Are you curious about how taxes vary for residents and non-residents in Luxembourg? Explore all the specifics in this article.
Taxpayers in Luxembourg
In Luxembourg, taxpayers are divided into two main groups: residents and non-residents. Residents are obligated to pay income tax on their earnings from anywhere in the world, whereas non-residents only have to pay income tax on their income within Luxembourg.
To be classified as a resident taxpayer in Luxembourg, individuals must have their tax domicile or usual place of residence in the country. Conversely, they are considered non-resident taxpayers if neither their tax domicile nor their usual place of residence is in Luxembourg, and they have taxable income within Luxembourg along with substantial connections to another country.
In summary, an entity is categorized as a resident taxpayer if its registered office or central administration is located in Luxembourg. Conversely, if these are situated outside Luxembourg, the entity is considered a non-resident taxpayer.
Tax classes in Luxembourg
There are three categories of taxpayers in Luxembourg:
- Tax class 1: This category is for individuals who are single, widowed, or divorced and have no dependents. The tax rates are progressive and vary based on their income level;
- Tax class 1a: Tax class 1a is designed for single or divorced taxpayers who have one dependent. The tax rate in this class is more favorable compared to Tax class 1, providing some benefits for those with a dependent;
- Tax class 2: Tax class 2 is applicable to married couples or partners in a registered partnership. In this category, progressive tax rates are applied jointly to the combined income of the couple or partners.
Collective income taxation in Luxembourg
Under Tax class 2 in Luxembourg, when a couple is subject to collective income taxation, the incomes of both spouses or partners are combined to calculate a total family income. This combined income is then subject to a progressive tax rate that is applied jointly to the couple's income.
In a progressive tax system, the tax rate increases as the couple's income rises. This means that different income brackets are established, each with progressively higher tax rates. As a result, lower income levels are subject to lower tax rates, while higher income levels face higher tax rates
This method of taxation, which involves combining the incomes of both spouses or partners, takes into account the couple's total income when determining the tax they owe. This can impact the overall tax liability, as certain tax benefits or deductions may be more advantageous when the incomes are considered together.
It's worth noting that collective income taxation is only applicable to married couples or partners in a registered partnership. Couples who are not married or in a registered partnership typically undergo individual taxation, with each partner being taxed separately on their own income.
Tax assimilation in Luxembourg
The principle of tax assimilation for non-residents involves attributing the income of a non-resident taxpayer to their resident spouse or partner as if it were the resident's own income. This can be advantageous if the resident spouse or partner has a lower income or more favorable tax deductions, resulting in a reduction of the overall tax burden for the couple.
However, it's essential to be aware that tax assimilation for non-resident taxpayers is subject to specific conditions and limitations. For example, the non-resident taxpayer must genuinely pay taxes on their income in Luxembourg and should be officially recognized as a non-resident for tax purposes in their country of residence. Additionally, tax assimilation typically does not extend to other family members, such as children or parents.
The rules and conditions related to tax assimilation for non-resident taxpayers can vary, so it is advisable to consult with the Luxembourg tax authorities or seek advice from a tax expert to obtain accurate and current information tailored to your individual circumstances.
Taxable income in Luxembourg
When applying the progressive tax rates and tax regulations in Luxembourg, taxable income is the sum on which personal income tax (IRPP) is calculated. It represents a taxpayer's total income liable for taxation, considering certain deductions and exemptions (like deductions for social security contributions, insurance payments, professional expenses, pension contributions, and so forth).
Taxable income typically encompasses earnings from professional activities, property, investments, self-employment, and pensions.
Taxation methods in Luxembourg
There are two main types of taxation in Luxembourg: withholding tax (refer to Taxable income) and assessment tax.
Assessment tax is employed by tax authorities to determine a taxpayer's taxable income in certain situations. This includes cases where the taxpayer does not provide the necessary information to complete a tax return when discrepancies are identified in the submitted return, when the taxpayer fails to meet the tax return deadline, or when irregularities or inconsistencies are found in the return.
In such instances, the tax authorities assess the taxpayer's taxable income and calculate the owed tax using available information, including data from employers, bank statements, tax records from other countries, or any relevant sources.
Tax assessment is an exceptional tax procedure. In these cases, the taxpayer retains the right to challenge the tax assessment and request a reevaluation of their tax record.
Income tax return in Luxembourg
The Model 100 is the form used for the personal income tax return (IRPP) of resident taxpayers in Luxembourg. This form allows taxpayers to report their income from various sources, such as salaries, pensions, property income, income from movable property, and more. Additionally, the form includes sections where taxpayers can report tax deductions, tax credits, and other necessary details to calculate their tax liability.
Resident taxpayers are obligated to complete the Model 100 by providing all the required information, including a breakdown of their income and deductible expenses while following the instructions provided by the tax authorities. Once the form is accurately filled out, it must be submitted to the tax authorities within the specified deadline.
It's crucial to note that the Model 100 is specifically designed for resident taxpayers, and there are different tax return forms for various situations. For example, Model 163 is used for cross-border workers, and Model 163bis is intended for non-residents who earn income in Luxembourg. Taxpayers should ensure they select the appropriate form that corresponds to their individual tax circumstances.
Withholding tax in Luxembourg
The withholding tax system in Luxembourg involves the employer deducting income tax directly from the employee's salary before paying it out. However, it's essential to be aware that this system may not cover all tax aspects, and some items, such as property income or income from foreign sources, may require employees to make additional declarations on their annual tax return.
For non-resident taxpayers, it is typically necessary to report their income and fulfill their income tax obligations annually by filing a tax return. In this return, they would disclose their income from sources within Luxembourg, such as salaries earned in the country. Depending on their specific circumstances, they may also be eligible for certain deductions and tax credits.
Non-resident taxpayers should take the time to understand their specific tax responsibilities and consult the guidelines provided by the Luxembourg tax authorities or seek advice from a tax expert. By doing so, they can ensure that they meet their tax obligations accurately and in compliance with Luxembourg's tax regulations.
Other taxes in Luxembourg
Apart from personal income tax (IRPP), Luxembourg imposes various other taxes, including wealth tax, corporation tax, VAT (at rates of 3%, 8%, and 17%), inheritance and gift tax, as well as local taxes.
It's crucial to remember that tax obligations can vary depending on individual circumstances and specific situations. Tax rates and regulations are also subject to potential changes. Therefore, it is advisable to contact the Luxembourg tax authorities or seek advice from a tax professional to obtain precise and current information regarding the different taxes in Luxembourg.
Register with the Direct Tax Department in Luxembourg
The withholding tax form, also referred to as the tax card, plays a crucial role in enabling employers or pension funds to deduct income tax directly from the source. It serves as a registration with the Direct Tax Administration, and every employee and pension recipient must possess this document. The tax card specifies the individual's tax class, while the “fiche additionnelle de retenue d'impôt” indicates the applicable tax rate. Overall, the tax card is an essential document that facilitates the withholding of income tax by the employer or pension fund.
For residents, this form must be prepared at the beginning of the year by the RTS office of the Direct Tax Department.
For non-residents, it must be issued by the RTS office dedicated to non-residents. In both cases, the tax card is mailed and cannot be obtained in person from the issuing office.
Tax returns for cross-border commuters in Luxembourg
Cross-border commuters who work in Luxembourg and live in France must file an annual tax return in France, regardless of their family status. They must report their entire global income, including that of their spouse or partner. While income earned in Luxembourg won't be subject to taxation in France, it is taken into account to calculate a progressive tax rate for the individual or couple if there is additional income in France. Consequently, they may face a higher tax rate in France due to the inclusion of their Luxembourg income.
Cross-border workers residing in Luxembourg must declare their entire worldwide income, including that of their spouse or legal cohabitant, by June 30th of the following calendar year. In cases where income is earned in both countries, only the taxpayer must calculate both incomes to determine the progressive tax rate, which is then applied to the taxable portion of their Belgian income. This may result in an increased Belgian tax liability accordingly.
Special features and details in Luxembourg
The Luxembourg tax system encompasses numerous exceptions and specific tax conditions. For more detailed information, we recommend consulting the "Memento fiscal du Grand-Duché de Luxembourg". This comprehensive and precise document addresses each potential situation individually.
Useful links:
Direct tax authorities: www.impotsdirects.public.lu
Downloadable forms - Direct tax authorities: www.impotsdirects.public.lu/formulaires/index.html
Income tax form - model 100: www.impotsdirects.public.lu/formulaires/pers_physiques/index.html#revenu
Direct tax authorities - RTS offices: https://impotsdirects.public.lu/fr/profil/organigramme/rts.html
Tax memento: https://impotsdirects.public.lu/fr/legislation/memento.html
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