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Luxembourg incentivises highly skilled expatriates

On 21 May 2013, the Luxembourg tax authorities published an amended Circular LIR 95/2 on the taxation of expatriates, which aims at attracting highly skilled workers to Luxembourg by means of a favourable tax regime. The new Circular replaces the former Circular [LIR 95/2] as from 1 January 2013. Taxand Luxembourg presents the regime as provided by the new Circular, highlighting the changes compared to the former Circular and the subsequent opportunities for multinationals.

The new Circular no longer refers to highly skilled workers but to so-called ‘inpatriates’ (foreign employees working in Luxembourg), demonstrating its aim of increasing the number of people attracted to working in the country. In practice, the former Circular (since 2011) proved to be too restrictive in several aspects and its formal requirements too burdensome. The new Circular is designed to broaden the scope of application of the regime and to relax its formal requirements. One notable change is that the prior approval from the tax authorities for applying the regime is no longer required. 

Benefits of the regime
Given the size of Luxembourg, some companies wanting to develop their products or services have been required to hire highly qualified workers from the international labour market - the Luxembourg labour market being short in highly qualified resources. Moving highly skilled workers from one country to another entails various financial costs (accommodation, travel, etc.). To encourage these workers to come to Luxembourg, employers often bear these costs. From a tax point of view, these costs are considered a fringe benefit granted to the employee, and thus taxable as an additional remuneration at the level of the employee. The net effect is that most of the fringe benefits that are necessary to attract expatriates often end up costing the employer more than double the amount of the actual price in additional taxes.

The Circular resolves this issue by specifying that certain costs borne by the employer for the move, stay and exit of the employee in Luxembourg, will be exempt from tax to the employee during a 5 year period (while remaining tax deductible at the level of the employer). 

The employer will therefore be able to compensate free of tax the moving, travel and child care expenses of their employee, including school costs. It will also be able to compensate housing and tax equalisation costs tax-free if the compensation does not exceed:

  • EUR 50,000 (EUR 80,000) for a married couple and 
  • 30% of the expatriate salary. Finally, certain costs of living allowances may also be granted, subject to conditions and limitations 

Who can benefit from the favourable tax regime?
The Circular cites qualifying inpatriates as:

  • Employees recruited abroad to work in Luxembourg (no longer temporally as in previous Circular) for a Luxembourg company
  • Employees assigned by a foreign company that is part of an international group to a Luxembourg company of the group. The concept of international group is no longer defined, as it was in the former Circular, most probably in order to take a broader approach and to apply the Circular in an increased number of cases. 

Employees must fulfil the following conditions: 

  • The inpatriates are no longer required (as was the case in the previous Circular) to have specific diplomas. They are also no longer required to contribute to the development or creation of economic activities in Luxembourg with high added-value
  • The new Circular states, however, that specific knowledge and skills of the employee must benefit the staff of the Luxembourg company in order to stimulate sustainable activities in Luxembourg
  • The inward expatriates have to become Luxembourg tax residents
  • They may not have been resident in Luxembourg before or have lived closer than 150 km from the border zone and may not have been subject to individual income tax in Luxembourg on their employment income in the 5 years preceding the assignment to Luxembourg
  • They must earn a taxable gross salary of at least EUR 50,000 (while it was the maximum amount subject to social security under the former Circular). In this context, bonuses and benefits in kind are not taken into account.
  • They may not replace other employees to which the regime of the Circular does not apply
  • The employee is required to have in-depth skills in a sector in which there are recruiting issues in Luxembourg

In the case of secondment within an international group, the following additional requirements apply:

  • The expatriate must have 5 years’ seniority within the group or have at least 5 years’ experience in the relevant sector 
  • A working relationship has to remain between the foreign group company and the seconded employee during the period of secondment
  • There must be a secondment contract between the Luxembourg company and the foreign group company
  • The seconded employee must be able to go back to the foreign group company when the secondment period ends 

Conditions applicable to the Luxembourg company for the tax regime to apply
The conditions for the Luxembourg company are:

  • The company must employ or undertake to employ at least 20 full time employees in the mid-term and 
  • The number of inpatriates may not exceed 30% (10% under the former Circular) of the total number of full-time employees. As far as this condition is concerned, the new Circular does not say ‘inpatriates’ but ‘highly qualified workers’. It is understood thatthis is a mistake made during the drafting of the new Circular as the new Circular is only an amended version of the previous one. This requirement has therefore to be understood as regarding the number of inpatriates, although this condition does, however, not apply to companies that have been established in Luxembourg for less than 10 years.

Procedure to benefit from the regime
A prior authorisation from the tax authorities is no longer required to benefit from the regime. The employer is merely required to communicate to the tax authorities a list of the employees benefitting from the regime. This communication has to be made once a year, at the latest on 31 January of the given tax year.

The expatriates’ regime applies for a maximum period of 5 years. 

Your Taxand contacts for further queries are:
Keith O’Donnell
+352 26 940 257

Gilles Sturbois
+352 26 940 209

Samantha Merle
+352 26 940 235

Taxand's Take

While the changes introduced by the new Circular are positive as they aim at making the favourable tax regime more flexible and available to more people, one should bear in mind that some of the conditions still remain subject to different interpretations. The fact that prior approval from the tax authorities is required is on the one hand good news as it will speed up the administration process. On the other hand, it’s a risk to be taken by employer and employees as tax authorities may ultimately take a different view when assessing the employee. A careful review of each individual situation is required before applying the Circular. 

Taxand's Take Author

Keith O'Donnell
Taxand Board member & Taxand global real estate tax service line leader

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