Law & Numbers - News Tax

CHANGES IN THE LUXEMBOURG TAX SPHERE IN 2011

11.01.2011

On December 31st, 2010 a Law which increased Luxembourg tax regime was published. Indeed, Luxembourg was also affected by the end 2008 world crisis. Therefore, many amendments were taken by the Luxembourg government in order to face up to this crisis and to be a source of revenue for the government.

CHANGES IN THE LUXEMBOURG TAX SPHERE IN 2011

On December 31st, 2010 a Law which increased Luxembourg tax regime was published. Indeed, Luxembourg was also affected by the end 2008 world crisis. Therefore, many amendments were taken by the Luxembourg government in order to face up to this crisis and to be a source of revenue for the government. This law answers the Bill No. 6166 aimed at introducing tax measures relating to economic and financial crisis.

Concerning direct taxation, the above-mentioned law includes the following measures in order to balance public finances.

I. INCOME TAX FOR INDIVIDUALS

1. A new maximum tax rate

First of all, the Law of December 4th, 1967 on income tax (ITA) is once more amended.
The Law of December 31st, 2010 introduced a new maximum tax rate. Indeed, according to the Article 118 L.I.R., a new maximum tax rate is introduced, and this new level of costs which has the same extent as the previous levels of 39% for adjusted taxable income exceeding EUR 41,793 for the tax class 1, and from EUR 33,978 for the tax class 1a and from EUR 83,586 for the tax class 2.
The new maximum tax rate is added beyond the current maximum level of 38%.
The rates applying from January 1st, 2011 are specified in Memorial A - No. 248 of December 31st, 2010.

2. Increase in the solidarity tax for individuals

Also, the law provides for an increase in the solidarity tax for individuals. According to this law, the solidarity tax (Tax to Employment Fund) increases from 2.5% to 4%.
Moreover, this rate is increased from 2.5% up to 6% for tax class 1 and 1a when annual taxable incomes exceed EUR 150.000.
Concerning the taxpayers belonging to tax class 2, the rate of 6% applies to annual taxable incomes which do not exceed EUR 300,000.

According to the annual taxable incomes of the taxpayer and their family situation, the marginal maximum tax rate (inclusive solidarity tax) rises up either to 40.56% or to 41.34% for the 2011 tax year. (This rate was 38.95% in 2010.)

3. Increase in the maximum rate for special depreciation

The maximum rate for special depreciation, as provided for by Article 32bis LIR is raised from 60% up to 80%.

The Article 32bis L.I.R deals with special depreciation for interests of environmental protection and achieving of energy savings. The change in the law consists in the support of more companies making such investments through a marked rise in the rate for special depreciation.

4. Introduction of a crisis contribution dependent for individuals

The most important change in the Luxembourg tax regime concerns the introduction of a contribution for crisis.

First of all, the law introduced a contribution of the crisis management dependent for individuals.
The contribution for crisis is levied on any professional income, replacement and estate. The contribution of crisis is organized in the same way as the dependence tax is, namely in two parts, the first one is entrusted to the Central Office of Social Security («Centre Commun de la Sécurité Sociale») and the second one is the responsibility of the Inland Revenue («Administration des Contributions Directes»).

The crisis contribution rate is fixed at 0.8%. The monthly basis is however reduced by a decrease corresponding, in principle, to the minimum monthly wage for an unskilled worker who is 18 years old at least. However, no allowance is deducted from the basis of the contribution of crisis within the jurisdiction of the Inland Revenue.

Furthermore, the employer or institution is responsible for payment of income relating to the deduction from pay or income replacement.

It shall also be pointed out that exempted incomes under an international convention for double taxation or other interstate agreement fall outside the basis of the contribution to crisis.

5. Ceiling on the amount deductible from severance pays

Furthermore, this law introduces a ceiling on the amount deductible from severance pay.

In the Article 48 L.I.R., Luxembourg decided to introduce a ceiling beyond which the severance will no longer be deductible concerning tax purposes. This resolution was made in order to limit the impact of excessive severance pay tax on the employer’s taxable amount.

Thus, the part of the severance pay amount or the redundancy payment paid to employees exceeding the amount of EUR 300,000 will no longer be tax deductible.

This ceiling concerns severance pays, commonly referred to as «Golden parachutes» or «golden handshakes» available in case of expiration or termination of the employment contract.

It shall be noted that the taxation of severance pay or redundancy payment as to the beneficiary is not affected by this measure.


TAX ON CORPORATE INCOMES.

1. Increase in the investment tax credit rate

Also, the investment tax credit rate has increased pursuant to the law of December 31st, 2010.

Indeed, paragraph 2 of Article 152bis L.I.R. (concerning the tax rebate for investments), gives rise to a tax refund on additional investment from 12% to 13%.

Before that, the tax refund was up to 6% for the first investment bracket for investments which did not exceed EUR 150,000 and 2% for the investment bracket exceeding EUR150,000. Currently, the law of December 21st, 2011 has increased each rate and brought them to 7% and 3%.
It can be pointed out that the ceiling of EUR150,000 remains.

2. Minimum taxation for some bodies having a collective nature

The law introduced a minimum taxation for some bodies having a collective nature.

A new paragraph is added to the Article 174 L.I.R, which deals with a minimum taxation for bodies the collective activity of which is exempt from any authorisation and where the sum of financial assets, securities and bank deposits exceed 90% of the total assets. The article 174 specifies that the minimum amount of this taxation for companies without any commercial activity (like SOPARFIs) is EUR 1,500 per year.

It can be noted that bodies having a collective nature subject to authorizations for business establishment given either by the Minister for the Middle Classes, or by the Minister of Economy and Foreign Trade, including those given to people responsible for the management or the direction of the body having a collective nature, and authorizations granted by the Commission for the supervision of the financial sector («Commission de surveillance du secteur financier») or the Insurance Commissioner («Commissaire aux assurances»), fall outside the scope of the contribution to crisis.

It should be noted that in case of the implementation of tax integration system (Article 164bis LIR), the minimum tax applies only to the parent or native establishment («établissement indigène») on account of the fact that during the application of this system’s period, the parent company or «établissement indigène» is the only one which is liable to corporate income tax concerning the global tax profit of companies which are close to the tax integration.
Therefore, the minimum tax is to be increased, in order to be a source of income for the government.

The provisions governing the allocation of taxes levied through withholding tax at source and tax rebates remain applicable.

3. Increase in the solidarity tax for corporate bodies

Also, the law provides for an increase in the solidarity tax for public authorities. According to this law, the solidarity tax (Tax to Employment Fund) for corporate bodies increases from 4% to 5%.

ENFORCEMENT

Concerning the enforcement of the December 31st, 2010 law, its provisions shall apply starting from the 2011 tax year.

Furthermore, in order to avoid a retroactive effect on the non-deduction of severance pays and redundancy payments (Article 48 ITA), the new provisions apply only to severance pays and redundancy payments allocated from January 1st, 2011.








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