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July 31, 2024 Luxembourg proposes reduction in corporate income tax rates and other changes
Executive summary On 17 July 2024, the Luxembourg government submitted a Draft Law to Parliament containing a variety of tax measures. Overall, the proposed changes aim to alleviate the tax burden on households and enhance Luxembourg's appeal as a work and investment place, with provisions for both corporate and individual taxpayers. Key amendments affecting corporate taxpayers include a reduction of the CIT rates, a modernization of the SPF Law1 as well as a suggested subscription tax exemption for UCITS ETFs. The reduced CIT rates would apply as from tax year 2025. Detailed discussion Reduction of corporate income tax rate The Draft Law foresees a reduction of the CIT rate by 1%, aiming to align more closely with the European Union (EU) and Organisation for Economic Co-operation and Development (OECD) averages. This move follows a trend of CIT rate reductions in Luxembourg since 2017, which has seen decreases in the maximum rate from 21% to 17%, and the minimum rate from 20% to 15%. In more detail, the Luxembourg CIT has a two-tiered rate structure: 15% for taxable income up to €175,000 and 17% for taxable income exceeding €200,000, with a smoothing mechanism for taxable income between these two amounts. The Draft Law proposes to lower the maximum CIT rate from 17% to 16% and the minimum CIT rate from 15% to 14% as from tax year 2025, with an intermediate rate to ensure a gradual increase for taxable income between €175,000 and €200,001. To support the employment fund, the CIT rate is subject to a surcharge, which has been 7% since tax year 2013. As a result, for a company operating in Luxembourg City with taxable income exceeding €200,000, the global tax rate, inclusive of the employment fund surcharge and the municipal business tax (MBT), would drop to 23.87% in fiscal year 2025, down from the current 24.94%. Modernization of the SPF regime Introduced in 2007 Luxembourg legislation, the purpose of an SPF is the management of private wealth of individuals without carrying out an economic activity. SPFs are exempt from CIT, MBT and net wealth tax and are only subject to annual subscription tax (similar to funds). The Draft Law suggests several amendments to the SPF Law, including:
The above measures will take effect from the first day of the trimester following the publication of the law, except for the measures related to fines and withdrawal of the SPF status. Those would apply only to breaches occurring after the Draft Law comes into force, with ongoing breaches to be addressed under the new framework. Subscription tax exemption for certain UCITS ETFs As from the first day of the trimester following the enactment of the law, UCITS ETFs (as well as compartments of UCITS ETFs) that meet certain conditions would be exempt from subscription tax. The definition of (compartments of) UCITS ETFs aligns with the European Securities and Markets Authorities (ESMA) Guidelines and the Law of 17 December 2010 relating to Undertakings for Collective Investment. To be eligible for the exemption, a (compartment of a) UCITS ETF must be actively traded on a regulated market or multilateral trading facility with at least one market maker ensuring the share price closely reflects the net asset value or, where applicable, the indicative net asset value. The exemption applies only to those classes of shares within the (compartment of the) UCITS ETF that meet the ETF criteria. Next steps and implications The Draft Law will now go through the legislative process. Specifically, the text will be analyzed by a dedicated parliamentary commission; opinions will be collected from different advisory bodies (and most importantly the Council of State); and the final draft will be discussed and voted on in a parliamentary session before finally being published in the Official Gazette (Memorial). The entire process may take a couple of months. Taxpayers potentially affected by one or more of the different measures of the Draft Law should remain aware of its progress through Parliament and consult with their tax advisors to fully understand how it could affect them.
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