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Starting 1 June 2024, a non-time limited partial tax exemption applies to the allowance paid to an employee for the purpose of renting accommodation occupied as the employee’s principal residence, provided specific conditions are met.
Mechanism
The rental allowance benefits from a 25% income tax exemption in the hands of the employee. The maximum monthly allowance that can benefit from the beneficial tax regime is set at €1,000, with the rental property occupied on a full-time basis.
Where income is exempt due to the application of a Double Taxation Treaty or another intergovernmental agreement, the exemption for the allowance must be apportioned based on the ratio of days worked (and subject to tax in Luxembourg) to the days worked abroad for the month in which the rental allowance is paid.
In case of incomplete pay periods or part-time work, the maximum monthly rental allowance that qualifies for tax exemption should be calculated based on the fraction that reflects the ratio of the actual paid work hours in the month to the total work hours that the employee would have been paid for if they had worked full-time for the entire month.
Conditions
The exemption is subject to the following conditions (to be satisfied at the time the rental allowance is made available to the employee):
- The employee is under 30 years old as at 1 January of the relevant tax year.
- The amount paid by the employer does not exceed the actual amount borne by the employee for their rent, excluding charges, as evidenced by the lease agreement concluded by the employee.
- The employee’s gross annual remuneration, including all emoluments and benefits but excluding the rental l allowance, does not exceed thirty times the minimum monthly social wage for qualified workers (i.e., €92,553.30 as of 1 June 2024).
Employers can pay additional allowances to cover part of the rent not covered by the rental allowance, however such allowances will not benefit from the partial tax exemption.
Requirements for the employer
Annual regularization
No later than the last salary payment of the tax year, the employer must review and, if necessary, regularize the exemption applied to the rental allowance if the employee exceeds the annual salary limit that qualifies them for the exemption.
When the employee has not worked for the entire year for the employer granting the rental allowance, the employer must extrapolate the remuneration received during the period of the employee's activity with them to a full year of full-time work, to verify that the aforementioned annual salary limit is not exceeded.
An employer that is a member of a fiscal unity as defined by the Luxembourg Corporate Income Tax Law must consider the cumulative remuneration the employee has received during their period of service across all entities within the fiscal unity to ensure compliance with the aforementioned annual salary limit.
Documentation
The employee must provide their employer relevant evidence for the employer to be able to evaluate that the conditions are met. If the lease agreement lists more than one individual as tenants who have entered into the lease (e.g., in the case of a shared rental), for the purposes of the Rental Premium, the total amount of rent is divided by the number of tenants, unless the agreement specifies the amount of rent payable by each tenant. The resulting amount should be considered for determining the maximum amount of the Rental Premium that can benefit from the 25% exemption.
Impact
The initiative represents a significant enhancement to Luxembourg's tax landscape, designed to draw in young professionals by acknowledging the challenging housing market. The rental allowance offers tax reductions, leading to increased take-home pay—an essential factor for young individuals embarking on their careers. This benefit is likely to enhance the appeal of employers to emerging talent, with the anticipation that the advantages will surpass any extra administrative burden and expenses.
For additional information with respect to this alert, please contact the following:
Christophe Joosen, Partner, People Advisory Services Leader
+352 42 124 7222
Christophe.Joosen@lu.ey.com
Azam Akram, Senior Manager People Advisory Services
+352 42 124 8691
Azam.Akram@lu.ey.com
Summary
A non-time limited partial tax exemption applies to the allowance paid to an employee for the purpose of renting accommodation occupied as the employee’s principal residence, provided specific conditions are met. The rental allowance benefits from a 25% income tax exemption.