Franz Kerger is a Tax Partner at A&O Shearman, specializing in tax structuring and litigation.
What are the key features of Luxembourg’s new impatriate tax regime, and how do they enhance the country’s attractiveness for international talent?
The new impatriate regime, effective from fiscal year 2025, offers a simplified and highly competitive framework for attracting high-skilled employees to Luxembourg. Eligible employees relocating to Luxembourg can benefit from a 50% tax exemption on annual gross remuneration up to EUR 400,000 for up to nine fiscal years. The new regime is available to highly skilled professionals hired directly from abroad or seconded from group companies, provided they meet certain conditions, such as a minimum annual base salary of EUR 75,000 and not having been a Luxembourg tax resident, or having lived within 150km of the border, in the preceding five years. This streamlined approach makes Luxembourg’s offering competitive with other jurisdictions.
How does the new impatriate regime compare to the previous system, and what transitional provisions are in place for employees already benefiting from the old regime?
Under the former regime, tax benefits were tied to specific relocation allowances, which required extensive documentation and were often perceived as cumbersome. The new regime provides a straightforward 50% exemption on gross remuneration, making it easier for both employers and employees to administer. In most circumstances, the new regime should result in higher tax benefits. Employees currently benefiting from the old regime can choose to switch to the new regime. This choice is irrevocable and can be made at any time, allowing for flexibility and continued benefit up to the eighth year following the start of employment in Luxembourg.
What other tax incentives does Luxembourg offer to attract and retain talent, beyond the impatriate regime?
Luxembourg has long been recognized for its attractive tax framework. Notably, there is in principle no capital gains tax on movable property after a six-month holding period. Additionally, individuals relocating to Luxembourg can benefit from a step-up in the tax basis of substantial participations, effectively resetting the value for tax purposes and minimizing future tax liabilities. There is also no inheritance in direct line, which is a significant advantage to pass on the wealth to the next generation.
Can you elaborate on the recent changes to the profit-participating bonus regime and their impact on employee retention?
The profit-participating bonus regime, introduced in 2021, allows employers to grant bonuses to employees with a 50% tax exemption, subject to certain thresholds. As of 2025, the individual bonus threshold has increased from 25% to 30% of the employee’s annual gross remuneration, and the overall bonus pool that employers can distribute has risen from 5% to 7.5% of the previous year’s net profits. These enhancements make the regime more attractive for both employers and employees, supporting retention by rewarding performance in a tax-efficient manner.
What new incentives have been introduced for young employees, and how do these support Luxembourg’s talent pipeline?
Starting in 2025, employers can grant an annual bonus to employees under 30 years old, which is 75% tax exempt, subject to specific limits based on salary bands. This incentive is available for up to five years, provided the employee remains with the same employer and meets the criteria, including being on their first permanent contract in Luxembourg. Additionally, since June 2024, young employees can receive a monthly rental allowance of up to EUR 1,000 that will be 25% tax exempt, further supporting their integration and financial stability in Luxembourg.
How does Luxembourg’s tax framework support the private capital industry, particularly in attracting front office professionals?
Luxembourg is in the process of introducing a new carried interest taxation regime, designed to further attract professionals in the private capital sector. This regime is expected to offer preferential tax treatment for carried interest, enhancing Luxembourg’s appeal for fund managers and investment professionals. Combined with existing incentives, this development positions Luxembourg as a premier destination for talent in private capital and asset management.
What role do these tax measures play in Luxembourg’s broader strategy to remain competitive as a business and financial hub?
Luxembourg’s tax framework is a cornerstone of its strategy to attract and retain top talent, particularly in sectors such as finance, technology, and private capital. By continuously modernizing its tax incentives, such as the impatriate regime, profit-participating bonuses, and new measures for young employees, Luxembourg ensures it remains competitive with other leading jurisdictions. These measures not only support individual professionals but also help companies build and maintain world-class teams, reinforcing Luxembourg’s reputation as a dynamic and innovative business environment.