On 23 and 24 December 2024, amendments to the Luxembourg Income Tax Law were published,impacting the taxation of individuals, applicable from 2024 or 2025 tax years. No major changes were made to what was announced last summer by Luxembourg Minister of Finance Gilles Roth to decrease Luxembourg taxpayers’ income taxes.
Major tax amendments are listed below:
Luxembourg income tax brackets have been amended incorporating an additional 2.5 indexations. This will lead to lower taxes for all tax classes from January 2025. The tax rates remain the same, ranging from 0% to 42% (excluding contributions to the unemployment fund of 7% to 9% which is calculated on the taxes due).
As an example of this change, please find below an overview of the impact of the amendments to the minimum (i.e. free from taxes) and maximum tax brackets:
| Tax class 1 | ||||
|
Tax Rate | 2024 | 2025 | ||
| From | to | From | to | |
| 0% | 0 | 12,438 | 0 | 13,230 |
| 42% | 220,788 | – | 234,870 | – |
| Tax class 2 | ||||
|
Tax Rate | 2024 | 2025 | ||
| From | to | From | to | |
| 0% | 0 | 24,876 | 0 | 26,460 |
| 42% | 441,576 | – | 469,740 | – |
Specific amendments to tax class 1a have been applied, in order to lower the tax burden on this category of taxpayers (parents considered as single parents and entitled to a child bonus, widows and single taxpayers aged more than 64 at the beginning of the tax year).
| Tax Class | Situation |
Gross Annual Salary |
2025 Income Taxes |
Tax Savings Compared to 2024 |
| 1 | Single | €50,000 | €5,208 | (€502) |
| 1 | Single | €100,000 | €22,045 | (€748) |
| 1a | Widow / aged 64+ | €50,000 | €2,890 | (€1,794) |
| 1a | Widow/ aged 64+ | €100,000 | €19,724 | (€2,928) |
| 1a | Single parent with CIM | €50,000 | – | (€2,793) |
| 1a | Single parent with CIM | €100,000 | €17,929 | (€2,674) |
| 2 | Married jointly taxable | €50,000 | €1,011 | (€173) |
| 2 | Married jointly taxable | €100,000 | €9,123 | (€896) |
This tax credit amounts to EUR 108 per annum. It can be requested as a deduction from the 2024 annual tax liability.
The conditions to be eligible for it depend on the level of the professional income and the tax class of the taxpayer:
The CIB is applicable upon the request of the taxpayer, for the fiscal household, through the filing of a tax return/withholding tax adjustment or through a specific application form if no filing obligations apply in 2024.
This tax credit has been introduced and applies at tax return level as from the 2024 tax year. Payment of overtime is tax free in Luxembourg, but this may not be the case in every country. The tax credit targets employees who are treaty resident outside of Luxembourg, and whose residency country effectively taxes overtime (either through a specific provision in the Double Tax Agreement in force with Luxembourg e.g. Germany, or through the application of a foreign tax credit which will not offset the taxes due in the other country).
If the CIHS is requested by the taxpayer, it can amount to EUR 700 per year for overtime exceeding EUR 4,000 per year (salary + extra payment). For less than EUR 1,200 of overtime payments per year, no CIHS is granted.
New article 115 13b LITL introduces changes in the way the inpatriate regime applies. The old regime aims at exempting from tax part or all of the relocation benefits and premiums paid to an employee hired from abroad or seconded to Luxembourg. The exemptions applicable primarily depend on what real expenses the individual employee incurred when moving to and living in Luxembourg.
The new regime in force as from 1 January 2025 adopts a more pragmatic approach. It provides an exemption of 50% of the gross annual remuneration (excluding benefits in kind paid by the employer to the inpatriate and any income which is exempted under other provisions of the law) regardless of actual costs or benefits associated with the move to Luxembourg. The exemption is capped. The total annual remuneration to which the 50% exemption applies may not exceed EUR 400,000 i.e. maximum EUR 200,000.
The new regime will not simply replace the previous regime. The previous regime and the updated regime may in fact coexist until 2032. The updated regime will automatically apply to new hires or secondees into Luxembourg from 1 January 2025. For the updated regime to apply, the inbound employee and their Luxembourg employer must still respect certain conditions.
For employees who were already benefitting from the regime prior to 1 January 2025, the law provides that they will continue to benefit from the previous regime by default. However, it will be possible for them to be transferred to the new regime. The choice to move from the previous regime to the new regime is irrevocable and needs to be communicated to the tax authorities.
The eligibility criteria to apply for the application of the new regime mostly remains the same as under the previous regime. One exception to the conditions relates to the performance of the employee’s professional activity. The previous regime has a condition that the employee must carry out the professional activity for which he/she benefits from the exemption provided by the regime “as the principal activity”. The updated regime replaces this condition and specifies that the activity benefiting from the regime should represent at least 75% of his/her working time.
Assumptions:
| Computation of the Luxembourg Yearly Net Income (in EUR) | Without Special Tax Regime Application | With Updated Special Tax Regime Application |
| Gross income | 100,000 | 100,000 |
| Social security contributions | (11,050) | (11,050) |
| Exemption under special tax regime | – | (50,000) |
| Taxable basis | 88,950 | 44,475 |
| Income taxes and dependency contributions | (24,889) | (6,855) |
| Net income | 64,061 | 82,095 |
| Tax saving | – | 18,034 |
This mechanism allows companies to pay a 50% tax free participation premium to their employees providing that certain conditions are fulfilled. In the amended tax law, the total amount that can be allocated to employees as part of the scheme increases from 5% to 7.5% of the profits of the employing company in year Y-1. In addition, the ceiling of the maximum premium payable per employee increases from 25% to 30% of the employee’s annual gross fixed remuneration (excl. benefits and non-periodic payments).
As from 1 June 2024, a new paragraph 13c was induced in article 115 LITL, allowing, under certain conditions (one of which is to be under the age of 30), the tax exemption of a “rental premium” paid by the employer. There is no limitation regarding the country where the rental property is located. This provision therefore also applies to frontier workers meeting the conditions. The exemption must be requested and claimed via the Luxembourg payroll.
The amended tax law introduces article 115 13d, which provides a new premium for employees aged less than 30 and benefitting from a discretionary payment. The premium is 75% exempted and capped at:
When the yearly gross remuneration is above EUR 100,000, the premium for young employees can not be exempted. The “yearly gross remuneration” taken as a reference for this premium is the remuneration including any income exempted with progressivity based on a Double Tax Treaty but before including benefits in kind and in cash of the related tax year.
The conditions to benefit from this premium are the following:
This means that if an employee changes employer, he/she will not be eligible for the exemption anymore.
As from tax year 2024, interest paid on a mortgage loan contracted for the primary residence is deductible without any ceiling for the year the rental value is fixed and the following year. For primary residence, rental value is fixed on the acquisition date or date of completion in case of construction. After that, ceilings of EUR 4,000, EUR 3,000 or EUR 2,000 will apply, depending on the date the rental value was fixed.
As from 2025 tax year, the maximum deduction for costs per child not forming part of a taxpayer’s household (for instance, children living with the other parent and for whom alimony payments are paid) is increasing from EUR 4,422 to EUR 5,424.
For a deeper discussion on the above, please reach out to your Vialto Partners point of contact, or alternatively:
Eric Paques
Partner
Denise Chambers
Director
Michael Roser
Senior Manager
Quentin Cosco
Manager
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