Introduction of a special tax regime for expatriate highly skilled employees
On 31 December 2010, the Luxembourg tax authorities issued a circular which introduces a beneficial income tax regime for expatriates. The aim of this tax regime is to attract highly qualified individuals to Luxembourg and to reduce the expenses incurred by companies who employ expatriates. The tax regime takes the form of a tax relief for certain costs linked to expatriation and is subject to a number of conditions.
The provisions entered into force on 1 January 2011 and are applicable to assignments or recruitments made on or after this date.
Conditions for relief
The tax regime applies to employees who assigned to a Luxembourg entity of the group Luxembourg. It can also apply to employees who are directly recruited abroad by a Luxembourg company.
The relief is subject to a number of conditions:
- The employee must make a significant economic contribution or contribute to the creation of new economic activities with high added value in Luxembourg
- The employee must be Luxembourg tax resident
- The employee must neither have been a tax resident in Luxembourg nor have paid individual income tax in Luxembourg in the five preceding years
- The employee must receive a base monthly remuneration at least equal to the maximum monthly social security ceiling (EUR 8,787.81 in January 2011)
- The employee must have a higher education or at least five years of relevant experience
- The Luxembourg company must have, or commit to have in the medium term, at least 20 employees working full-time; and
- The number of assignees may not exceed 10 percent of all staff (only applicable to companies established in Luxembourg for more than ten years)
Tax relief on certain elements of expatriation package
Provided that these conditions are met, various costs directly related to the expatriation would not be considered to be taxable employment income.
The tax relief applies to the following expatriate benefits and allowances:
- Moving costs, including transportation of goods, furnishing costs and travel expenses in light of special circumstances (birth, marriage, death of relatives)
- Costs related to housing in Luxembourg and expatriation:
- Rent and utilities in Luxembourg (if the former residence of the assignee is kept in the home country) or the housing differential between Luxembourg and the home country (if the former residence is not kept)
- One home leave trip per year
- Tax equalisation costs
However, these costs may not exceed the lesser of EUR 50,000 per year or 30 percent of the employee’s annual base remuneration. If the employee shares housing with his/her spouse or partner, the ceiling is increased to EUR 80,000.
- School fees for children in primary and secondary education
- Lump sum allowance
This notably includes cost of living allowance. The monthly allowance is limited to the lesser of EUR 1,500 per month or 8 percent of the employee’s monthly base remuneration. If the employee shares housing with his/her spouse or partner, the monthly amount and the percentage are doubled (i.e. EUR 3,000 and 16 percent respectively) provided that the spouse or partner is not performing a professional activity.
Duration of the expatriate regime and procedure
The tax regime is applicable for a maximum of 5 years following the year of the employee’s arrival in Luxembourg.
The benefit of the tax relief is subject to the employer making an application to the competent tax office within two months of the start of the expatriate’s employment with the Luxembourg company.