Greetings!

The end of 2023 has been marked by the legislative elections and the formation of a new government in Luxembourg. Time has now come to provide you with a few insights on what has happened in the Grand-Duchy and at European level in the past few months.

In addition to tax measures that have just been passed and will be applicable as from the fiscal year 2024, the new coalition agreement announced several tax measures for the coming years. These are described in our 2024 tax forecast.

On 23 November 2022, the Luxembourg Administrative Court gave its decision in a case concerning an interest-free loan which was granted by a Luxembourg company to its wholly-owned Luxembourg subsidiary. In our dedicated article, we analyse the decision of the Administrative Court according to which an interest-free loan qualifies as a debt instrument.

Also from a case law perspective, on 10 November 2023, the Constitutional Court concluded that the minimum net wealth tax regime for companies holding predominantly financial assets is unconstitutional in certain cases. In our article, we analyse the facts leading up to the reference for a preliminary ruling as well as the Court's reasoning and the consequences of this ruling.

On 20 December, the law transposing the so-called Pillar 2 directive was passed. However, before being passed, a few amendments to the initial draft law were made in order to introduce additional clarification in line with the OECD guidance and address Luxembourg-specific points. In our article, we describe selected amendments proposed by the government.

In view of the upcoming change in the presidency of the Council of the EU, we provide an overview of the state of play of various (new) EU direct tax initiatives such as the "BEFIT", "HOT" and "TP" directive proposals, as well as the "Unshell" proposal, the initiative aiming to tackle the role of so-called "enablers" called the "SAFE" proposal and also the "DEBRA" proposal to address Debt-Equity bias. The so-called "FASTER" proposal is moving forward quickly and the "DAC8" was formally adopted.

We also describe, in more detail, the implications and provide a critical analysis of the "BEFIT" and "TP" directive proposals adopted by the EU Commission on 12 September 2023.

Finally, a law on the use of digital tools and processes in company law and implementation of the digitalisation of the notarial profession was passed in June 2023. In our article, we present the main measures of this law and the current status of implementation by notaries.

We hope you enjoy reading our Insights.

The ATOZ Editorial team

2024 Tax Forecast

OUR INSIGHTS AT A GLANCE

  • Various tax measures such as the major reform of the current investment tax credit framework and the adjustment of income tax scales will be applicable as from tax year 2024.
  • In the 2023-2028 coalition agreement of the recently elected Luxembourg government, various measures related to income taxes, subscription tax, housing, the modernisation of tax administration and the tax procedure were announced.
  • The new double tax treaty between Luxembourg and the UK as well as the new protocol to the double tax treaty between Luxembourg and Germany are on the way to be soon applicable.
  • We provide hereafter an overview of the main changes to be introduced.

Luxembourg Income Tax Measures

  • Investment tax credit regime to be modernised as from 2024

On 19 December 2023, the law introducing a major reform of the current investment tax credit ("ITC") framework was passed and will be applicable with effect as from tax year 2024. The law not only implements the investment tax credit modifications agreed upon in the tripartite agreement of 28 September 2022, but also completely reforms the current regime.

First, it increases the rates of the global investment tax credit. Further, it replaces the current additional investment tax credit by an additional tax credit for investments and operating expenses linked to the digital transformation and the ecological and energy transition and introduces a new system to certify the nature and reality of such investments and operating expenses.

The reform of the ITC regime is a positive initiative to accelerate the digital transformation as well as the ecological and energy transition of Luxembourg businesses and strengthen their competitiveness. However, since the new procedure of certification (which is only applicable to benefit from the new additional ITC) seems heavy, it remains to be seen how it will work in practice, given the related additional administrative burden for both taxpayers and the administration.

Read more about this new law in our previous Alert: Luxembourg Parliament adopts law modernising investment tax credit regime as from 2024

  • Individual taxation and tax brackets

Given the difficult economic situation and the polycrisis context, the coalition agreement for the period 2023-2028 dated 16 November 2023 (hereafter referred to as the "Coalition Agreement") provides for a set of tax measures in order to strengthen the purchasing power of households.

To that aim, on 20 December 2023, a tax law was passed in order to adjust the income tax scale by 4 index brackets as from 1 January 2024. The tax relief provided for by the new law is in line with the Tripartite Agreement dated 3 March 2023, which had already provided for an adjustment of the tax scale by 2.5 index brackets implemented by a law dated 5 July 2023, which 1.5 additional brackets have now been added to. The law also reviews the tax scale for class 1A - which applies to single parents, widows and widowers - to ease the tax burden on single earners.

In practice, the law provides for an adaptation of tax brackets of 10.38% compared to the rate applicable since 2017.

According to the Luxembourg government, taking into consideration the economic tax credit (crédit d'impôt conjoncture or "CIC") applicable in 2023, the law involves the following tax reductions:

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.