Attracting international talent is no easy thing. Faced with a severe labor shortage, Luxembourg is finding it hard to hire foreign talent. Aware of the current situation, the government recently introduced a new tax incentive for highly qualified foreigners. But will that be enough to attract foreign talent?
Tax incentives for expatriates look insufficient
Luxembourg has been trying to resolve a crisis that has been going on for some time, causing a lot of concern at the national level. In its 2023 budget, the government amended the special tax regime intended for highly skilled professionals so that expatriates from outside the European Union (EU) can come work in Luxembourg. According to this conditional scheme, prospective foreign professionals will be eligible for full or partial tax exemption on everything related to their relocation to Luxembourg. This includes moving, housing, schooling and other expenses incurred to settle in their new home. However, only expatriates with a gross annual income of €75,000 will be eligible for this tax benefit. Previously set at 100,000 euros per year, this threshold has been lowered by the government with the aim of reaching out to more expatriates.
But it is unclear whether this change in taxation will really attract highly skilled foreigners. Local employers are welcoming the news rather coolly, acknowledging that any step to attracting talent is a good one. Still, they have serious doubts about the relevance of this tax incentive. Many of them believe that this measure will attract only select foreigners, as the primary condition of earning at least 75,000 euros gross per year is still considered too restrictive. Even though the government has lowered the salary threshold for this particular tax incentive, local recruiters still deem it to be too high. At the same time, the Fédération Entrepreneuriale Multisectorielle (Fedil) pointed out that before 2021, the threshold was fixed at 50,000 euros per annum.
High property prices deter expats
While salaries in Luxembourg appear to be higher on average than in other European countries, the cost of living there is significantly higher too. Conversely, though, the global price index indicates that Luxembourg City, which is home to many expatriates, is not the most expensive city in Europe. It ranked 13th in 2021, behind London, Paris, Dublin and Oslo. In fact, housing remains one of the most significant expenses for people in Luxembourg.
The current situation is so bad that industry professionals (in the construction and real estate sectors) are urging the government to take action. According to them, housing construction could fall by 40% this year if nothing is done. On top of this, the energy crisis, the rising cost of raw materials, and the rise in interest rates are putting additional pressure on a sector already in crisis. Homes available on the market are too expensive and no longer find buyers. Besides, fewer and fewer new homes are being built, and individuals are also complaining about high rents. Hence, many companies are of the opinion that solving the housing problem is more urgent than solving the tax problem. The high salaries of foreign talent vanish in their rents, which makes life in Luxembourg much less competitive than in other large countries. They are indeed quite pessimistic and consider that the situation is getting worse, year after year. In fact, construction professionals fear a negative impact on the entire Luxembourgish economy. It's worth noting that in 2021, the cost of housing in Luxembourg was 87% higher than the average for EU countries.
An acute labor shortage
There is an undisputable truth! Luxembourg is in dire need of manpower. On Tuesday, 24 January, the Union des Entreprises Luxembourgeoises (UEL) published its employment barometer. According to the survey, the country will need to hire 300,000 new workers by 2030. Banking, accounting, marketing, human resources, hotel business, tourism, insurance, and legal professions are as many sectors that will require human resources. By late 2022, 70% of artisans had already experienced a significant skilled labor shortage. According to the Chamber of Commerce, this shortage is very likely to hinder the country's economic growth.
The UEL notes three factors that could explain the country's difficulty in attracting foreign talent. These include the lack of flexibility, the salary levels, and quasi-non-existing perspectives for professional development. Businesses concur with this statement. Employees are increasingly expressing their need for flexibility and craving teleworking, not to mention the reorganization of work and working hours. Nowadays, employees want to have their say in the organization of their work, the definition of their position, the way they perform their tasks, and their place in the company. As a matter of fact, the trend has never waned ever since the lockdown days. Quite on the contrary, working patterns are becoming increasingly hybrid, and yet, many Luxembourgish companies still seem attached to some old-fashioned model. Furthermore, because of the complexity of hiring foreign talent, many companies seem compelled to hire expats already in the country.
Luxembourg's difficulties are not a new thing. Some analysts even speak of a worrying "brain drain". The World Talent Ranking of the International Institute for Management Development 2022, which assesses the attractiveness of countries for foreign talent, ranks Luxembourg 7th, whereas it was in the top 3 in 2021 and 2020. Nevertheless, the Luxembourg government is determined to stem this brain drain and retain qualified professionals. While companies say they are ready to move forward and do everything to attract foreign talent, the year 2023 represents a major strategic challenge for the Luxembourg government.
Useful links:
Working in Luxembourg: job offers in the public sector (in French)
