Luxembourg has a lot to offer in a lot of areas. Its capital city is charming, its countryside idyllic. Great food, cultural events, and lifestyles, and an amazing mix of expats and locals. But as a tax man, I want to focus on its tax aspects—continuing from my post last year, Tax facts about Luxembourg from a recent arrival. This time I want to explore the good things that the Luxembourg tax system offers individuals. For a start, I'm impressed by how it allows people to optimise their tax positions while maintaining fairness overall. In helping design the KPMG Tax Calculator I saw the full extent of what the government has done to allow individuals to optimise their own filings.
Luxembourg is also in the meaty part of the curve when it comes to income tax. Using KPMG LINK technology, I compared individual taxes in 17 European countries. Inputting a standard situation, 1 I set the individual's income at €100,000, which resulted in total income tax and social security between 19% (Switzerland, specifically Geneva) and 49% (Greece). In comparison, Luxembourg imposes 27%. Increasing the income to €200,000 the rates vary between 29% (again Geneva) and 52% (again Greece), with Luxembourg at 36%. This means that the country offers benefits and deductions, but the government maintains a strong tax base too, which helps everyone.
(Read more details on percentages like these in the Salary Comparisons Report).
Every country has its own tax laws prescribing how income is taxed, permissible exemptions, and special provisions. Within these frameworks, employment benefits can be optimised by exchanging cash taxed at progressive rates for other benefits that are taxed less or are even exempt.
Luxembourg scores well for such benefits, though it differs by company, of course, and some benefits are available only under certain conditions. For example, the interest subsidy scheme is available to all employees, whereas certain equity-based compensation is only available to higher level personnel. Company cars are a popular benefit, as are meal vouchers. Special exemptions are available for employees hired from abroad and who meet certain conditions.
Let's look at a married individual in tax class 2, Luxembourg-resident, subject to Luxembourg social security, no children, and earning €100,000/year (gross). Let's call him Dave. Dave costs his employer €113,220, taking the average mutual insurance rate of 1.16% into account. Dave nets €73,140. Here are the benefits and their impacts:
If all three benefits are combined, Dave nets €77,358 and costs his employer €111,935. That's €4,218 saved in taxes and social security for him, and €1,285 in social security contributions for his employer. This is win-win, without eroding the government's tax base excessively.
Impatriate tax regime
For qualifying employees that are hired from outside of Luxembourg, certain expenses may be reimbursed tax-free (sometimes up to a limit): rent, home leave, cost of living allowance, international school fees for children, and specific moving expenses.
Here, too, gross salary can be traded for tax-free reimbursement of qualifying expenses. With good planning (before making the offer) taxes can be saved for both employer and employee.
Tax deductions and credits
Further deductions are available through personal tax returns: alimony paid to a former spouse, debit interest on consumer loans, insurance contributions, contributions to a home savings scheme, charitable donations, and voluntary (3rd pillar) pensions.
Tax credits are available for employees, self-employed persons, and pensioners—and there is also a single parent credit. Luxembourg has furthermore introduced a special tax relief for reduced-emission vehicles (including bicycles), in support of sustainable individual transportation. Also, allowances for children's education, as well as extra-professional allowances, are available in some cases.
Individual taxpayers: our tax calculator is specifically designed for you. Play around with it to see which deductions are available, and how each one affects your overall taxes. It's free and we don't store any data.
Other tax benefits in Luxembourg
When I first moved here, I saw a few roads along the border with six, seven petrol stations in a row. All on the Luxembourg side. It was surprising at first, but it didn't take much deductive reasoning to figure out why: taxes on fuel are quite low in Luxembourg—which is definitely another benefit of living here. Alcohol and tobacco are the same.
The standard VAT rates within the EU vary between 17% and 27%: Hungary has the highest, and the lowest? Luxembourg. So shopping is good here, at least tax-wise.
Luxembourg location report
Check out our guide to Luxembourg! It's full of practical information on things like renting/buying a home, getting around, education, childcare, local leisure and cultural attractions, and (we couldn't resist) taxation.
1 Based on a married resident employee, two dependent children, fully subject to tax and social security in the respective country.
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.