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How to get a tax deduction in Luxembourg
Luxembourg offers several tax deductions, and taxpayers have the right to claim them. This guide will cover the main reasons for deductions and the requirements for applying for them.
A tax deduction is a legal way to reduce the amount of taxes a taxpayer owes. To qualify for a tax deduction, certain criteria must be met. The deduction is considered when filing a tax declaration and is granted if certain criteria are met.
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Deductions for categories:
salaried employees
self-employed and free professionals
homeowners
car owners
people with children
Tax deduction options for Luxembourg residents
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A tax declaration is an important document for the IRS. It allows you to track your income and expenses and document your allowable exemptions and deductions.
You can complete a tax declaration on paper or online. There are no specific requirements; the important thing is to fill it out accurately and without errors.
To automate the process, you can use online services such as taxx.lu or hire a professional accountant to help you fill out the document.
If you fill it out on your own, you have to read it very carefully. There are notes under almost every field. Most of the time they will also tell you about compensation amounts you can get on every tax item.
There are several tax deductions in Luxembourg. For your convenience, we have divided them into the main categories. You can set the necessary criteria using the filter system.
An employee (resident or non-resident) can receive a tax deduction in the following categories:
Financing costs related to a loan for primary residence
A taxpayer who takes out a mortgage to buy or build their primary residence can deduct the cost of financing the loan from their income. In other words, the money that goes to the bank each month can be deducted from your taxable income.
An important condition: this is how you buy your primary home in the property. For subsequent houses or apartments, the deduction does not apply. In this case, the country in which the property is located does not matter.
Job-related expenses (business expenses)
This is an intriguing category because it includes all types of expenses that are related to business operations and are intended to support business activity and/or income.
These include:
- Business travel expenses;
- Purchasing expenses;
- Additional expenses for disabled employees.
Note that the employer has already budgeted an amount of 540 euros per employee. Expenses in this category are only deductible if they exceed the 540 euros limit!
Interest and other expenses related to an unoccupied building
At first blush, this might appear to be the same as the first paragraph. However, this is not quite the case. In the case of an unoccupied building, things are a little more complicated. It can be a building under construction or remodeling, as well as a completed building.
The main difference is that the taxpayer can be the owner of a building of any size.
The deduction is available to
- Residents who own a building in Luxembourg or outside of Luxembourg.
- Non-residents owning a building in Luxembourg.
- Non-residents who own a building outside Luxembourg but wish to pay taxes in the Grand Duchy.
With this relief, the acquisition costs can be deducted from the tax base. These include:
- Fees for the loan.
- Interest payments on the loan.
- Property tax.
- Collateral pledge agreement.
- And others.
You can receive deductions right up until the building is occupied.
Fixed payments and pensions
Taxpayers are entitled to deduct from their tax base fixed expenses incurred during the year.
These can be:
- Allowance paid to a divorced spouse;
- Permanent charges for an obligation;
- Alimony payments;
- Lifetime payments.
To benefit from the deduction:
- Luxembourg resident taxpayers who file their income tax return no later than December 31 of the year following the relevant tax year.
- Non-resident taxpayers who wish to pay tax in Luxembourg and who submit their income tax declaration no later than December 31 of the year following the relevant tax year.
- Luxembourg resident taxpayers, employees, or pensioners who apply for the payroll tax regularization in their annual declaration not later than December 31 of the year following the relevant tax year.
- Luxembourg resident taxpayers, employees, or pensioners who request a statement of expenses on their tax withholding form or card during the relevant tax year.
Social security contributions
Only contributions paid directly to the system are counted. Additional pension contributions set by the employer and life insurance contributions are not deductible.
To deduct these expenses from the base, non-resident taxpayers must submit a request for tax treatment equal to that of resident taxpayers.
Contributions, insurance premiums, and interest expenses related to a personal loan
The fees or interest paid on loans can also be deducted from the tax base but under certain conditions.
In the case of a loan, there are three reasons for the benefit:
Purchase of a car
Purchase of furniture
Personal expenses
This list does not include:
- Mortgage, as it is subject to the separate conditions described in the first paragraph.
- Business loans.
Insurance premiums are deductible if the recipient company is private and accredited in Luxembourg. They must also be related to insurance:
- Life insurance;
- Accident insurance;
- In case of disability;
- In case of sickness;
- Civil Liability.
Premiums paid to a private pension plan
Retirement insurance is a special type of insurance contract that allows you to save for a comfortable retirement.
A deduction can be obtained if the insurance company is accredited by Luxembourg or another EU country and is authorized to operate in the Grand Duchy.
Conditions for obtaining the deduction:
- The contract must be concluded for a minimum period of 10 years.
- The savings are paid out to the taxpayer at the earliest at the age of 60 and the latest at the age of 75.
- The insurance contract stipulates that early repayment of the savings is excluded, except in cases of serious illness and disability.
- Non-resident taxpayers must apply to be recognized as Luxembourg residents for tax purposes.
The maximum deduction for this category can be 3,200 euros per year, regardless of the age of the taxpayer.
Taxpayers are also allowed to deduct extraordinary expenses. Extraordinary expenses are those that cannot be avoided but are not the same for all people in the same income or social category.
Procurement or transaction costs are not considered extraordinary expenses.
Full extraordinary expenses are:
Child care expenses
Child care expenses include amounts paid to approved child care organizations. Also included are the costs of nursery schools, day care centers or kindergartens, relay centers, and duly licensed parental assistants.
Expenses for domestic services
This includes expenses for household help, such as a cleaning service. You can deduct these expenses if three conditions are met:
- Domestic workers are affiliated to the social security system by the taxpayer or an intermediary company.
- Domestic workers mainly perform work in the taxpayer's home.
- There are persons hired as employees by the taxpayer or by the intermediary company.
Based on these rules, it is not possible to obtain a deduction for the services of a gardener, driver, or concierge. Such services are considered a luxury rather than a household necessity.
Aid and care expenses
Expenses related to the dependent status of the taxpayer, his or her partner or child, if the person is not entitled to child benefit.
Costs related to maintenance, education, or vocational training
This section covers children, and oddly enough, none of the above are considered extraordinary expenses. The reason for this is simple: all of the categories are covered in one way or another under the terms of the Child Benefit or Child Tax Credit.
Maintenance, education, and vocational training of close relatives taken into the household of the person paying for their support
This category includes, for example, parents brought in by the taxpayer from another country. To receive a deduction, it is necessary to substantiate the expenses. This is usually done by providing receipts for medical services, food, etc.
Child maintenance/support payments
Alimony is classified as a special expense. However, if the order for payment was issued before January 1, 1998, the claimant is entitled to a deduction in proportion to the amount of the payment. If the spouses have requested that alimony be reclassified as a special expense, this section no longer applies.
Other expenses that may be deducted
Other expenses that do not fall into the above categories may also be recognized as extraordinary:
- Costs of divorce proceedings;
- Criminal proceedings if the taxpayer is acquitted;
- Expensive medical treatment or surgery not covered by CNS;
- Costs caused by disability or inability to work;
- Other.
The question of whether a type of expense is an extraordinary expense can be answered accurately by a qualified accountant.
With all the new variables in mind, carefully fill out the return, paying particular attention to the sections where tax deductions are shown. These lines usually contain notes and comments from the preparer.
It is recommended that you consult a professional accountant who can advise you on controversial issues
After making sure the document is completed correctly, submit it to the IRS. Nothing more is required of you. After some time (up to 30 days on average), you will receive an official letter from the IRS.
This letter will indicate the total tax base, the amount of mandatory payments, and the amount of compensation to which you are entitled. A tax deduction in Luxembourg is essentially a large refund that you receive sometime after the tax has been paid.
If there is an error in the tax office's calculations, you have the right to appeal the inspector's decision. You have 90 days from the date you receive the calculation sheet to do so.
Keep in mind, however, that as with appeals, the outcome can be in your favor or against you. There have been cases when the tax office has found additional errors in the calculations and the end has received an even larger amount than before.
Frequently Asked Questions (FAQ)
Can a foreigner get a tax deduction?
Definitely, yes. Any resident of the country who pays taxes to the budget is entitled to a refund of certain expenses.
If I claim a tax deduction, does that mean I pay less?
Not exactly. You will pay exactly what the IRS estimates. However, after you have paid all of your checks, you will receive a refund of a certain amount. This is called a tax deduction.
Can I argue with the IRS if it is wrong?
Not only can you, you should. Keep in mind, however, that you must have verified evidence of the miscalculation. There have been cases where the tax office has recalculated the amount owed and it has only become more.
Should I contact an accountant?
Such a decision can only be made by the taxpayer. However, the help of a qualified specialist is rarely harmful. For a relatively small fee, you will be relieved of responsibility for the accuracy of calculations and the correctness of filling out the declaration, and you will also be able to clarify unclear points.
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