Luxembourg income tax rates for individuals are among the lowest in Europe, resulting in Luxembourg becoming known for being a tax haven.
Based on average income statistics and the income tax rate, the standard of living in Luxembourg is relatively high but taxes in Luxembourg are comparatively low compared to neighbouring European countries. For individuals, the basic types of tax and social security costs are income tax (impôt sur le revenu des personnes physiques), social security (sécurité sociale), investment income and capital gains.
This guide to Luxembourg income tax law & tax rates includes:
- What is taxable personal income in Luxembourg?
- Tax classes
- How many brackets and when to file
- Employee income tax exemptions
- Social security rates
- Company tax rates
- VAT rates
- Tax terms (French – German)
What is taxable personal income in Luxembourg?
There are eight categories of taxable income which, added together over the year, determine the total taxable income:
- Commercial/business profits: if you own a business
- Profits from agriculture and forestry: if you own farmland in use for commercial activity
- Profits derived from self-employed professions
- Net income from employment: for employers who work in Luxembourg
- Net income from pensions and/or annuities: tax on any monthly pension income
- Net income from investments (movable capital)
- Net income from rental of property
- Other net income (including capital gains)
Luxembourg income tax liability is based on the individual’s personal situation (e.g. family status). For this purpose, individuals are granted a tax class. Three tax classes have been defined as:
|Class 1||For single persons.|
|Class 2||For married persons as well as civil partners, married non-resident taxpayers who are not separated, and non-resident civil partners.|
|Class 1a||For single persons with children as well as single taxpayers aged at least 65 on 1 January of the tax year.|
Tax is calculated in accordance with a sliding increase table (see below), ranging from zero% to 42% depending on your income. A solidarity tax of 7% of taxes must also be paid (9% for those earning more than €150,000 in tax class 1 and 1a, or more than €300,000 in tax class 2). Here are examples below for income tax owed from 2018 from Pricewaterhouse Coopers:
Single taxpayer (Class 1/Class 1a)
|Taxable salaried income||0 – €20,000||€38,700||€58,700||€77,400||€96,700||€116,000||€135,500||€155,000|
|Income tax Class 1||€ 921||€5,317||€13,081||€21,177||€29,231||€37,456||€45,802||€54,242|
|Income tax Class 1a||€0||€4,271||€12,325||€20,420||€28,474||€36,699||€45,045||€53,486|
Married taxpayer (Class 2)
|Taxable salaried income||0 -€20,000||€38,700||€58,000||€77,400||€96,700||€116,000||€135,500||€155,000|
|Income tax Class 2||0||€1,675||€5,113||€10,635||€18,110||€26,164||€34,302||€42,439|
Luxembourg tax brackets for 2018
Residents in Luxembourg are taxable on their income in 23 brackets up to a maximum rate of 42%.
|Taxable income bracket||Tax rate on income in bracket|
|From €||To €||%|
All taxpayers must make an annual tax declaration to the relevant tax office, depending on your area of residence.
You must file a tax return by 31 March every year. To check which your area you come under, see the ‘Administration des Contributions’ website and look under Profil de l’Administration/ Adresses et Competences/ Section des Personnes Physiques. They also include a summary of direct taxes in English. If you disagree with your tax assessment, you can appeal — within 3 months — to the tax office or Directorate for direct taxes.
Employee Income Tax Exemptions
Taxable employment income usually includes all gains and benefits in cash earned as an employee, however there are a few exemptions:
Tax benefits for company cars is based on the mileage multiplied by the kilometre cost of the car. A mileage logbook will determine the numbers, otherwise a lump-sum method is an option.
A 25% reduction can be applied to the total amounts that equal monthly rent and other rental charges, and 17.5% if accommodation is furnished.
Employment related expenses
Expenses relate to your job can be tax deductible. There is a yearly lump sum of €540 to deduct, as well as commuting expenses (at a maximum of €2574).
Any gifts by seniority can be tax exempt at a maximum of €4500.
Overtime pay, working night shifts, Sundays or public holidays have tax exempt benefits.
Depending on the conditions, severance pay also has tax exemptions.
Occupation pension schemes
Any employer’s contributions to their pension scheme are subject to a flat tax rate of 20%, and benefits received are tax-exempt in Luxembourg.
A lunch voucher from work that is for example €8.40 has a tax benefit of €2.80
If you have a loan granted by the employer at an interest rate lower than 1.5% there are tax breaks — up to €3000 for mortgage loans toward a main residence, and up to €500 for personal loans.
Social Security Rates
Social security rates apply to employees and employers and are based on the gross salary including benefits in kind. They are also tax deductible. All those who earn a salary must submit an ‘Assurance-Dépendance’. Social security contributions for employees average 12.45% in 2018.
For a single person, €1,500 of investment income is tax free and for a married person, €3,000 is tax free. Half of the dividends from European Companies are exempted. Capital gains are mostly taxable at the marginal rate, with a tax exemption of €50,000 for a single person and €100,000 for a married couple.
Company Tax Rates
Since the start of 2018, corporate income tax rates have stood at 18%. According to data from KPMG, the aggregate income tax rate for companies in Luxembourg City will be 26.01% in 2018. Start-ups are taxed at the lower rate of 15% if they have incomes of below €25,000. A third bracket also exists for companies making between €25,000 and €30,000.
- The maximum VAT rate is 17%, the lowest in the EU.
- Super-reduced rate: 4% (e.g. foodstuffs, pharmaceuticals, restaurants);
- Reduced rate: 8%;
- Intermediate rate: 14% (e.g. adult clothing, wine);
- Standard rate: 17% (e.g. alcohol, beer, adult shoes).
Tax terms (French – German)
of living: niveau de vie – lebensstandard
Income tax: impôt sur le revenue – einkommenssteuer
Tax declaration: déclaration fiscale – steuererklärung
VAT: TVA (Taxe sur la Valeur Ajoutée) – MwSt. (Mehrwertsteuer)
Luxembourg income tax law
Loi concemant l’impot sur la revenueI (income tax law) of Luxembourg was put into place in December 1967, with the latest reform in force 46 years later, in January 2013.
The Luxembourg law #7020 introduced new tax measures for individuals and companies and was known as a ‘game changer’, introducing new measures which became applicable in January 2017.