exception to the general principal of localization of supply of services. However, the lack of definition of these two key notions resulted in numerous disputes triggering differences of application incompatible with the proper functioning of the common market.
In order to solve this issue, the Regulation now provides that the notion of immovable property encompasses not only "any specific part of the earth, on or below its surface, over which title and possession can be created; any building or construction fixed to or in the ground [...] which cannot be easily dismantled or moved" but also "any item that has been installed and makes up an integral part of a building or construction without which the building or construction is incomplete such as doors, windows, roofs, staircases and lifts;" and "any item, equipment or machine permanently installed in a building or construction which cannot be moved without destroying or altering the building or construction." In addition, the notion of supply of services connected with immovable property is defined as concerning the services presenting a sufficiently direct connection with the said property, which is in particular the case "where they are derived from an immovable property and that property makes up a constituent element of the service and is central to, and essential for, the services supplied;" and "where they are provided to, or directed towards, an immovable property, having as their object, the legal or physical alteration of that property."
In practice, the Regulation extends the scope of the notion of supply of services connected with immovable property to include some services which have previously been excluded. Some of the services that will be included as of 1 January 2017 will be:
- Surveying and assessing the risk and integrity of immovable property.
- Legal services on the transfer of ownership titles, such as notarial deeds and sale and purchase agreements.
Since VAT will be frequently levied according to the location of the immovable property, real estate professionals should review their service offering to comply with the newly established obligations.
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