_On 17 December 2020, the Luxembourg Parliament approved the budget law for 2021, which was filed on 14 October 2020 by the Luxembourg Government with the Luxembourg Parliament as bill n°7666 (the “2021 Budget Law”). Most of the 2021 Budget Law measures will be applicable as from 1 January 2021.
For the purpose of this newsletter, we have summarised the main new tax measures provided in the 2021 Budget Law.
> Tax justice measures
Introduction of a real estate levy (prélèvement immobilier) for Luxembourg investment funds
As per the announcements contained in the coalition agreement of 2018–2023, a real estate levy has been implemented in Luxembourg tax law.
The new real estate levy, which amounts to 20%, will apply to gross income1 (rental income2 and capital gains3) derived from real estate located in the Grand Duchy of Luxembourg by alternative investment funds (AIFs) falling under Part II of the amended law of 17 December 2010 concerning undertakings for collective investment (UCIs), specialised investment funds (SIFs) subject to the amended law of 13 February 2007 and reserved alternative investment funds (RAIFs) subject to the amended law of 23 July 2016 (“Covered Funds”).
The real estate levy would not apply when the Covered Funds are incorporated under the form of a tax transparent vehicle (such as a Luxembourg SCS/SCSp4) or a contractual fund regime, such as Luxembourg common funds (Fonds Commun de Placement – “FCP”). Covered Funds holding real estate outside Luxembourg would not be impacted by the real estate levy.
In terms of reporting, real estate levy due on income (or gains) arising (or realised) in a calendar year must be reported to the Luxembourg tax authorities no later than 31 May of the following calendar year. Based on this, the first tax return should be filed by 31 May 2022.
Finally, it is worth mentioning that any Covered Funds5 will have to declare on 31 May 2022 at the latest if it has held real estate located in Luxembourg (directly or through a transparent vehicle) in 2020 and 2021. Any Covered Funds having changed its legal form into a tax transparent vehicle (SCS/SCSp) or FCP in 2020 or 2021 will also have to perform this reporting. The Luxembourg tax authorities may impose a lump-sum penalty of EUR 10,000 to any Covered Fund that does not comply with this reporting obligation.
The real estate levy entered into force as of 1 January 2021.
Repeal of stock options and warrants regime
In accordance with the announcement contained in the coalition agreement of 2018–2023, the Circular L.I.R. No 104/2 issued by the Director of the Luxembourg tax authorities on 29 November 2017 relating to the stock options and warrants applicable to tax treatment was repealed by the Director of the Luxembourg tax authorities on 14 December 2020.
Therefore, the so-considered favourable stock options and warrants tax regime will cease to be applicable as of 1 January 2021.
Introduction of a participative premium (prime participative)
According to the parliamentary works to the 2021 Budget Law, this new tax measure aims at encouraging the participation of employees in the profits of their enterprises.
As per the new paragraph 13a of the Luxembourg income tax law, 50% of the participative premium allocated (at the employer’s discretion) by the employer to its employee affiliated with a mandatory social security scheme may be exempted from wages tax.
The exemption of the participative premium will be limited to (i) 25% of the gross annual remuneration6 of the tax year during which the participative premium is allocated, and (ii) 5% of the profits realised by the employer during the fiscal year immediately preceding the fiscal year during which the participative premium is allocated.
In addition, the employer will have to (i) realise either a commercial profit, an agricultural and forestry profit or a profit from a liberal profession, (ii) keep regular accounts during the tax year preceding the tax year during which the participative premium is allocated and (iii) provide the Luxembourg tax authorities with the list of employees benefiting from this participative premium and any other information allowing for confirmation that the conditions provided for in the new article 13a of the Luxembourg income tax law are fulfilled.
Finally, it is worth noting that the participative premium will be considered as an operating expense at the employer’s level.
Increase of registration duties applicable upon the contribution of a Luxembourg real estate to a civil or commercial company
The registration and transcription duties applicable in case of a contribution of a Luxembourg real estate to a civil or commercial company in exchange for shares have been increased from 1.1% (i.e. 0.6% of registration duties7 plus 0.5% of transcription duty) to 3.4% (i.e. 2.4%8 of registration duties plus 1% of transcription duty).
Furthermore, the anti-abuse measure, under which the registration and transcription duties are applicable when a Luxembourg real estate is allocated to a partner other than the initial contributor as a result of a dissolution, liquidation or capital reduction of a civil or commercial company, has been extended from 5 to 10 years.
> Measures related to sustainable development
Amongst the new tax measures taken by the Luxembourg Government in view of developing sustainable investment, it is worth mentioning that Luxembourg investment funds (or a compartment of investment funds) governed by the amended law dated 17 December 2010 relating to undertakings for collective investments in sustainable economic activities as defined by Article 3 of Regulation (EU) 2020/852 on the establishment of a framework to facilitate sustainable investment, will benefit as from 2021 from a reduction of the subscription tax (taxe d’abonnement) rate currently levied at 0.05% on the net asset value.
The reduction of the subscription tax will be as follows:
- 0.04% when the percentage of the net assets of the fund or compartment invested in sustainable assets is over 5%;
- 0.03% when the percentage of the net assets of the fund or compartment invested in sustainable assets is over 20%;
- 0.02% when the percentage of the net assets of the fund or compartment invested in sustainable assets is over 35%;
- 0.01% when the percentage of the net assets of the fund or compartment invested in sustainable assets is over 50%.
The percentage of the net assets of the fund or compartment invested in sustainable assets will have to be confirmed by an independent auditor (réviseur d’entreprise agréé).
> Other significant measures
Measures impacting SPFs
A Luxembourg SPF9 under the amended law of 11 May 2007 would no longer be allowed to hold real estate assets directly or indirectly through Luxembourg and/or foreign tax transparent vehicles (such as a real estate company – société civile immobilère) and FCPs.
This measure will apply as from 1 July 2021.
Increase of the VAT franchise threshold
The threshold under which small enterprises can perform transactions without applying VAT (VAT exemption scheme – régime de franchise de TVA) has increased from EUR 30.000 to EUR 35.000.
Amendment of the tax unity regime
The 2021 Budget Law allows a group benefiting from a vertical tax unity to form a new group integrated through a horizontal tax unity without dissolution of the existing tax group, subject to certain conditions.
1. Realised after 1 January 2021.
2. Rental income (excluding VAT) deriving from Luxembourg real estate assets held directly or indirectly through a transparent vehicle (such as a Luxembourg SCI – société civile immobilière).
3. Capital gains deriving from the alienation of the real estate assets or the alienation of units.
4. Société en commandite simple or société en commandite spéciale.
5. Having realised rental income/capital gains in 2020/2021 from real estate located in or outside of Luxembourg. Luxembourg Covered Funds incorporated under the form of SCSs/SCSps are not subject to this reporting obligation.
6. Excluding any benefit in cash or in kind.
7. 0.5% x 2/10.
8. 2% x 2/10.
9. Société de gestion de patrimoine familial.