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Luxembourg government’s draft budget law for 2021

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20 October 2020

As announced by the Prime Minister last Tuesday, new tax measures are included in the Luxembourg government’s budget bill for fiscal year 2021 which has been submitted to the Parliament on 14 October 2020 (the Bill).

The aim of the proposed measures is to i) close existing loopholes, as formerly agreed by the coalition government, in particular in the real estate area by inter alia introducing a new real estate tax (prélèvement immobilier) due by certain investment funds holding Luxembourg real estate as well as regarding stock options and warrants and ii) increase the competitiveness of Luxembourg by inter alia reducing the subscription tax due by ESG funds and creating a new tax treatment applicable to profit-participating premium paid to employees (prime participative).

The main tax measures mentioned in the Bill which are described below should apply as from 1 January 2021.

1. New real estate tax due by investment funds

An annual real estate tax at the fixed rate of 20% would be due as from 1 January 2021 by certain Luxembourg investment funds which hold real estate assets located in Luxembourg.

The Luxembourg entities covered by the new measure are the following investment funds having legal personality (SCS being, however, expressly excluded from the scope):

  • Undertakings for collective investment (UCIs) subject to Part II of the Luxembourg Law of 17 December 2010
  • Specialised investment funds (SIFs) subject to the Luxembourg Law of 13 February 2007
  • Reserved alternative investment funds (RAIFs) subject to the Luxembourg Law of 23 July 2016

Thus, foreign investment funds, Luxembourg tax-transparent limited partnerships (ie SCSs and SCSps) as well as FCPs and SICARs would not be subject to the real estate tax.

According to the Bill, the tax is levied on income and gains received or realised by the investment funds, which derive directly or indirectly through Luxembourg tax transparent entities or fonds commun de placement (FCPs) from Luxembourg real estate.

If the real estate is held through Luxembourg tax transparent entities or FCPs, the amount subject to the real estate tax due by the funds will be determined on a pro rata basis. Furthermore, in such a case, any gain realised by an investment fund upon the transfer of its interests in the tax transparent entities or FCPs will be treated as the sale of the underlying real estate for the purposes of this measure and taxed accordingly taking into consideration the amount equal to the increase in value of the real estate asset.

The real estate tax which is due and payable by the investment fund cannot be deducted or credited by the fund or the investors.

A specific tax return should be filed in this respect and submitted to the Luxembourg direct tax authorities before 31 May of the following calendar year. As a consequence, the first tax return should be made by 31 May 2022 at the latest.

A listing of any properties held during 2020 and 2021 by investment funds subject to the tax should be reported to the tax authorities by 31 May 2022 at the latest.

This measure has been proposed by the government due to the abusive use of Luxembourg investment funds by certain Luxembourg real estate developers to in fact conduct commercial activities. Fund promoters may wish to consider a conversion of their existing funds into an ordinary commercial company.

2. Reduced subscription tax for ESG funds

To develop sustainable investment, Luxembourg UCIs or compartments of UCIs which invest in economic activities qualifying as environmentally sustainable as defined by Article 3 of Regulation (EU) 2020/852 of 18 June 2020 on the establishment of a framework to facilitate sustainable investment would benefit as from 2021 from a reduction of the subscription tax rate currently levied at 0.05% on the net asset value. The rate would vary from 0.01% to 0.04% depending on the proportion of sustainable investments made by the UCI/ compartment (from 5% to 50% of the net asset value).

The amount corresponding to the proportion of sustainable investments realised by the fund should be certified by a statutory auditor (réviseur d'entreprise agréé).

3. Repeal of the tax regime applicable to stock options and warrants replaced with a partial exemption of profit-participating premium

The Circular issued by the Luxembourg tax authorities in 2017 on the tax treatment applicable to stock options and warrants would be abolished at the end of this year.

As from 1 January 2021, a specific tax treatment would however be introduced regarding certain profit-participating bonuses paid to employees. The profit-participating premium would be treated as a tax-deductible expense at the level of the employer and as a salary at the level of the employee.

The employee would benefit from a 50% income tax exemption provided that the amount of the profit-participating premium is limited to:

  • 25% of the gross annual salary (additional benefit in kind or in cash being excluded) of the employee in the tax year during which the premium is allocated
  • 5% of the profits realised by the employer during the accounting period preceding the allocation of the premium

A list of the employees benefiting from this tax measure as well as any relevant information should be provided by the employer to the Luxembourg tax authorities.

4. Additional measures

  • Wealth management companies (SPFs) would no longer be allowed to hold real estate properties directly or indirectly through Luxembourg and foreign tax transparent entities (such as SCIs) and FCPs. An SPF however would still be allowed to hold real estate assets through companies subject to corporate income tax.
  • Registration duties applicable in cases of contributions of Luxembourg-based real estate properties made to civil and commercial companies in exchange for shares would be increased from 1.1% to 3.4% (including transcription tax).
  • A vertical tax consolidation may be replaced with a horizontal tax consolidation without any tax impact at the level of the existing tax group, subject to conditions and for a limited period of time.
  • The tax regime regarding premium and costs reimbursed by the employer applicable to employees becoming Luxembourg tax resident (impatriés) would be reshaped. An eight-year income tax exemption would be applicable under certain conditions. The discriminatory character of this measure may result in criticism.
  • The accelerated amortisation applicable in cases of rental housing would be reduced to 4% except for costs linked to sustainable energy (maintained at 6%) and a specific deduction limited to EUR10,000 would be granted.

The Bill should now be reviewed by the Luxembourg Parliament and the Council of State to be adopted before year-end.