The much-awaited Luxembourg state budget for FY 2021 has finally been tabled before the Chamber of Deputies. Delayed due to the ongoing COVID-19 pandemic, the Luxembourg government published bill number 7666 on 14 October 2020. It is intended that the provisions of the bill will enter into force from 1 January 2021. Although the Luxembourg Parliament still needs to vote on the bill, it is expected that most measures presented in the bill will be adopted as is.
The purpose of this article is to briefly summarise the main tax changes contemplated by the bill which impact the Luxembourg fund industry. For individuals, the bill targets a range of topics and taxpayers should seek to assess the impact of such measures.
Corporate tax measures
There are no tax increases and no plans for major tax reform in the proposed bill. For FY 2021, corporate income tax (impôt sur le revenu des collectivités) and municipal business tax (impôt commercial communal), at an aggregate tax rate of 24.94%, shall remain unchanged in Luxembourg city. Similarly, the net wealth tax (impôt sur la fortune) rate remains unaffected at 0.5%.
For Luxembourg investment funds, the rates of subscription tax (taxe d’abonnement) levied on net asset values will also generally remain unchanged. However, effective from 2021, certain sustainability measures have been introduced offering certain tax incentives. The bill proposes to set a progressively decreasing subscription tax rate for fund vehicles covered by the Luxembourg law of 17 December 2010 relating to the undertakings for collective investments which invest in sustainable assets that meet EU criteria, subject to certain requirements. Interestingly, other measures (outside the scope of this article) have been introduced in the bill to increase economic sustainability.
Taxation of Real Estate
Introduction of new real estate tax
Luxembourg investment vehicles are generally only subject to a fixed annual subscription tax. Where these real estate funds are treated as tax opaque and hold domestic real estate assets, this leads to the unexpected (and unfavourable) outcome that proceeds arising from such assets are exempt at both the fund and the investor level. Given the rise in interest in domestic real estate assets, the Luxembourg government has proposed amendments to the current tax treatment to combat tax abuse in the real estate sector.
The bill proposes the introduction of a new real estate tax (prélèvement immobilier), at a flat rate of 20%, on the portion of income derived by tax opaque Luxembourg funds from real estate assets situated in Luxembourg (without deductions). The fund itself will be liable for this tax and will be required to file an annual tax return. Further, under the bill, such funds will be subject to a mandatory reporting requirement regarding the holding of Luxembourg real estate.
For the avoidance of doubt, this new form of levy will not apply to Luxembourg limited partnerships, such as the common limited partnership (société en commandite simple) and the special limited partnership (société en commandite spéciale) and contractual fund regimes, such as the Luxembourg FCP (fonds commun de placement).
Contributions of real estate
The contribution of real estate to the share capital of a Luxembourg civil or commercial company will increase to 3.4% (including registration duty and transcription duty). For non-residential property, this will increase to 4.6%. This substantial increase is to better align with the tax treatment for the direct sale of a property, which is set at respectively 6% and 10%.
Whilst this article briefly lays out the main impacts to the fund industry, the draft legislation foresees numerous tax amendments — for instance, in relation to the fiscal unity regime and other direct/indirect tax measures in relation to individual taxation. That being said, the need for stability in these increasingly uncertain times, has led the government not to implement drastic wide ranging changes on the tax system. This is evidenced by the limited scope of the imposition of the new real estate levy on certain Luxembourg investment vehicles. Further, the Luxembourg government has rather focused its efforts on addressing certain gaps in legislation, as well as, addressing economic and environmental sustainability.