**Luxembourg Parliament Introduces Draft Law No. 8414: Key Tax Reforms and Enhancements**

On 17 July 2024, Draft Law No. 8414 was presented to the Luxembourg Parliament (Chambre des Députés) introducing significant tax reforms aimed at bolstering the competitiveness and appeal of Luxembourg for businesses, investors, and international talent. The proposed legislation focuses on reducing individual tax burdens to stimulate investment and consumption while enhancing existing tax regimes.

Corporate Income Tax Reduction

Starting from the fiscal year 2025, the corporate income tax (CIT) rate will be reduced by 1%, as follows:

– Companies with taxable profits under EUR 175,000 will see the CIT rate decrease from 15% to 14%.

– Companies with taxable profits exceeding EUR 200,000 will experience a reduction in the CIT rate from 17% to 16%, resulting in a combined tax rate of 23.87% for companies domiciled in Luxembourg-City (including the solidarity surcharge and municipal business tax), down from 24.94%.

This adjustment aligns Luxembourg’s CIT rate more closely with the OECD average of 23.6% and the EU average of 21.2%, as per the governmental coalition program.

Exemption for Actively Managed ETFs

While passively managed ETFs are already exempt from subscription tax, the Draft Law extends this exemption to actively managed ETFs, reflecting the growing interest in these investment vehicles. The exemption will take effect from the first day of the quarter following the law’s enactment.

Private Wealth Management Companies (SPF) Reforms

SPFs, entities dedicated to holding financial assets on behalf of private individuals, are subject to an annual 0.25% subscription tax. The Draft Law introduces several key clarifications and modifications to the SPF regime:

– The corporate designation must include either “family wealth management company” or “SPF”.

– The minimum annual subscription tax will increase from EUR 100 to EUR 1,000.

– The amount of debt subject to subscription tax will be determined based on the debt outstanding on the first day of the financial year, rather than on 1 January.

– Compliance certificates, confirming eligibility of shareholders, must be filed electronically and can be issued by a rérevereur d’entreprises, chartered accountant, or domiciliation agent.

These changes will apply from the first day of the quarter following the law’s implementation.

  Sanctions for SPF Non-Compliance

The Draft Law empowers the AEDT Director to impose fines on non-compliant SPFs, alongside withdrawal of the SPF status, under the following conditions:

– Failure to include SPF or family wealth management company in the corporate name, to file the subscription tax return, or to submit the compliance certificate may result in fines up to 50% of the annual subscription tax or EUR 10,000 if the tax amount cannot be determined.

– Non-compliance with other legal requirements may lead to fines up to EUR 250,000, with the company required to rectify the issues within six months. Persistent non-compliance could result in SPF status withdrawal and additional monthly fines.

The determination of fines will consider the severity and duration of the breach, the financial situation of the SPF, the benefits derived from the breach, any damages caused, the SPF’s cooperation, and prior violations.

The effective date of SPF status withdrawal will be determined by the AEDT Director, with a statute of limitation for tax recovery being suspended during the non-compliance period until the decision becomes final.

Individual Tax Measures

  Overhaul of the Impatriate Regime

Effective from the fiscal year 2025, the impatriate regime will be revised to offer a 50% exemption on gross annual salary (excluding tax-exempt benefits) up to EUR 400,000. The existing regime will remain available for current beneficiaries, who may opt to transition to the new regime. This change is designed to enhance Luxembourg’s appeal to highly skilled foreign workers.

  Tax-Exempt Bonus for First-Time Employees Under 30

A new provision allows a 75% tax exemption on bonuses paid to employees under 30 entering their first permanent employment contract with a Luxembourg employer. This exemption is available for up to five years, with the bonus amounts tiered according to the employee’s gross salary.

  Enhancement of the Participatory Bonus Regime

The participatory bonus regime, which provides a 50% exemption on profit-sharing bonuses, will be relaxed. The maximum bonus eligible for exemption will increase to 30% of the employee’s annual gross salary, up from 25%, with the total employer payout capped at 7.5% of the previous year’s profit.

Tax Credit for Cross-Border Workers’ Overtime

To address double taxation issues faced by German cross-border workers, the Draft Law introduces a unilateral tax credit of up to EUR 700 for qualifying overtime income, effective from fiscal year 2024. This credit is contingent on specific conditions, including the presence of a double tax treaty (DTT) between Luxembourg and the employee’s country of residence.

Inflation Adjustment of the Tax Scale

The tax scale for individuals will be adjusted to account for inflation, with a 2.5 indexation tranche effective from fiscal year 2025. This adjustment will address the “cold progression” effect, effectively increasing each tax bracket by approximately 1.06376.

Targeted Measures for Low-Income Taxpayers

Several targeted measures will be introduced from the fiscal year 2025 to alleviate the tax burden on low-taxpayer incomes, including:

– Revising the tax scale for Class 1a (single-parent households, widowed individuals, and taxpayers over 64), increasing the tax-exempt threshold from EUR 24,876 to EUR 26,460.

– Raising the single-parent tax credit from EUR 2,505 to EUR 3,504 annually.

– Increasing the allowance for children living outside the household from EUR 4,422 to EUR 5,424.

– Enhancing the minimum social wage tax credit from EUR 70 to EUR 81 per month, ensuring that minimum wage earners are not subject to tax regardless of their tax class.

These comprehensive reforms, if enacted, will significantly impact both corporate and individual taxpayers in Luxembourg, enhancing the country’s tax regime to remain competitive on a global scale.