How does the tax system work in Luxembourg? What are the differences between residents, non-residents, and cross-border workers? This article covers the key tax specifics for each situation and provides essential information to help you navigate this unique system.
Taxpayers in Luxembourg
In Luxembourg, taxpayers are divided into two main groups: residents and non-residents.
Resident taxpayers:
- Residents are individuals whose primary residence or main place of stay is in Luxembourg.
- They are taxed on their worldwide income, regardless of whether it comes from Luxembourg or abroad.
Non-resident taxpayers (including cross-border workers):
- Non-residents are individuals who do not live in Luxembourg but earn income there, such as through employment.
- They are only taxed on income generated in Luxembourg.
The same rules apply to businesses. If a company's registered office or main management is in Luxembourg, it is considered resident. Otherwise, it is classified as non-resident and only taxed on income linked to its activities in Luxembourg.
Tax classes in Luxembourg
There are three categories of taxpayers in Luxembourg:
- Tax class 1: This class applies to single individuals, married non-residents who have not requested assimilation, individuals separated or divorced for more than three years, and partners who registered for a civil partnership during the current year. Progressive tax rates vary based on income levels;
- Tax class 1a: This class is intended for single parents, widowed individuals for more than three years, or individuals aged 65 or older at the beginning of the year. The tax rates in this class are more favorable compared to Tax Class 1;
- Tax class 2: This class applies to resident married couples, non-resident married couples who have requested assimilation, as well as individuals who are separated, divorced, or widowed for less than three years. It also applies to partners who registered for a civil partnership at the end of the year. Progressive tax rates are calculated on income. This is the most favorable tax class.
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 is important to note that joint income taxation applies only to resident married couples, non-resident married couples who have requested assimilation, individuals who are separated, divorced, or widowed for less than three years, and partners in a registered civil partnership. Unmarried couples or those not in a registered partnership are generally subject to individual taxation, where each partner is taxed separately on their own income.
Tax assimilation in Luxembourg
Non-residents have the option to request fiscal assimilation, which allows them to be treated as Luxembourg residents for tax purposes. This arrangement can be particularly advantageous for married couples or registered partners who choose joint taxation.
However, fiscal assimilation is subject to certain conditions. For instance, non-residents must demonstrate that at least 90% of their worldwide income is taxable in Luxembourg. If this criterion is not met, they may still apply, provided their net income not subject to Luxembourg tax does not exceed 13,000 euros. These criteria are assessed annually and based on the individual circumstances of each taxpayer.
The specific rules and conditions regarding fiscal assimilation for non-residents can vary. It is therefore recommended to consult the Luxembourg tax authorities or seek advice from a tax expert to obtain accurate and up-to-date information tailored to your personal situation. The website of the Direct Tax Administration also offers resources and online tools to assist with these procedures.
Taxable income in Luxembourg
Under Luxembourg's progressive tax rates and applicable fiscal rules, taxable income refers to the amount on which personal income tax (PIT) is calculated. This income represents the total net income of a taxpayer after deducting certain allowable expenses, such as social security contributions, insurance premiums, interest on specific loans, or professional expenses.
Taxable income generally includes earnings from professional activities (salaried or independent), rental income, income from financial investments (such as interest or dividends), as well as pensions and retirement benefits. These categories may be adjusted based on applicable expenses and specific tax rules.
Taxation methods in Luxembourg
There are two main types of taxation in Luxembourg: withholding tax (refer to Taxable income) and assessment tax.
Taxation by assessment is not the standard mode in Luxembourg. It primarily applies to taxpayers receiving income not subject to withholding tax, such as the self-employed, or those whose taxable income exceeds certain thresholds. Affected taxpayers are required to declare their annual income by completing the appropriate form.
This type of taxation can also apply if the taxpayer fails to submit their declaration on time or if irregularities are detected. In such cases, taxable income is assessed based on available information, such as employer-provided data or other relevant sources. This type of taxation can be contested, and the taxpayer may request a review of their tax file.
Income tax return in Luxembourg
The Model 100 is the form used for the annual income tax declaration by taxpayers subject to taxation by assessment. It allows the declaration of income from various sources (salaries, pensions, rental income, or investment income), as well as applicable tax deductions and credits.
Taxpayers must complete the Model 100 following the instructions provided by the tax administration and submit it within the specified deadlines. This process can be completed online via MyGuichet.lu, requiring LuxTrust authentication.
It is also important to note that other forms, such as Model 163 for cross-border workers or Model 163bis for non-residents earning income in Luxembourg, are also used. Taxpayers must use the appropriate form according to their specific tax situation.
It should be noted that the annual income tax return, whether mandatory or voluntary, must be filed no later than December 31 of the year following the tax year (for example, by December 31, 2025, for income earned in 2024).
Withholding tax in Luxembourg
The withholding tax system for those living and working in Luxembourg is a mechanism by which employers directly deduct income tax from employees' salaries before paying them. This deduction is based on a tax card that specifies the applicable tax class or rate.
The withholding tax system does not cover all tax aspects, and certain types of income, such as rental income or income from foreign sources, require an additional declaration through an annual tax return. Employees whose taxes are withheld at source and who do not have other sources of income are not required to file an annual tax return. However, it may still be beneficial for them to do so, as errors can occur in the calculation of the withheld tax. Filing a tax return not only allows them to verify the accuracy of the amounts withheld but also to claim deductions or tax credits they may be entitled to. As a result, it is not uncommon for taxpayers subject to withholding tax to receive a tax refund after submitting an annual return.
Non-resident taxpayers earning income in Luxembourg, such as salaries, are also subject to withholding tax. Depending on their personal situation or the amount of their taxable income, they may be required to file an annual tax return. For instance, non-residents with a taxable salary exceeding €100,000 in Luxembourg must declare their income. They may also request fiscal assimilation to benefit from the same deductions and tax credits as residents, under certain conditions.
It is essential for non-resident taxpayers to familiarize themselves with their specific tax obligations in Luxembourg and to refer to the guidelines provided by the Luxembourg tax administration or seek advice from a tax expert to ensure full compliance with their tax responsibilities.
Other taxes in Luxembourg
In addition to personal income tax (IRPP), Luxembourg levies various other taxes (corporate tax, value-added tax (VAT), donation taxes, and local taxes.
It is important to note that tax obligations vary depending on the individual circumstances of each taxpayer. Furthermore, tax rates and regulations are subject to change. It is therefore recommended to consult 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
For employees, residents as well as non-residents, registration with the Tax Administration is handled directly by the employer.
For self-employed workers (independents), registration is not automatic. The worker must register using the self-employed registration form available on MyGuichet.lu. Once the declaration is made, the Tax Administration issues the tax withholding card, which determines the applicable tax class.
Tax returns for cross-border commuters in Luxembourg
Cross-border workers residing in France
Cross-border commuters who work in Luxembourg and live in France are required to file an annual tax return in France, regardless of their family situation. They must declare all of their worldwide income, including that of their spouse or partner, if they are married or civilly partnered. Although income earned in Luxembourg is not directly taxed by France under the Franco-Luxembourg tax treaty, it is taken into account to determine the applicable progressive tax rate in France (effective tax rate rule). This can lead to an increase in French tax on other taxable income.
Cross-border workers residing in Belgium
Cross-border workers residing in Belgium and working in Luxembourg must declare all of their worldwide income, including that of their spouse, in their Belgian tax return. If income is earned in both countries, tax is calculated based on the total worldwide income to determine the applicable progressive tax rate. This rate is then applied to the taxable Belgian income, which may lead to an increase in Belgian tax. Luxembourg income is exempt from tax in Belgium but is taken into account for the calculation of the tax rate.
Cross-border workers residing in Germany
Cross-border workers residing in Germany and working in Luxembourg must declare their worldwide income, including that of their spouse, if married, in their German tax return. Income earned in Luxembourg is not directly taxed by Germany due to the tax treaty between the two countries, but it is used to determine the applicable progressive tax rate on German income (exemption with progression method). This can lead to an increase in the tax in Germany on other taxable income.
Teleworking and tolerance thresholds
It is important to note that tolerance thresholds for teleworking (34 days per year for France, Belgium, and Germany since January 1, 2024) are in place. If these thresholds are exceeded, it may affect the taxation of income, depending on the specific tax rules of each country.
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
Income tax form - model 100
Direct tax authorities - RTS offices
Tax memento
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