EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.
Recent Searches
It is that time of the year again to start preparing for personal income tax returns.
This moment is certainly well-chosen to think thoroughly about sources of income, obviously locally but also abroad.
Indeed, Luxembourg tax residents are taxable in Luxembourg on their worldwide income. While Double Tax Treaties may allocate (partial) taxation right to a foreign country (e.g. real estate located abroad, dividends…), taxpayers would still have to report such income in their Luxembourg income tax return. Other income, even if foreign-sourced (e.g. usually interest, capital gains, certain pensions) is exclusively taxable in Luxembourg.
With the rise of the exchange of information between tax authorities, they become increasingly aware of such foreign income.
Under Common Reporting Standards (CRS) for instance, foreign tax authorities will automatically communicate to the Luxembourg tax authorities1 information related to interest, dividends, sales proceeds (in case of disposals of movable assets), balance of account at year-end (or closure) attributed to Luxembourg resident taxpayers.
European Directives for Administrative Cooperation (DAC)2 also include the automatic exchange of information (AEOI) for certain types of income (salary, pension, director’s fees, real estate, life insurance) or transactions, that can be relevant for personal income tax purpose.
Experience shows that, especially when such income is actually taxed abroad, some taxpayers may not be fully aware that they also have to report it in Luxembourg.
In presence of foreign assets, it is certainly important to consider how to adequately report in the context of the Luxembourg personal income tax return. Luxembourg has not had wealth tax for natural persons for more than 15 years and does not impose on its tax residents – contrary to a number of other countries – any obligation to declare foreign assets if they do not produce reportable/taxable income. Still, in certain situations, it could be considered to adopt a very proactive approach and report even more information than required (e.g. disposal of movable assets not representing a substantial participation, held for more than 6 months and therefore not taxable, but subject to such AEOI) to align to the information the tax authorities would ultimately receive.
What if some items would have been omitted?
Given the volumes of information received from foreign countries, the Luxembourg tax authorities (‘LTA’) are very well equipped to assess whether the taxpayer disclosed all its revenue and relevant information and documents that are required by the LTA to determine an accurate taxable base. In this respect it is also to be reminded that the intentional submission of an inaccurate or incomplete tax return, might lead to an administrative fine between 5% and 25% of the avoided taxes, or undue reimbursement.
In case the LTA are not able to reconcile the data declared by the taxpayers with those they received, they will raise formal requests whose number has grown exponentially over the recent years.
The requests made by the tax authorities will usually not only be very broad in terms of scope, requesting taxpayers to provide information about any income or wealth they may hold abroad but also in terms of duration: it is not uncommon that those requests go back up to the 10 preceding years on the basis of the extended statute of limitation that applies in case of incomplete or incorrect tax return.
Given that sanctions and fines have been severed in the past years, it is highly advisable that taxpayers include all relevant information in their tax return. Moreover, requests for information should be handled accurately, comprehensively, and timely. The adequate attention being put into the handling of such requests will enable the taxpayer to limit exposure to sanctions and certainly help prevent controversy with the tax administration.
[1] In 2021, the Luxembourg tax authorities received 482 300 CRS reports from 91 countries
[2] In 2021, the Luxembourg tax authorities received 206 222 reports based on DAC 1
Summary
Luxembourg tax residents are taxable in Luxembourg on their worldwide income. While Double Tax Treaties may allocate (partial) taxation right to a foreign country (e.g. real estate located abroad, dividends…), taxpayers would still have to report such income in their Luxembourg income tax return. Other income, even if foreign-sourced (e.g. usually interest, capital gains, certain pensions) is exclusively taxable in Luxembourg.