Taxes

Income tax in Luxembourg

In this article, we will provide an overview of the Luxembourg income tax system, including its key features, rates, and exemptions. Whether you're a resident or non-resident, understanding the income tax system in Luxembourg is essential for anyone seeking to live or work in this vibrant and prosperous country.

Table of content

As with many developed nations, income tax is a crucial aspect of the country's fiscal policy, providing the government with the necessary funds to finance public services and maintain the country's infrastructure. However, the tax system in Luxembourg can be complex and daunting, particularly for newcomers to the country.

Income tax rates

In Luxembourg, income tax is paid by anyone who receives any income, not only wages; this can be for example the net income from renting out property in Luxembourg or investment income.

Although there are different classes of taxable income and each has its particularities, taxes are generally based on a progressive income tax system. A progressive income tax rates system means that the more you earn, the higher the percentage you will pay in taxes. You can see the full progressive scale of the tax rates.

The progressive scale of the tax rates in 2023 for Luxembourg

From EUR	To EUR	Tax rate (%)	Employment fund surcharge (%)	Effective tax rate (%)
0	12,438	0	7	0
12,439	14,508	8	7	8.56
14,509	16,578	9	7	9.63
16,579	18,648	10	7	10.70
18,649	20,718	11	7	11.77
20,719	22,788	12	7	12.84
22,789	24,939	14	7	14.98
24,940	27,090	16	7	17.12
27,091	29,241	18	7	19.26
29,242	31,392	20	7	21.40
31,393	33,543	22	7	23.54
33,544	35,694	24	7	25.68
35,695	37,845	26	7	27.82
37,846	39,996	28	7	29.96
39,997	42,147	30	7	32.10
42,148	44,298	32	7	34.24
44,299	46,449	34	7	36.38
46,450	48,600	36	7	38.52
48,601	50,751	38	7	40.66
50,752	110,403	39	7	41.73
110,404	165,600	40	7	42.80
165,601	220,788	41	9	44.69
Over 220,788		42	9	45.78

You must take into account that the tax is calculated progressively. This means that if for example, you have an annual income of 16,000 euros, although the percentage that corresponds according to the table is 9%, this percentage is not applied to the totality of the full amount of 16,000 euros, but is applied only to the range of income that falls in this level.

To make things easier, the administration has a page that allows you to automatically calculate taxes based on a given income, but it is important to understand how the calculation process works.

Example

This will be much clear with an example, for a taxable income of 16,000 euros per year, the tax would be calculated as follows:

0% on the first 12,438 euros
8.56% on the next 2,069 euros (12,439 – 14,508)
9.63% on the next 1,491 euros (14,509 – 16,000)

To calculate the tax due on each amount, we multiply it by the corresponding tax rate:

2,069 euros x 8.56% = 177.10 euros
1,491 euros x 9.63% = 143.58 euros

So, the total income tax amount for 14 thousand euros per year would be 177.10 + 143.58 = 320.68 euros.

It's worth noting two points about these calculations:

Measurement error

The calculation made by the government page differs by a few cents because the actual calculation is slightly different, and the tax rate and the employment fund surcharge are calculated separately and rounded down before being grouped to form the total tax. The calculation presented here allows us to understand the concept and only differs by a few cents.

Net settlement

This calculation only takes into account the basic income tax and does not include any other deductions, exemptions, or credits that might apply to an individual's tax situation

Tax classes for income tax

In addition, income tax rates in Luxembourg vary depending on your situation. You will be classified according to three classes: 1, 1a, and 2. A full detailed table is available on the government site, as well as in our special Guide article.

Tax classes

		Without dependent children	With dependent children	> 64 years old
Single		1	1A	1A
Married		2	2	2
Partnered		1	1A	1A
Divorced/ separated	> 3 years	1	1A	1A
Divorced/ separated	< 3 years	2	2	2
Widowed	> 3 years	1A	1A	1A
Widowed	< 3 years	2	2	2

Tax residency and factual residency in Luxembourg are not the same. Read more in our special article:Tax residency in Luxembourg

These classes will then affect the calculation of your taxable as follows:

Class 1

Tax rate applies to your entire income.

Class 1A

There are two possible scenarios: 1) if you earn more than 45,000 euros per year you will be taxed on your entire net salary; 2) if you make less than 45,000 euros a year, your annual income will be reduced by half of the difference between your actual annual income and the 45,000 euros threshold.

For example, let's say you make 40,000 euros a year. The difference between 40,000 and 45,000 is 5,000 euros. Half of that is 2,500 euros. So, your net salary will be reduced by 2,500 euros. This new amount (37,500 euros) will be used to determine how much income tax you owe in Luxembourg, based on the tax rates previously presented.

Class 2

Taxes are based on half the combined household income, but the tax amount is multiplied by 2 at the end.

For example, let's say a married couple has a combined taxable income of 60,000 euros. Since they are in Class 2, their taxable income will be divided by two, which gives us 30,000 euros. According to the tax rates, the tax for this income level is 2,792 euros, then it’s necessary to multiply this by 2 to have the final tax amount of 5,584 euros.

This system has worked this way for quite some time and the problem is that it penalizes single people enormously. For this reason, there has recently been a petition to review the tax classes that have piled up 5,500 signatures, which is more than the 4,500 signatures needed for a debate in the Chamber of Deputies.

If you work in Luxembourg, your employer will normally withhold your income tax from your wages and transfer it to the tax authorities on your behalf. At the end of the tax year, you will need to file a tax return and pay your taxes directly to the tax authorities.

It's important to remember that the tax amount deducted from your income may not be the final tax you owe. You may have to pay additional tax when you file your tax return. This is especially common for couples who file jointly under tax class 2, and both have income from working.

What income is taxable

Taxable income for tax residents and nonresidents is divided into 8 categories:

employment income,
self-employment income,
trade or business income,
investment income,
rental income,
pension income,
agriculture and forestry,
miscellaneous income, including capital gains.

For both residents and non-residents, taxable income is determined by the amount of net domestic income that is determined by adding together the different categories.

However, there are a few deductions, that are available for people, making parts of the income not taxable. Net domestic income amount varies according to deductions for special expenses:

Benefits paid to divorced spouses or other permanent benefits;
Interest payments on consumer loans used to finance the purchase of a car, movable property, etc. (Note that interest paid on existing buildings or buildings under construction is not considered a special expense and should be reported on Form 100, sheet L.)
Contributions and payments for voluntary and private insurance
Gifts and donations, etc.

For residents, income tax is based on their worldwide income, meaning all income earned both in and outside of Luxembourg is subject to taxation. Non-residents, on the other hand, are only taxed on income earned within Luxembourg.

When must residents and non-residents declare taxes

Residents and non-residents earning direct income in Luxembourg are required to declare their taxes annually by 31 March of the year following the tax year.

There are certain conditions under which residents and non-residents may not be required to declare taxes in Luxembourg. For example, if their annual income is below a certain threshold or if they have already had tax withheld at source, they may be exempt from filing a tax return. It’s important to check with the tax authorities or a qualified tax professional to determine if these exemptions apply to your situation.

Non-resident taxpayers

Resident taxpayers

Annual tax adjustment

It might be a good idea to consider the annual adjustment procedure as an option to adjust your tax withholdings. The goal of this procedure is to calculate the amount of tax you owed based on your total taxable income for the year. If the tax amount calculated is less than the total tax withheld by your employer or pension fund, you will receive a refund from the tax authorities.

At the end of each fiscal year, taxpayers must submit a tax return to the Luxembourg tax authorities, which details their income and deductions for the year. Based on this information, the tax authorities will calculate the amount of income tax that the individual owes for the year and send a tax assessment notice stating the amount of tax owed, as well as any applicable tax credits or deductions.

There is always a certain period of time, that allows the taxpayers to pay the tax, or adjust the sum if they believe it was calculated wrong. The procedure of annual tax adjustment helps to ensure that individuals are paying the correct amount of tax based on their income

How to file tax returns in Luxembourg

If you pay taxes in Luxembourg, you must report your income by completing the Form 100 tax return. You need to report your income from all sources and if some of your income is exempt from taxes, it won't be taxed, but it may be used to determine the tax rate for your remaining taxable income. And depending on your situation you may have or want to be taxed jointly with your couple.

If you don’t have to file a tax return but you want to request an annual adjustment you can do it by filing a Form 163 return at the end of the year.

Want to get more information? Make sure to read the article about tax declarations, covering companies, and entrepreneurs and giving detailed instructions on how to file taxes online — Tax declarations for companies and individuals.

Deadlines for tax returns

To comply with Luxembourg tax regulations, it is important to submit the tax return papers to the relevant tax office by 31 March of the year following the tax year. There are several submission deadlines controlled by the Luxembourg Inland Revenue.

For instance, for tax year N, the tax return should be submitted before 31 March of the year N+1.

If you need an extension to submit or file the tax return, you must apply for it to the competent tax office by fax or post. Late submission may result in additional tax, a late payment fee, or a coercive penalty imposed by the tax office.

How to submit declarations

If you have received income from the exercise of a liberal profession, a salaried occupation, a pension, or rental income you will be able to file your personal income tax return online via MyGuichet.lu platform. In this case, you must

In this case, you must

Сreate a MyGuichet account
Then follow the step-by-step instructions provided on the platform otherwise, you will need to do it by filling paper form.

For more detailed information you can watch the Guichet.lu site or watch their educational video.

Each February, you should receive a letter with proper indications and either an invitation to electronically complete the tax return form or a paper form by mail. In both cases what you will have to do is to declare all your sources of income in each of the income categories that we mentioned previously.

The only difference is that when doing it online the digital form guides you step by step through the process and you can attach the supporting documents digitally, while when doing it with the paper form you will have to attach paper documents and mail the form at the end to the competent tax office. It can be handy for some professionals, who are allowed to file declarations through online assistance.

What documents are required

When filing a tax return, you must include the following supporting documents when applicable:

Annual salary or pension statements;
Annual financial statements for interest paid on a mortgage or personal loan taken out during the tax year;
A civil partnership certificate when joint taxation is requested for the first time;
For non-residents: should also include proof of income received in their country of residence.

The Luxembourg Inland Revenue authority may ask for more documents to support any information, statements, applications, declarations, claims, or appeals submitted to its offices during the verification process.

Filling out and submitting the declaration

Once you have finished filling out the form you will have to sign the document and send it. If you do it online, you will be guided through the process on the website. But if you send the form on paper you will have to mail it to the Luxembourg Inland Revenue tax office in any post office.

There are several offices in the Grand Duchy, you can find all the offices on the Luxembourg Inland Revenue website.

There are also three tax offices for non-residents and cross-border workers paying taxes in Luxembourg. All of them are located at the same address and have different functions, based on the country of origin of the taxpayers: