The European, May 2014

New Luxembourg Government’s tax policy in a challenging environment

Navigating in perilous times

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 Determining a local fiscal policy is nowadays certainly a very burdensome exercise. While local economies are still overshadowed by the financial crises, the overall international tax debate has been reinforced as a consequence of the latter: combatting tax avoidance and applying transparency to cross-border transactions have become key elements to be considered when designing national tax legislation.

This is the context in which the new Luxembourg government has to elaborate its tax policy for the forthcoming parliamentary term. Rebalancing the State budget is the key element, since a decrease of VAT revenues of approximately €800 million is anticipated due to the change of the EU legislation on e-commerce.

As stated in the coalition program and reconfirmed by the Prime Minister Xavier Bettel in his speech on the state of the nation, the consolidation of the public finances is based on two major pillars. The first pillar is a detailed screening of public expenses where the draft law on the Budget 2014 already provides for a reduction of expenses of approximately €230 million. The second pillar focuses on an increase of tax revenues by generating an overall economic growth rather than an increase of the tax burden.

An increase of the VAT rates has nevertheless been considered as unavoidable,  the current rates will thus be increased as from 1 January 2015 by 2%, raising the top VAT rate to 17% but keeping it the lowest within the EU. The super-reduced rate applicable, upon conditions and subject to a cap, to the acquisition and renovation of buildings is maintained at 3%, but it will no longer be applicable to secondary residences or housings intended for rental.

A major tax reform is scheduled for 2017, but measures aiming at simplifying and reinforcing tax collection as well as combatting tax fraud will presumably be introduced already at an earlier stage. Luxembourg will also follow the path of tax transparency with laws on the automatic exchange of information on interest and further categories of income, as well as compliance with the requirements of the Global Forum on Tax Transparency.  Both the Action Plan on Base Erosion and Profit Shifting and the amended Parent-Subsidiary Directive will require an adaptation of the existing tax law as well.

The frame for the future is thus placed…


Marc Schmitz, Partner, Tax Leader, EY Luxembourg


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