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Income tax: who will pay and how much?

Income tax in Luxembourg: what will change from 1/1/2018?

The living cost in Luxembourg is quite high if we compare it to other European countries, especially neighboring ones. Indeed, some items – such as housing – reach prices comparable to those of London or Paris in some neighborhoods. As a consequence, salaries are significantly higher than the European average – especially in the Greater Region.

In this context, as underlined by our expert Michel Roumieux, partner and personal tax leader at PwC Luxembourg, “Luxembourg’s finances are good, as the triple AAA of S&P underlines it. Nearly half of the state’s spending is financed by direct taxes like the income tax. In contrast to many countries, almost all personal income is subject to taxation.”

How am I taxed in Luxembourg ?

Luxembourg is known for its tax rate, more attractive than in its neighboring countries. Three classes of taxes are defined according to marital status (single, married, divorced, widowed…), parental status (children at charge or not) and the age threshold of 64 years old. More details here. These classes are designated by numbers 1, 1a, 2 – 2 being the most advantageous class. The tax is calculated based on the amount of income and the associated class.

Who is taxed in Luxembourg?

First, Michel Roumieux, partner and personal tax leader at PwC Luxembourg, underlines the necessity to distinguish residents from non-residents.

-       Residents are people who have their fiscal residence in Luxembourg, in other words, their main home. In some cases, residents may have to be subject to double taxation. They are strongly advised to approach a tax expert to optimize their taxation.

-       Non-residents are generally assimilated to people who cross the border to work. The tax is deducted at source. Meaning that money is taken from the employee’s salary and paid, at the end, by the employer. At the end of the year, a declaration is made by the taxpayer. Corrections can be carried out, giving rise to additional payments or retrocessions depending on other sources of taxes or tax deductions (insurance in particular). In the case of a household in which one or two spouses are working in Luxembourg, and their income represents more than 50% of the total household income, class 2 is applied. However, the tax reform – starting from 2018 – will shift this situation into class 1.

 In conclusion, “it is clear that if taxation on income is quite explicit, and Luxembourg tax stability is deemed, it is strongly recommended to turn to a tax expert to optimize the payment of taxes. This is generally a very good investment”, said Michel Roumieux, partner at PwC Luxembourg.

For more information, about administrative procedures, click here.

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