Type of union and tax implications

The tax implications of different types of civil unions in Luxembourg: everything you need to know.

"Choosing a union status in Luxembourg is not merely an administrative formality or a symbolic decision. Whether you are a Luxembourg resident or an expatriate in Luxembourg, it is a commitment with significant tax and legal consequences," says Séverine Bergé of the firm Neofisc.

So, common-law marriage, PACS, or marriage? Each option has advantages, but also limitations that are crucial to understand before committing.

Cohabitation: Simplicity Personified

What is a common-law marriage?

Cohabitation means living together without signing a contract. No paperwork to fill out, no formalities to worry about. It’s the perfect solution for couples who value simplicity and independence.

How cohabitation affects your taxes

From a tax perspective, cohabitation has the same implications as if you were living alone. Each person is considered single and is taxed individually. The consequences are as follows:

• Limited tax benefits: You cannot take advantage of joint deductions or pool your income.
• In the event of a separation: No special administrative steps are required.

Who is cohabitation for?

Cohabitation is best suited for those who want to avoid administrative procedures or maintain complete independence.

PACS: An Attractive Middle Ground

What is a PACS?

The PACS (Civil Solidarity Pact) is a formof official union, but less restrictive than marriage. Quick to establish and easy to dissolve, it combines flexibility with legal recognition. No wonder it’s gaining popularity!

The tax benefits of PACS or civil union

• Joint filing is possible. As long as the PACS^{was in effect from} January¹ to December 31 of the tax year and you shared a common residence, you can request joint filing on your annual tax return. This allows you to combine deduction limits and income to maximize your tax savings.
• Ease for your projects. Want to buy a house? The PACS makes it easier to deal with banks, as it offers more stability and takes both partners’ incomes into account.
• Flexibility: Unlike marriage, there is no community of property. Each partner owns the assets they acquire and is responsible only for the debts they incur. In the event of a separation, you are not tied up in a lengthy legal process. There is no need to hire a lawyer or obtain a court judgment.

What the PACS does not change from a tax perspective

• Tax bracket. Nothing changes on your pay stubs. You will remain in bracket 1 (or 1a if you have at least one child).
• Not the same rights as marriage: In the event of death or separation, the PACS does not offer the legal protections of marriage.

Who is the PACS for?

PACS is the preferred option for those seeking a balance between simplicity and recognition.

Marriage: a commitment with significant implications

What is marriage?

Marriage is the ultimate commitment. It grants extensive rights to each partner, but also entails responsibilities. It is the most comprehensive option for those who wish to fully formalize their union.

How marriage affects your taxes

Immediate move to Tax Class 2 after marriage

As soon as you get married, one spouse will move from tax class 1 to tax class 2, while the other will be taxed at the flat rate of 15% regardless of their income. This can be advantageous… or not.

Warning! If your incomes are very different: the one who earns less could end up paying proportionally more in taxes.

Mandatory joint tax return for married couples

All of the married couple’s income is combined and taxed collectively. However, it is possible to request an individual tax calculation.

Expect an adjustment

A married couple’s first joint tax return may result in additional tax due and the implementation of quarterly estimated tax payments.

What about separation?

• A complicated divorce: Dissolving a marriage is more complex than dissolving a civil partnership (PACS). You must go to court, assess joint assets, and manage property matters.
• A useful transition period: After a divorce, you remain in tax bracket 2 for three years, which mitigates the tax impact of the separation. Be aware, however, that you will return to tax bracket 1 afterward.

Marriage: Who is it for?

Marriage is recommended for those seeking maximum legal protection and who are prepared to handle the tax implications.

Comparison chart: Which union is right for you?

Criteria	Cohabitation	Civil partnership	Marriage
Legal recognition	No	Yes	Yes
Immediate tax impact	None	None	Yes (Class 2)
Inheritance benefits	No	Limited	Full
Dissolution	Automatic	Quick	Long and costly
Banking benefits	No	Yes	Yes

Tax reform in Luxembourg: what will change for married couples

The Luxembourg tax system is undergoing significant changes. A major reform, scheduled to take effect in 2028, will fundamentally alter how couples—particularly married couples—are taxed.

While today the choice between cohabitation, civil partnership, or marriage can have a significant impact on your tax situation, this approach is set to change.

Toward the end of tax class 2

Currently, married couples benefit from Tax Class 2, which is based on joint taxation with a “splitting” mechanism. This system often reduces the overall tax bill, particularly when incomes are unequal within the couple.

With the announced tax reform, this model will gradually be phased out in favor of a more individualized system.

Individualized taxation by 2028

Starting in 2028, Luxembourg plans to implement a single tax bracket for all taxpayers, regardless of their marital status.

• Each person will be taxed individually on their income
• Marriage will no longer confer any specific tax advantage
• Differences between singles and couples will be reduced

The goal is to make the tax system fairer and more transparent, adapting to changing family and work patterns.

What will the practical impact be based on your situation?

Couples with similar incomes

If both of you work and have similar incomes, the impact of the reform should be limited. In some cases, individual taxation could even prove slightly more advantageous.

Couples with a single income or very different incomes

On the other hand, if one spouse earns the majority of the household income, the elimination of tax bracket 2 could result in a relative increase in taxes.

This point is particularly important for certain types of expatriates, especially when one spouse temporarily puts their career on hold.

A gradual transition to limit the impact

To avoid overly abrupt changes, the reform calls for a gradual implementation, with adjustment mechanisms spread over several years.

The exact implementation details will continue to evolve, but the stated goal is to limit the negative impacts on households.

What you can anticipate today

• Rethink the income balance within the couple
• Plan for the non-working spouse or a spouse in transitionto return to work
• Conduct short- and medium-termtax simulations
• Incorporate this change into your plans (real estate purchase, relocation abroad, career change)

A shift in thinking to embrace

This reform marks a turning point: taxation will no longer be based on the household, but on the individual. In other words, your choice of relationship status will, over time, have less direct tax impact than it does today.

It remains essential, however, to fully understand the current rules, as they will continue to apply in the coming years and may influence your short-term decisions.

In this context, seeking professional guidance allows you to make informed decisions, taking into account both your current situation and future developments.

Frequently Asked Questions (FAQ) received by our Neofisc expert

Which tax regime should a couple choose in Luxembourg?

It depends on your income and your plans. Marriage offers immediate tax benefits, but the PACS is more flexible.

Does a PACS allow you to pay less in taxes?

Yes, if you opt for joint taxation and your incomes are unequal. However, this benefit only applies starting from the year in which the PACS^{is in effect from} January¹ to December 31.

What are the tax risks of marriage?

With very different incomes, the spouse who earns less may end up contributing proportionally more. This can lead to financial strain.

What happens in the event of a divorce?

A divorce is long and costly, but you benefit from a three-year transition period under Class 2 to limit the tax impact.

Practical advice before choosing your type of union

Run tax simulations

Estimate your taxes for each option based on your income.

Think ahead

Planning to buy a home? A civil union or marriage are strategic choices.

Plan for the costs of dissolution

In the event of a separation, a PACS is simpler and less expensive to dissolve than a marriage.

In conclusion, choosing between cohabitation, a PACS, and marriage depends on your priorities and personal situation. If you prioritize simplicity, cohabitation is an option without constraints. If you’re looking for a balance between flexibility and tax benefits, opt for a PACS. Finally, marriage remains the most comprehensive choice for those seeking maximum legal protection, even if it entails greater tax and administrative responsibilities.

Take the time to discuss these options with a tax specialist to avoid unpleasant surprises and optimize your situation.

Practical example of the tax impact based on the type of union chosen

Let’s consider the case of two people, X and Y.

• X’s annual taxable income: 20,000 euros.
• Y’s annual taxable income: 80,000 euros.

Calculation of withholding tax (tax year)

	.Common-law marriage	Civil partnership	Marriage
X	756 euros	756 euros	3,000 euros
Y	21,091 euros	21,091 euros	9,949 euros
Total	21,847 euros	21,847 euros	12,849 euros

X's withholding will be multiplied by 4 in the event of marriage.

Calculation of actual tax on the annual tax return (following year)

.Cohabitation	Civil partnership	Marriage
21,847 euros	15,369 euros	15,369 euros

Civil unions and marriage can reduce your tax burden.

Comparison of withholdings and actual tax

.Common-law marriage	Civil partnership	Marriage
21,847 euros	Refund 6,478 euros	Additional amount: 2,520 euros

The civil partnership results in a refund because the deductions are higher.

Marriage results in an additional amount because the withholdings are insufficient, as well as the implementation of additional quarterly advance payments to avoid the same situation the following year (630 euros per quarter in this example).

If X and Y each contribute 50% toward these surcharges, X’s tax burden is seven times higher than it would be in a common-law marriage.

Want to learn more about taxation in Luxembourg? Check out our dedicated pages.