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Luxembourg : Living There
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Luxembourg : Living ThereINDIVIDUAL TAXATIONLuxembourg residents are liable to tax on their worldwide income. Taxable income is income from business or profession, employment income, agricultural income, pensions and annuities, movable capital, rents and royalties, and miscellaneous income (i.e. capital gains). Married couples can file jointly or separately. INCOME TAXThere are two ways by which the taxes are levied: withholding at source and assessment. Tax on the following types of income is withheld at source: INCOME TAX RATES | | TAXABLE INCOME | RATE | | Salaried and pension income | progressive rates | | Dividend payments | 20% | | Directors’ Fees | 20% | | Source: Global Property Guide |
This may constitute a person’s entire tax liability except on cases wherein: - The annual taxable income of the taxpayer’s household exceeds €58,000,
- The taxpayer’s household receives income not withheld at source amounting to more than €450,
- The taxable income includes income from movable property greater than €1,500
If the preceding conditions are satisfied, a taxpayer must file for assessment. The same rates and tax classes apply.The payable income tax is then adapted to the taxpayer’s personal circumstances by his classification in a particular tax class. The tax amount which resulted from the above computation is further adjusted through a combination of proportional, linear, and degraded deductions and rebates.The taxpayers are classified as follows: - Class 1 taxpayers are single individuals or those who live alone. They are taxed at the general tax rates without any deductions.
- Class 1a taxpayers are individuals in reduced circumstances (because they are widowed, or over 65 years of age, or because they are living alone with dependants in their household). For class 1a taxpayers, the first €39,000 is taxed at normal tax rates and only half (50%) of their income exceeding €39,000 is further subject to tax.
- Class 2 taxpayers are jointly assessed married couples that use the split tariff (the tax rates in tax class 2 are the same as on half the income in tax class 1). This removes the effect of the progressive rates in the upper income brackets. After a legal separation or spouse’s death, the taxpayer continues to be classified as a Class 2 taxpayer for the subsequent three years and will be reclassified into Class 1 thereafter.
DeductionsBasic deductions are granted to employees up to €600 annually, and €1,800 for married couples filing jointly. An additional deduction of €4,500 defined as “extra-professional allowance” is given to individuals earning income subject to social security contributions to account for increased household expenditure.Further allowable deductions are professional expenses up to €540, commuting expense up to €2,970, mandatory social security contributions, gifts made to qualifying institutions (maximum of €500,000 or 10% of total net income), and voluntary contributions to an occupational pension scheme up to €1,200.Employees are also granted a yearly lump-sum allowance for special expenses amounting to €480 (doubled if taxpayers are a married couple filing jointly), with an option of exchanging it for the following deductions albeit under certain conditions: - Alimony €20,400
- Interest payments €672
- Insurance premiums €672
- Contributions to home savings plan €672
- Private old-age pension scheme €1,500 – €3,200
- Single death insurance premium €3,000 related to a mortgage loan
Extraordinary charges relating to costs for child care, household employees, and home assistance for the disabled are allowed up to €3,600 annually. Furthermore, single parents with dependent children are also given allowances not exceeding €1,920. Education and maintenance costs for non-dependent children may also be claimed up to €3,480. Rental Income (Owner-Occupied Property)Property owners living on their own property are still liable to pay tax. For private properties, the tax is levied on the “rental value” of the property which is based on the property’s “unit value” (generally 1% to 2% of the property’s market value).The only deduction allowable in relation to this “rental income” is interest on loan used to acquire property: fixed at €1,500 for first five years of occupation, €1,125 for the next five years, and €750 thereafter. Capital GainsCapital gains realized through selling the real property within two years of acquisition are considered speculative gains and are taxed as miscellaneous income at the full marginal rates. The taxable gain is computed by deducting the acquisition price and incidental costs (agents’ commissions, fees to notaries, surveyors, advisers, etc.) from the selling price. No other deductions are allowed.If the property is held for more than two years, the tax rates are reduced to a maximum of 19.475%. The taxable gain is computed by deducting the acquisition price and incidental costs from the selling price. In this case, the purchase price is adjusted by official coefficients to account for inflation during the period of ownership.Furthermore, a single taxpayer will be entitled to a deduction of €50,000. The amount is doubled if the property is owned by a married couple filing jointly. This allowance is available every ten years.If the property was obtained by inheritance (direct line), the tax deduction can be increased by €75,000. The taxpayers can also defer the payment of capital gains tax if they decide to re-invest the money in a new property that will be rented out.Capital gains realized from the sale of a resident taxpayer’s primary residence are not liable to tax. PROPERTY TAX Municipal Ground TaxA property in Luxembourg is subject to municipal ground tax which is levied annually at 0.7% to 1% of its assessed unit value (usually lower than its actual market value). The tax amount based from the preceding computation is further multiplied by a municipal coefficient that is between 180% and 800% depending on the municipality. The property’s unit value, basic tax rate and the municipal coefficients depend on the property’s classification such as size, age, site, and economic use. The maximum rate is set at 7.5%. Last Updated: Nov 29, 2007
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Source: www.globalpropertyguide.com
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