On 16 December 2021 the Luxembourg budget bill for 2022 (n°7878) has been adopted by the Luxembourg Parliament (the Law). In general, the Law aims at maintaining a stable tax environment considering the current sanitary situation. The main tax measures can be summarized as follows:
Pan European Individual Pension Plan (PEPP) - The Law introduces a new tax provision in the Luxembourg income tax law (LITL), article 111ter of the LITL, which relates to contributions made under a PEPP. This new article defines the conditions of (tax) deductibility and partial exemption (in case of reimbursement) of payments made under a PEPP. The conditions are similar to those applicable to payments made under an individual pension schemes as provided for by article 111bis of the LITL. It is worth noting that the deductibility of payments made under a PEPP and under an individual pension scheme is limited to an annual cumulative cap of EUR 3,200.
Home saving scheme - Currently, annual contributions made under home savings schemes (building societies recognized in Luxembourg or in another EU Member State) are deductible insofar as these contracts are concluded for the purpose of financing, at the end of the saving phase, the construction or acquisition of the dwelling used for personal living purposes or for the repayment of obligations entered into for the purpose of financing the construction, acquisition or conversion of the dwelling. From 2022, the deduction will be extended to contracts concluded to finance maintenance and repair costs of the dwelling used by the owner for his personal needs as well as the costs of photovoltaic or thermal solar installations attached to this dwelling.
Remuneration paid by temporary employment agencies - The Law introduces a new provision according to which remuneration paid by temporary employment agencies to temporary employees whose gross hourly wage does not exceed EUR 25 will be subject to a flat-rate tax. The flat-rate tax is 10% and applies on the gross amount of the remuneration taxable in Luxembourg reduced by the social contributions payable in Luxembourg.
Tax credit for hiring unemployed persons - The Law provides that the tax credit for hiring unemployed persons will be extended until 31 December 2023.
Brexit related adjustments – Since 1 January 2021, the United-Kingdom is no longer an EU Member State and as such UK companies do not benefit anymore from EU tax directives. In this respect, the Law removes UK companies from any tax provisions of the LITL referring to EU Member State companies (i.e., Annex of article 166 (10) of the LITL and §60 of the Luxembourg valuation law).
Consolidated group for financial accounting purposes – The Law introduces a definition of the concept of “consolidated group for financial accounting purposes” based on the definition provided by Directive (EU) 2017/952 of 29 May 2017 (ATAD II). The term is now defined as a group consisting of all entities which are fully included in consolidated financial statements prepared in accordance with International Financial Reporting Standards or the national financial reporting system of a Member State. This definition has been introduced for the purpose of article 164bis LITL (tax consolidation) and article 168bis LITL (interest deduction limitation rule).
Controlled foreign companies (CFC) and municipal business tax (MBT) – Luxembourg CFC rules provide that, under certain conditions, undistributed income of foreign subsidiaries or permanent establishments (PE) are reallocated to a Luxembourg parent company, when such foreign subsidiary or the PE qualify as a CFC. During the year the undistributed income is recognized at the level of the Luxembourg company, such income is subject to Luxembourg corporate income tax but not to MBT. When the CFC finally distributes its profits or when the Luxembourg company sells the CFC at a gain, the law provides for certain exemptions under corporate income tax and municipal business tax to avoid double taxation. However, given that the income initially included under the CFC rules is disregarded for MBT purposes, the Law now provides that the amount exempted for corporate income tax purposes upon effective distribution or disposal of the CFC should be added back for MBT purposes to ensure tax neutrality.
Tax rates – Tax rates for direct or indirect tax purposes remain unchanged.
In conclusion, the Law does not contain any major corporate tax reform. However, Luxembourg companies are expected to be impacted by future EU rules that will be implemented under domestic law in the coming years (e.g., ATAD 3 and Pillars I and II etc.).