Expatriate tax ebook - Luxembourg

Facts and figures

Pre arrival procedures
Employment visas
Tax year
Tax returns and compliance
Income tax rates
Sample income tax calculation

Pre arrival procedures
Before arriving in Luxembourg, both the employer and employee need to be aware of their rights and obligations. The most important seems to be the difference which is made between European Union [EU] & European Economic Area [EEA] workers and non-EU & EEA workers.

EU & EEA workers
According to Luxembourg law, an EU & EEA National does not need to be holder of a work permit.

Only a national identity card (current or expired less than 5 years) is necessary to work on the Luxembourg territory.

However, there is an exception for workers coming from the new member states following the two previous enlargements of the European Union (May 1st, 2004 & more recently January 1st, 2007). For these people a visa may be required to enter Luxembourg and a work permit is compulsory before being allowed to take up paid employment.

The employer and employee are subject to various administrative formalities, such as:

• file a declaration of entry at the Social Security Centre (a copy of the employee’s identity card has to be joined),
• file a hiring split at the Inspection du Travail et des Mines,
• provide the employee with the tax card request,
• provide the employee with a hard copy of the work contract duly signed by both parties,
• make an appointment for the employee to attend the medical visit (attesting to the employee’s ability to work),
• employee to file a tax card request with the Tax Office.
  

Non EU workers & Non EEA workers
Foreign individuals who are neither EU & EEA citizens nor citizens of the countries included in the enlarged EU may only enter Luxembourg with a valid passport and a visa if required. To be authorised to take up paid employment in Luxembourg, they are required to obtain a work permit to be issued by Minister of Labour and Employment (Ministère du Travail et de l’emploi).

The foreign worker is entitled to work as soon as he has received the work permit and not before.

Employment visas
When applying for a work permit an employer is required to submit an application to the relevant government department.

The decision to grant work permits is only taken once every month and a guarantee (cash or bank guarantee) will be requested during the validity of the permit; the amount may vary and will not be less than €1,487.36.
Different kinds of work permits exist, but the first one provided to any worker is for one year and for one profession with one employer (category A).

When the work permit expires, the employer must apply for a renewal.

In some circumstances, a work permit may be withdrawn from a foreign worker, e.g. if the worker is away from Luxembourg for six months or longer without interruption (however this is not applicable if the worker continues to be employed under contract throughout the period of absence).

When the work permit is obtained, the same formalities as for Luxembourg nationals or new employees from within the EU must be completed.

Tax year
The Luxembourg tax year runs from 1 January to 31 December.

Tax returns and compliance
The Personal Income Tax return should be filed before 31st March, but the administration remains flexible on this point.

Income tax rates - YA 2007
Individuals’ income is taxed on the basis of a progressive tax schedule according to income brackets.

The first €10.335 is taxed at 0% for single persons and €20.670 for married couple. Subsequent income is taxed at rates between 8% to a maximum of 38% on income in excess of € 36,570 for single persons or € 73,140 for married couples.

A solidarity tax amounting to 2.5% is added to the calculated income tax due.

Tax Classes
The tax calculation is determined by means of tax classes. As from 2008, three tax classes are subsisting:

• Class 2: (married couples taxed jointly; widow(er)s and persons divorced for three years or less)
• Class 1a: (single and persons divorced for more than three years, all with dependent children, widow(er)s, single aged 65 or more)
• Class 1: (single individuals under 65).
  

Married non-resident taxpayers are placed in Class 2 if more than 50% of the professional income of their household derives from a Luxembourg source; otherwise, they are placed in intermediary class 1a.

Child tax bonus
As of 2008, in replacement of the former tax credit per child, an annual child tax bonus amounting to €922,5 is paid directly to taxpayers per dependent child belonging to their household. This payment is made in addition to the family allowances.

Joint taxation of life partners (non-married)
After a full year of common domicile or residence (recognised in Luxembourg or abroad), resident and non-resident “life partners” may opt to be jointly taxed under certain conditions.

Lakebrink case – deduction of mortgage interest for non-residents
Subsequent to the Lakebrink case, non-resident tax payers are able to claim that their mortgage interest from loans financing their principal residence, even if it is located out of Luxembourg, be taken into account to reduce the tax rate applicable to their Luxembourg income provided they derive at least 90% of their professional income from Luxembourg.

Sample income tax calculation
Assumptions: Married couple, both are employed and earn dividend and interest income from Luxembourg, 2 dependent children, distance to workplace= 35 km.

a. Calculation of taxable income

Information about Luxembourg: