On 12 October 2022, Finance Minister Yuriko Backes presented the budget bill for 2023, the last budget under the current legislature. Spending priorities are on social benefits, public investment, with a particular focus on climate transition and digitization, and affordable housing. The tax reform contemplated in the current coalition agreement will not materialise under this legislature. However, a number of targeted measures will be introduced. The level of taxation of companies shall remain stable with no windfall taxes on the agenda.
A crisis budget
With a state spending of EUR 27.3 billion compared to revenues of EUR 24.5 billion, the central government will have a deficit of EUR 2.8 billion. Extraordinary expenditures to support private households, to contain inflation and to stabilize energy prices will push public debt up to 26.3% of the GDP.
Nearly half (47%) of the central government expenditures will be dedicated to social benefits, grants and transfers to social security.
Public investments in 2023 will focus on mobility, education and public health and will amount to EUR 3.8 billion, of which EUR 1.2 billion will be dedicated to environmental and climate investments.
EUR 1.5 billion will be made available until 2026 to enhance the digitization of the country and of public services.
Additional budget of EUR 474 million will be allocated to the housing ministry and the housing development fund to support the development of affordable housing.
To further support the development of the financial centre additional means will be provided to Luxembourg for Finance (LFF) and the Luxembourg House of FinTech (LHoFT) and a “Finnovation Hub” will be set up with the University of Luxembourg.
The tax reform contemplated in the current coalition agreement will not materialise under this legislature. Nevertheless, a number of targeted measures are set out in the budget bill and other draft legislation released early this month.
Personal tax incentives
o Additional flexibility will be provided under the profit-sharing scheme (“prime participative”) to companies in a tax unity group to allow a determination of the eligible profits with reference to the group’s aggregate profits.
o Eligibility requirements for the tax regime for impatriates will be relaxed by a lowering of the annual fixed minimum salary from EUR 100,000 to EUR 75,000.
These adjustments are welcome and echo industry submissions.
Reduction of VAT rates
o Most VAT rates will be temporarily reduced by 1% in 2023 to mitigate the impact of inflation.
o Reduced VAT rates will be introduced to foster the installation of solar panels, the use of bicycles and the circular economy.
Real estate taxation
o A (long-awaited) reform of the current property tax will be implemented from 2026 onwards and will be coupled with the introduction of a new tax on unbuilt land and vacant housing to foster residential development and to curb real estate speculation.
o A reform of the tax system for depreciation of construction will be introduced in 2023 to support affordable housing.
Relief for individual taxpayers
o Increased tax credits and deductions for single-parent families and low-income earners will be introduced/maintained as an effort to mitigate the effects of inflation.
o The budget bill finally clarifies the tax treatment of tax transparent entities under the EU anti-tax avoidance framework as well as the concept of paying agent under the 20% withholding tax on interest paid to Luxembourg residents (RELIBI). These clarifications are deemed non-contentious and echo current market practice.
The budget bill will now go through the legislative process and is expected to be adopted by mid-December.
The contemplated modernization of tax credits for investments to foster the digital and green transition set out in the tripartite agreement signed on 28 September 2022 will be addressed by separate legislation expected in 2023 and shall become effective from 2024 onwards.
We shall further advocate for the introduction in the longer term of more comprehensive enhancements to our tax framework based on proposals developed in collaboration with the Luxembourg Employers’ Association (UEL). These notably relate to a decrease of the nominal corporate income tax rate to match the EU average and to further incentives to foster future-proof investment and talent attraction.