Luxembourg: Main tax measures of the 2021 draft budget law announced during State of the Nation Speech

New Real Estate Withholding tax “REWHT”on certain investment vehicles investing in Luxembourg real estate

In line with the agreement reached on 3 December 2018 by the government of coalition for 2018-2023, certain investment vehicles will suffer a 20% REWHT on real estate income (rents and capital gains) derived from immovable properties located in Luxembourg without possibility to avail from any particular deduction. The investment vehicles that are in scope of the present measure are the following entities having a legal personality distinct from their partners:

• Undertakings for Collective Investment “UCIs” subject to part II of the law of 10 December 2010 (as amended) except those having the legal form of common limited partnerships “CLPs” (Sociétés en Commandite Simples);
• Specialized Investment Funds “SIFs” subject to the Law of 13 February 2007 except CLPs;
• Reserved Alternative Investment Funds “RAIFs” subject to article 1 of the law of 23 July 2016 (as amended) except CLPs.

The 20% REWHT also applies to gains derived by the investment vehicles referred to above from sale of share or units in partnerships or contractual funds holding Luxembourg real estate assets. This measure will apply as from 1st January 2021 onwards.

The 20% REWHT return will have to be declared by 31 May of the year following the year the income or the gain is derived and the tax will be payable by the 10th of June of that same year.

All investment funds listed above will also have to declare no later than by 31 May 2022 whether they have or not been holding Luxembourg real estate assets either directly or indirectly through partnerships or contractual funds at any point in time during FY 2020 and/or FY 2021.

The aim of this measure is to tackle the abuse of the tax regime applicable to investment vehicles for investments in real estate properties located in Luxembourg. Investments vehicles investing in Luxembourg real estate are currently subject to a subscription tax on their net assets.

The 20% REWHT does not affect investment vehicles investing directly or indirectly into foreign real estate assets located outside of Luxembourg.

Luxembourg Private Wealth Management companies “PWMC” not allowed to hold real estate through tax transparent entities

Luxembourg PWMC (“sociétés de gestion de patrimoine familial”) will (no longer) be able to hold real estate assets through partnerships or mutual funds as from 1st July 2021.

This measure aims at clarifying an existing rule that forbids PWMC to hold real estate assets.

Increase of real estate transfer tax “RETT” for certain real estate transactions

Contribution of real estate properties to civil or commercial companies in exchange for shares will going forward be subject to 3.4% RETT (i.e. 2% + 2/10th + transcription rights of 1%) instead of currently 1.1% (i.e. 0.5% + 2/10th + transcription right of 0.5%).

In addition, the anti-avoidance waiting period under which a real estate property is allocated to a shareholder other than the one who has contributed the real estate asset, upon a dissolution, liquidation or decrease of share capital is extended from 5 to 10 years.

The increase of the RETT is strictly limited to the above transactions.

Amendments to the Luxembourg tax consolidation rules

In order to take into account the conclusions of the European Court of Justice (ECJ) decision on case (C-749/18) of 14 May 2020, the Luxembourg tax consolidation rules will be amended to ensure that an EU non-integrating parent entity (i.e., share capital company or permanent establishment) should be able to combine horizontal and vertical tax unity without terminating the pre-existing fiscal unity nor triggering any negative tax consequences resulting from such a termination.

We refer to our previous tax alert for further details. Please click here to read the alert.

New profit participating incentive scheme for employees

The Luxembourg circular nr 104/2 dated 29 November 2017 in connection with the tax treatment applicable to stock option plans will be repealed as from 1st January 2021 and replaced by a tax incentive for profit participating bonuses.

Profit participating bonuses will be deemed to remain salary income and deductible business expense for the employer.

A new 50% tax exemption on profit participating bonuses will be allowed for employees.

The tax incentive remains subject to the following conditions (amongst other):

• Profit participating bonus will have to be linked to the positive net result of the previous financial year of the employer;
• The profit participating bonus cannot exceed 25% of the regular annual remuneration of the employee (i.e. excluding variable part and other benefits);
• The total amount of profit participating bonuses an employer can distribute cannot exceed 5% of the previous year positive net result;
• Reporting to the competent tax office of a list of beneficiaries for any given year together with evidence that all conditions referred to above are fulfilled.

Impatriate tax incentive regime improved and now embedded into Luxembourg tax law

The circular L.I.R. – n° 95/2 dated 27 January 2014 will be repealed.

In the hands of the qualifying employee, the new impatriate regime provides for the full exemption of most expenses (within certain limits) borne by the employer upon a relocation to Luxembourg.

In addition, a relocation bonus granted to a qualifying employee will benefit from a 50% exemption in the hands of the latter. The amount of the relocation bonus that could benefit from the 50% exemption will be limited to the lesser between EUR 50,000 (EUR 80,000 for households subject to joint taxation) and 30% of the gross regular annual remuneration of the employee (i.e. excluding variable part and other benefits)

The minimum wage required for employees qualifying for the impatriate regime is increased to EUR 100,000 (currently EUR 50,000).

The incentives will apply until the end of the employment in Luxembourg and at the latest until the 8^th fiscal year following the year the qualifying employee is relocated to Luxembourg.

VAT – Increase of the threshold for the small undertakings scheme

The threshold to benefit from the small undertakings scheme is increased from EUR 30,000 to EUR 35,000.

Therefore, VAT taxable persons whose annual turnover does not exceed EUR 35,000 are relieved from VAT registration and filing formalities.

This new provision follows the EU Council Implementing Decision 2019/2210 dated 19 December 2019.

Subscription tax decreased for “sustainable” investments

Luxembourg investment funds investing at least 5% of their total net assets in sustainable investments will benefit from a reduced rate of 0.04% (instead of 0.05%) for the portion corresponding to the sustainable net assets.

In the event the sustainable investments exceed the thresholds of 20%, 35% or 50%, the subscription tax will be respectively reduced to 0.03%, 0.02% or 0.01% for the portion corresponding to the sustainable investments.

Conclusion

These new tax provisions are in line with the agreement reached on 3 December 2018 by the government of coalition and mainly aim at closing distortion of taxation of Luxembourg real estate while maintaining competitiveness of the Luxembourg economy. Indeed, additional measures aiming at encouraging sustainable investments and solidarity are also included in the draft budget law and shows again the willingness of the Luxembourg government toward ecological transition and solidarity.

It is worth to emphasize on the fact that the new REWHT rule applicable to investment vehicles only applies to the ones investing into Luxembourg real estate assets and does not affect investment vehicles investing directly or indirectly into foreign real estate assets located outside of Luxembourg.

The proposed tax measures are included in the 2021 draft budget law (bill of law nr 7666) which has been submitted to the Luxembourg Parliament on 14 October 2020. Additional comments and guidance should be released during the legislative process.

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