Luxembourg
This chapter includes data on the income taxes paid by workers, their social security contributions, the family benefits they receive in the form of cash transfers as well as the social security contributions and payroll taxes paid by their employers. Results reported include the marginal and average tax burden for eight different family types.
Methodological information is available for personal income tax systems, compulsory social security contributions to schemes operated within the government sector, universal cash transfers as well as recent changes in the tax/benefit system. The methodology also includes the parameter values and tax equations underlying the data.
The national currency is the Euro (EUR). In 2020, EUR 0.88 equalled USD 1. The Secretariat has estimated that in that same year the average worker earned EUR 58 040 (Secretariat estimate).
1.1. Taxes levied by central government
1.1.1. Tax unit
Spouses and partners are taxed jointly on their income. The income of minor children is included in determining the couple’s taxable income. However, any earned income that children may derive from work is excluded from joint taxation.
From 2018 onwards, there is the option to file separate tax returns for married couples and civil partners.
1.1.2. Tax reliefs and tax credits
1.1.2.1. Standard reliefs in the form of deductions from income
Wage-earners are entitled to a standard minimum deduction of EUR 540 for work-related expenses other than travel, unless their actual deductible expenses are higher. This deduction is doubled for spouses taxed jointly.
The first 4 distance units (i.e. 4 * 99 = EUR 396 per year) of the lump sum deduction for travel expenses between a taxpayer’s home and his working places are abolished. The maximum deduction will be limited to EUR 2 574 per year.
Like other taxpayers, wage-earners having no special expenses (interest charges, insurance premiums or contributions other than for social security) may take a standard deduction of EUR 480 for special expenses. Actual insurance premiums are deductible up to the limit set by law.
If both spouses have earned income and are taxed jointly, they qualify for an earned income allowance of EUR 4 500.
Social security contributions: contributions paid to compulsory health insurance and pension schemes are deductible in full.
Dependency insurance: the dependency contribution is not deductible for income tax purposes.
1.1.2.2. Standard reliefs in the form of tax credits
Wage-earners and pensioners receive a refundable tax credit. The tax credit will increase progressively until it is capped at EUR 600 per year for taxpayers earning between EUR 11 265 and EUR 40 000. Between EUR 40 000 and EUR 80 000, the tax credit will decline progressively. Over EUR 80 000, the tax credit is 0.
Single-parents receive a refundable tax credit. The tax credit will be increased to EUR 1 500 per year for taxpayers earning up to EUR 35 000. Between EUR 35 000 and EUR 105 000, the tax credit will decline progressively. Over EUR 105 000 the tax credit is EUR 750 like in the past.
A new tax credit for social minimum wage earners was introduced in January 2019. The tax credit is fixed to EUR 70 per month for employees earning a monthly gross wage between EUR 1 500 and EUR 2 500. For employees with monthly gross wages between EUR 2 500 and EUR 3 000, the tax credit declines progressively. Employees with monthly gross wages higher than EUR 3 000 will not benefit anymore from the tax credit. This tax credit come on top of the already existing tax credit for employees.
1.1.2.3. Non-standard allowances deductible from taxable income
Interest charges are deductible insofar as they are not considered operating expenses or acquisition expenses, and provided they are unrelated economically to the exempt income.
Taxpayers may deduct premiums paid to insurers licensed in an EU country in respect of life, death, accident, disability, illness or liability insurance, as well as dues paid to recognised mutual assistance companies.
From 2017 onwards, the deductibility of interest charges and for insurance and legal responsibility is aggregated under one category and limited to EUR 672.
Payments to an insurance company or credit institution in respect of an individual retirement scheme are deductible. These payments are capped at EUR 3 200 and must meet certain investment policy constraints.
Contributions to building society savings are deductible up to the limit of EUR 672. If the taxpayer is under 40 years old, this limit will be doubled to EUR 1 344.
Interest charges in respect of the rental value of owner-occupied housing are deductible only up to an annual ceiling. During the first five years, the ceiling is EUR 2 000; for the following five years it is EUR 1 500; thereafter it is EUR 1 000. These ceilings are increased by an equal amount for the taxpayer’s spouse/partner, and for each qualifying child.
As from 1 January 2009, the maximal deduction of premium related to the mortgage life insurance on the taxpayer’s principal residence is EUR 6 000. This ceiling is increased by an equal amount for the taxpayer’s spouse/partner and by 1 200 for each qualifying child. For taxpayers over the age of 30, the allowable deduction of EUR 6 000 is increased by 8% (e.g. EUR 480) for each year over 30, with a ceiling of 160%.
Upon request, taxpayers may be granted exemptions for extraordinary expenses that are unavoidable, and that considerably reduce their ability to pay taxes (e.g. uninsured health care costs, support for needy relatives, uninsured funeral costs beyond the taxpayer’s means, domestic or childcare expenses, expenses for children outside the taxpayer’s household, or expenses for children in a single-parent household).
A EUR 5 000 tax allowance will be granted for the purchase of an electric or hydrogen-powered car. A EUR 2 500 tax allowance will be granted for the purchase of a rechargeable hybrid car, when CO2 emissions do not exceed 50g/km. The tax allowance is EUR 300 for the purchase of a pedelec or bicycle.
From 2019 onwards, self-employed have the possibility to deduct premiums paid into a supplementary pension scheme for the self-employed as special expenses, as well as a flat-rate and final discharge. The financing of supplementary pension schemes is deductible up to 20% of annual income.
1.1.3. Tax schedule reliefs
Income tax is determined on the basis of the following schedule (amounts in Euros):
The income tax liability of single taxpayers is determined by applying the above schedule to taxable income.
The income tax liability of married taxpayers and partners corresponds to double the amount obtained if the above schedule is applied to half of their income (class 2).
For widow(er)s, taxpayers with a dependent child allowance and persons over 64 years of age (class 1a), tax is calculated as follows: the schedule is applied to adjusted taxable income reduced by half of the difference between that amount and EUR 45 060, with the marginal tax rate capped at 39% for the portion of income between EUR 37 842 and EUR 100 002, 40% for the portion of income between EUR 100 002 and EUR 150 000, 41% for the portion of income between EUR 150 000 and EUR 200 004, and 42% for the portion of income exceeding EUR 200 004.
Income tax as determined by the applicable schedules is subject to a 7% “solidarity” surtax to finance the employment fund. The rate is 9% for the taxable income exceeding EUR 150 000 (tax classes 1 and 1a), respectively EUR 300 000 (tax class 2).
No distinction is made according to family status or gender.
As from 1 January 2009 the differences in social security contributions between workers and employees are abolished.
The temporary budget balancing tax, the “impôt d’équilibrage budgétaire temporaire” (IEBT), introduced in 2015, is abolished from 1 January 2017.
Employers must make payments to the Employers’ Mutual Insurance Scheme. This scheme provides insurance for employers against the financial cost of continued payment of salaries or wages to workers who become incapacitated. Employers are required to pay the remuneration of an employee who is unable to work until the end of the month in which the seventy-seventh day of incapacitation occurs within a reference period of twelve successive calendar months. The Scheme is administered by a Board of Directors which is mainly composed of employer representatives (Chamber of Commerce, Chamber of Trade, Chamber of Agriculture and Federation of Independent Intellectual Workers). Employer contributions depend on the rate of “financial absenteeism” within the company, and range from 0.46 % to 2.70 %. A representative rate of 1.85 % is used in the Taxing Wages calculations.
3.2. For dependent children
Every child raised in the Grand Duchy entitles the person on whom the child is dependent to a monthly family allowance. Family allowances are adjusted regularly for the cost of living.
There has been a reform of the family allowance system in 2016.
For families that are eligible for family allowance before 1 August 2016, the old system remains, and the amounts for 2020 are :
Starting with the fourth eligible child, the allowance is raised by EUR 361.82 per child.
Additionally, a child bonus amounting to EUR 76.88 per child per month is paid in cash irrespective of the taxable income of the parents as from 1 January 2009. This amount is paid by the National Family Benefits Administration.
For children born on or after 1 August 2016, the child bonus amounting to EUR 76.88 per child per month has been abolished and incorporated in the new higher amounts:
The amounts indicated above (under the old regime as well as under the new regime) are increased by EUR 20 for children aged 6 to 11 and by EUR 50 for those aged 12 years or older. These new additional amounts, depending on the children’s age, are applicable for all children and are replacing the amounts of EUR 16.17 respectively EUR 48.52 from 1 August 2016 onwards.
4.1. Partnerships
The Act of 9 July 2004 introduced the notion of partnerships into tax law. The Act construes the term “partnership” as a relationship between two persons, called “partners”, of opposite sex or the same sex, who live together as a couple and declare themselves as such.
As from 1 January 2008, the fiscal treatment of the partnerships is modified. The deduction for extraordinary expenses is replaced by the joint taxation of partners as it already exists for spouses.
4.2. Introduction of tax credits
The following changes were made as of 1 January 2017:
The existing tax credit of EUR 300 for employees, self-employed people and pensioners will be increased progressively until it is capped at EUR 600 per year for taxpayers earning between EUR 11 265 and EUR 40 000. For taxpayers earning between EUR 40 000 and 80 000, the tax credit will decline progressively. Taxpayers earning more than EUR 80 000 will not benefit anymore from the tax credit.
The existing tax credit of EUR 750 for single parents with children will be increased to EUR 1 500 per year for taxpayers earning up to EUR 35 000. For taxpayers earning between EUR 35 000 and EUR 105 000, the tax credit will decline progressively. For taxpayers earning more than EUR 105 000, the tax credit will remain at its current level of EUR 750.
A new tax credit for social minimum wage earners was introduced. The tax credit is fixed to EUR 70 per month for employees earning a monthly gross wage between EUR 1 500 and EUR 2 500. For employees with monthly gross wages between EUR 2 500 and EUR 3 000, the tax credit declines progressively. Employees with monthly gross wages higher than EUR 3 000 will not benefit anymore from the tax credit.
This tax credit come on top of the already existing tax credit for employees.
4.3. Changes to labour taxation due to the covid-19 pandemic
In order to mitigate the negative impact of the covid-19 pandemic on the economy, the Luxembourg government introduced several measures to support taxpayers financially. Concerning labour taxation, the following measures were introduced:
The date for submitting PIT tax returns is postponed from 31 March 2020 to 30 June 2020
The deductibility for domestic costs is increased from EUR 5 400 to EUR 6 750 for the period of 1 April 2020 to 31 December 2020, for taxpayers who employ a housekeeper for domestic tasks.
Cross-border workers living in France, Germany and Belgium are allowed to work from home (e.g. teleworking) during the crisis without their wage being taxed in their country of residence.
With regards to measures not directly effecting labour taxation but from which the majority of taxpayers can benefit:
Short-time working in the event « force majeure » in relation with the current COVID-19 crisis is possible from 18 March 2020 to 30 June 2020. The short-time working scheme is an accelerated procedure that is intended to protect jobs in companies that had to completely or partially cease their activities due to the crisis. The scheme applies to employees that can no longer be employed on a full-time basis. The state will pay a compensation up to 80% of the employee’s wage, and the reimbursement is limited to 250% of the social minimum wage for unskilled workers aged 18 or over. Any difference between the amount of the compensation paid and the social minimum wage will be borne by the Unemployment Fund.
A specific procedure has been set up to allow parents to take leave for family reasons if they have to look after their children
Possibility to cancel the first two quarterly advance tax payments for 2020, tax types concerned: corporate income tax, communal business tax and personal income tax (only if profit from commercial or craft activities, from agricultural or forestry activities or from exercising a liberal profession)
Possibility to postpone for 4 months the payment of PIT based on tax returns (concerns only tax returns with a payment deadline after 29 February 2020). Tax types concerned: corporate income tax, communal business tax, net wealth tax and personal income tax (only if profit from commercial or craft activities, from agricultural or forestry activities or from exercising a liberal profession). This does not affect e.g. the withholding of PIT for employees.
The deadline for submitting a claim or a formal hierarchical appeal has been suspended until 30 June 2020
5.1. Identification of the average worker
Average gross hourly wages by industry and by gender are determined on the basis of biannual surveys on industry wages and working hours. These surveys cover gross compensation for regular hours (working hours + leave time) plus overtime pay. Hourly wages include bonuses and allowances such as premiums for output, production or productivity. In contrast, non-periodic compensation (bonuses, profit-sharing) that is not paid systematically in each pay period is not included. Nevertheless, in order to allow for comparisons between countries, gross annual pay is adjusted on the basis of average non-periodic compensation as calculated from triennial surveys of labour costs.
Regarding working hours, the time taken into account is the time effectively offered, including regular working hours, overtime, night shifts and work on Sunday.
The equations for the Luxembourg system are on a joint basis except for social security contributions. The functions which are used in the equations (Taper, MIN, Tax etc) are described in the technical note about tax equations. Variable names are defined in the table of parameters above, within the equations table, or are the standard variables “married” and “children”. A reference to a variable with the affix “_total” indicates the sum of the relevant variable values for the principal and spouse. And the affixes “_princ” and “_spouse” indicate the value for the principal and spouse, respectively. Equations for a single person are as shown for the principal, with “_spouse” values taken as 0.