Luxembourg personal taxes: no significant changes for individuals
As in recent years, there were limited changes introduced for individual taxpayers in 2021.
Taxable income and available deductions for 2021 are largely unchanged and a summary of these can be found here: https://www.analietax.com/luxembourg-tax-guide.
For residents, the primary focus continues to be tax optimization ensuring they take advantage of all available deductions. Changes in personal circumstances (e.g. marriage, divorce, children, moving home, moving cross-border, inheritance etc.) can all impact taxes and so a regular review of each individual’s situation is key in ensuring an optimal tax position. With a current focus from the tax office on undeclared foreign income, resident taxpayers should ensure to declare their global income on the annual tax return filed in Luxembourg.
For cross-border workers, the covid-19 tax and social security agreements were extended to 31 December 2021. These have, in many cases, simplified the 2020 & 2021 tax reporting for non-residents living in the border countries. Whether these provisions will be extended into 2022 remains to be seen.
For non-residents from non-border countries, the home-working situation has resulted in significantly more complex tax filings which we cover in more detail below.
Elections for married couples
The default filing position for married resident taxpayers is a joint declaration whereas for non-residents it is a single filing. Any deviation from the default position requires an election (for 2021, most elections/changes must be made by 31 March 2022).
Taxpayers making an election via the tax card find that this position is carried over from the prior year so care should be taken if a previous elected position is no longer optimal. Also, if income increases the previously calculated tax rate on the Tax Card may require adjustment to avoid liabilities with the tax return.
Taxation of non-residents
The impact of home working on non-resident taxpayers not based in the border countries has been significant.
The Luxembourg payroll is required to process adjustments for income that is subject to taxation in the taxpayer’s country of residence. While this is a very welcome provision there are a number of practical consequences.
Often, the basis for a payroll calculation may not agree with the basis for an income tax calculation under the double tax treaty. Therefore, the taxpayers would historically adjust the taxable income figures on the tax return in Luxembourg & their home country at the end of the year to ensure correct and accurate reporting.
However, we have seen some Luxembourg tax offices taking the position that the Luxembourg payroll calculations are definitive. In a number of cases, where the payroll and tax calculations do not align (or there has been no payroll adjustment) this is causing significant double taxation of income. Correcting this requires lengthy and costly appeals so we are advising all taxpayers to work with their employer, payroll & tax adviser to process a year-end payroll adjustment for 2021 to ensure that the payroll and ultimate tax calculations align to avoid double taxation situations arising.
Looking forward to 2022
The one area of taxation that may change from 2022 is the extension of the provisions applicable to Luxembourg personal pensions to also cover contributions to and distributions from EU personal pension plans.
There are some administrative changes (e.g. the move to electronic tax cards) and the government also hinted at plans to increase taxes on unoccupied real estate and unbuilt land.
While Luxembourg have mentioned previously moving to individual taxation for all, no further information has been issued in relation to this change.
Hot off the press
Following the personal tax presentation, the Luxembourg tax office have announced that there will be a new “interactive tool” from mid-February 2022 to prepare and submit personal tax returns.
The tool should enable tax advisers to submit personal tax returns online for their clients which will be a widely welcomed change for many.
While 2022 may be the beginning of the end of paper tax returns in Luxembourg, paper filing remains an option and it is anticipated that those with complex or non-standard situations may still need to file on paper.
Many thanks to Laura Foulds of Analie Tax &Accounting for this invaluble information!