Type of union and tax implications

The tax implications of different forms of union in Luxembourg: everything you need to know.

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

So, should you opt for a civil partnership, a PACS or marriage? Each option has its advantages, but also limitations that are crucial to understand before committing.

Cohabitation: simplicity incarnate

What is a common-law marriage?

A common-law relationship means living together without signing a contract. There are no papers to fill out and no formalities to complete. It is the perfect solution for couples who value simplicity and independence.

How common-law marriage affects your taxes

From a tax perspective, common-law relationships have 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 benefit from joint deductions or income.
• In the event of separation: There are no special administrative requirements.

Who is common-law partnership for?

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

PACS: an attractive middle ground

What is a PACS?

A PACS (civil solidarity pact) is a formof official union, but less restrictive than marriage. Quick to set up and easy to dissolve, it combines flexibility with legal recognition. No wonder it's growing in popularity!

The tax advantages of PACS or civil union

• Joint taxation is possible. As long as the PACS exists^from January¹ to December 31 of the tax year and you have shared a common residence, you can request joint taxation on your annual tax return. This allows you to pool your deduction limits and income and maximize your tax savings.
• Ease for your projects. Want to buy a house? PACS makes it easier to deal with banks, as it offers greater stability and takes into account the income of both partners.
• Flexibility: Unlike marriage, there is no community of property. Each person owns the property they acquire and is only responsible for the debts they incur. In the event of separation, you are not involved in a lengthy procedure. There is no need to hire a lawyer or obtain a court ruling.

What PACS does not change from a tax perspective

• Tax bracket. Nothing changes on your pay slips. 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, a PACS does not offer the same legal protections as marriage.

Who is a PACS for?

PACS is the best option for those seeking a compromise between simplicity and recognition.

Marriage: a commitment with significant implications

What is marriage?

Marriage is the ultimate commitment. It confers extensive rights on each member of the couple, but also entails duties. It is the most comprehensive solution for those who want to fully formalize their union.

How marriage affects your taxes

Tax class 2 immediately after marriage

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

Be careful! If your incomes are very different, the one who earns less could end up paying proportionally more taxes.

Joint tax return mandatory for married couples

All of the married couple's income is added together and taxed collectively. However, it is possible to request an individualized tax calculation.

Adjustment to be expected

The first joint tax return filed by a married couple may result in additional tax to be paid and the introduction of quarterly advance payments.

What about in the event of separation?

• A complicated divorce: Dissolving a marriage is more complicated than dissolving a civil partnership. You have to go to court, evaluate joint assets, and manage property issues.
• A useful transition period: After a divorce, you remain in class 2 for three years, which mitigates the tax impact of the separation. However, be aware that you will return to class 1 thereafter.

Who is marriage for?

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

Comparison table: which union is right for you?

Criteria	Common-law marriage	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 advantages	No	Yes	Yes

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 advantages, but a civil partnership (PACS) is more flexible.

Does a PACS allow you to pay less tax?

Yes, if you apply for joint taxation and your incomes are unequal. However, this advantage only applies from the year in which the PACS is in place^from January¹ to December 31.

What are the tax risks of marriage?

With very different incomes, the spouse who earns less may contribute proportionally more. This can lead to financial tensions.

What happens in the event of divorce?

Divorce is a long and costly process, but you are entitled to a three-year transition period in tax bracket 2 to limit the tax impact.

Practical advice before choosing your type of union

Run tax simulations

Anticipate your taxes for each option based on your income.

Think about the future

Are you planning to buy a house? A civil partnership or marriage are strategic choices.

Plan for the costs of dissolution

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

In conclusion, choosing between common-law marriage, civil partnership, and marriage depends on your priorities and personal situation. If you prefer simplicity, common-law marriage is an option without constraints. If you are looking for a compromise between flexibility and tax advantages, opt for a civil partnership. Finally, marriage remains the most comprehensive choice for those who want maximum legal protection, even if it involves more 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 depending on the type of union chosen

Let's take the case of two people, X and Y.

• X's annual taxable income: €20,000.
• Y's annual taxable income: €80,000.

Calculation of withholding tax (tax year)

	.Common-law marriage	Partnership agreement	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	12,849

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

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

Common-law marriage	Partnership agreement	Marriage
€21,847	15,369	€15,369

Civil partnerships and marriage allow for a reduction in tax liability.

Comparison between deductions and actual tax

Common-law marriage	Civil partnership	Marriage
€21,847	Refund €6,478	Supplement €2,520

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

Marriage results in a supplement because the deductions are not sufficient, as well as the implementation of additional quarterly advances to avoid the same situation the following year (€630/quarter in this example).

If X and Y each contribute 50% to these supplements, X's tax burden is seven times higher than it would be if they were cohabiting.

Would you like to know more about taxation in Luxembourg? Take a look at our dedicated pages.