Luxembourg Tax Alert — Draft Law Introducing a Single Tax Class and Full Individual Taxation

The Luxembourg government has submitted a draft law under Bill 8676 introducing a single personal income tax class and a move to full individual taxation. The reform aims to modernise the tax system, align it with current social realities, and establish a framework that is simpler, more transparent, and more equitable.

The reform seeks to ensure greater tax fairness through the application of a single tax class; provide predictability when family situations change; simplify and increase transparency of the tax system; allow flexibility for parents temporarily reducing work activity to care for children; increase purchasing power for many taxpayers through a lower tax burden; and offer legal certainty via a transition period preserving current joint taxation for existing couples for up to 25 years.

Shift From Joint to Individual Taxation

The reform will replace joint taxation with mandatory individual taxation and a single progressive tax scale by 1 January 2028. This represents a major change from the current system in which marital status influences tax liability, a principle which has been in place since 1842.

Individual taxation will apply to taxpayers currently in classes 1 and 1a and couples marrying or entering a registered partnership after the reform is in force (i.e., from 1 January 2028).

The new single tax class is generally more favourable than the current individual taxation under tax class 1 and is expected to encourage many formerly married or civil partnership taxpayers to opt for individual taxation. According to the Luxembourg government, this single tax class is also more favourable for a large proportion of married or civil partnership couples if the income earner with the lowest taxable income contributes at least 25% of the couple’s total income.

However, for married or civil partnership couples with unequal incomes, particularly if only one spouse or partner earns taxable income, the splitting mechanism under tax class 2 continues to reduce the overall tax burden by mitigating tax progression. This advantage is not fully replicated under the new single tax class.

The reform replaces the existing class-based tax tariffs with two distinct progressive schedules set out in articles 118 and 118bis of the income tax law.

Article 118 introduces a new progressive tax bracket structure applicable under the single tax class, which is largely modeled on the current class 1a tariff, with adjusted thresholds to reduce tax progression for low- and middle-income taxpayers.

Article 118bis establishes a separate progressive tariff applicable exclusively to taxpayers remaining under collective taxation during the transitional period, broadly mirroring the current class 2 schedule, including the effects of income splitting. These parallel tariff structures are intended to ensure technical continuity of tax outcomes for taxpayers remaining in collective taxation while anchoring the shift towards mandatory individual taxation under the new single tax class.

A solidarity surcharge of 7% (or 9% for higher income levels) applies to the tax due.

Transitional Regime for Existing Couples

Couples who are already married or in a registered partnership before 1 January 2028 may continue to benefit from the current class 2 regime for up to 25 years, or they can irrevocably opt in to the new single tax scale at any time during that period.

Once the option is exercised, reversion to joint taxation is not possible.

Other Aspects of the Reform

• Increase in deduction limit for certain personal expenses: The deduction ceiling for interest on consumer loans, insurance premiums, and contributions is proposed to rise from €672 to €900.
• Deduction for voluntary pension contributions on behalf of a spouse or partner: Taxpayers would also be allowed to deduct voluntary pension contributions made for their spouse/partner as special expenses. Currently, deductions are limited to contributions made by taxpayers for themselves, though joint filers may already deduct contributions paid by either spouse/partner. This change encourages couples to continue contributing to pension schemes, even if one spouse/partner temporarily stops working.

Conclusion

The draft law represents a significant shift in Luxembourg’s personal tax landscape and may materially impact household tax positions, including internationally mobile executives. The reform will now proceed through the legislative process and may be amended before adoption.

This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided on the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin or its lawyers. Prior results do not guarantee similar outcomes.