In 2014, a tax circular became effective in Luxembourg, aiming to attract skilled employees to the country. It did so by stating that certain expatriation costs usually borne by the hiring company are no longer considered taxable income for the impatriate (if certain conditions relating to the impatriate, the Luxembourg employer, and the position are met). Among other advantages, the circular also attracts groups looking to relocate part or all of their headquarters.
With several years having elapsed since this regime went into effect, we have had some experience with it and would like to answer the following commonly asked questions.
1. Must the impatriate worker exercise his/her employment as a main activity in Luxembourg?
In principle, the employee should perform 100% of his/her professional activity in Luxembourg.
However, the Luxembourg tax authorities have shown some flexibility in this respect, being aware that highly qualified employees are obliged to travel abroad in the framework of their professional activity in Luxembourg. In practice, the Luxembourg tax authorities tend to analyse each case individually.
Our experience shows that the Luxembourg tax authorities usually take no issue with employees performing 80% (or more, of course) of their professional activity in Luxembourg (i.e. 4 workdays a week).
2. What does it mean employ or commit to employ in the medium term at least 20 full-time employees in Luxembourg?
The tax circular does not provide any further indication of what should be understood by “medium term”. It does state that if, based on its business plan, a company can commit to employing 20 full-time employees (or 40 part-time employees) within 3 to 5 years, then the condition should be considered fulfilled.
In reality, the acceptable timeframe would probably vary from case to case based on the actual business plan of the company.
Additionally, following our correspondences with the Luxembourg tax authorities, we see that the authorities no longer accept the application of the impatriate tax regime if the minimum number of 20 employees is reached using the consolidated basis of the company (i.e. the company group level).
3. If the impatriate maintains his/her home-country residence (i.e. in terms of qualifying expenses), does that affect anything?
Yes: the difference would be in the deductible expenses available, which would depend on the impatriate’s maintaining this residence.
To be able to deduct the following expenses, the impatriate has to maintain his/her habitual residence in his home country. If he/she does, then costs (and related taxes, though excluding maintenance and cleaning) arising from rent, heating, gas, electricity, water, elevator are tax-exempt in Luxembourg up to the applicable ceiling (€50,000 per year or €80,000 for spouses/partners living together; or 30% of the total annual fixed remuneration of the impatriate).
Otherwise, only the cost-of-housing differential between housing costs and home costs is tax-exempt. Invoices should be kept in your internal files and available in case the Luxembourg wage tax authorities ask to see them.
4. How can you demonstrate that the potential impatriate worker has acquired a deep specialisation in a sector or has a profession characterised by difficulties of recruitment in Luxembourg?
This condition is required for recruitments, i.e. when an employee is directly recruited abroad by a Luxembourg company to exercise an employment activity with a local contract.
Before recruiting, some questions must be answered, including:
- Has the company experienced difficulties recruiting this profile locally in Luxembourg?
- Does the potential impatriate have specific specialisations that are difficult to find on the Luxembourg employment market?
- Has the job vacancy been declared at the employment agency in Luxembourg (ADEM)?
- Has the employee been recruited through a head-hunter after unsuccessful attempts to recruit on the local market?
Please note that supporting documents (CV, internal/local-market job offers, ADEM advertisements) should be kept in your internal files and available in case the Luxembourg wage tax authorities want to see them.
5. Is the impatriate obliged to become a Luxembourg tax resident?
Based on the above-mentioned tax circular, a registration at a Luxembourg town hall (commune) is required. However, the impatriate may simultaneously remain a tax resident in his/her home country (i.e. the centre of vital interests remains in the home country).
If the assignee is considered a Luxembourg non-resident taxpayer, it should not disqualify him/her from the impatriate tax regime. Attention should be paid to the actual resident country, more specifically to the method of avoidance of double taxation used by this country—generally speaking, a case by case analysis should be done.
6. What happens if the application of the impatriate tax regime is rejected in the framework of a payroll tax audit by the tax authorities?
As no prior approval of the tax authorities is required for the application of the impatriate tax regime, the employer should ensure that all the conditions laid down by the tax circular are met.
Indeed, employers retain the full responsibility as to the correct application of the tax circular. It is therefore recommended that they keep the necessary information and documents to sustain their positions in order to prevent any further questions in the annual reporting or a wage tax audit.
At this stage, the risk incurred if the Luxembourg tax authorities refuse to apply the regime is that of having to pay the wage withholding tax (and the social security contributions for employees subject to the Luxembourg social security system) that should have been due on the benefits exempted.
Please note that if the check of the Luxembourg tax authorities is made after several years and the conditions to benefit from this regime were not met, the retroactive taxation should be calculated (i.e. issuance of a corrected tax assessment).
For more details, please read our newsletter on this subject.
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 n°95/2 LIR dated 27 January 2014