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.
|From EUR||To EUR||Tax rate (%)||Employment fund surcharge (%)||Effective tax rate (%)|
You must take into account that the tax is calculated progressively. This means that if for example, you have an annual income of 14,000 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 14,000 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.
This will be much clear with an example, for a taxable income of 14,000 euros per year, the tax would be calculated as follows:
- 0% on the first 11,265 euros
- 8.56% on the next 1,872 euros (11,265 – 13,137)
- 9.63% on the next 862 euros (13,138 – 14,000)
To calculate the tax due on each amount, we multiply it by the corresponding tax rate:
- 1,872 euros x 8.56% = 160.24 euros
- 862 euros x 9.63% = 83.01 euros
It's worth noting two points about these calculations:
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.
|Without dependent children||With dependent children||> 64 years old|
|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|
These classes will then affect the calculation of your taxable as follows:
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.
Taxes are based on half the combined household income, but the tax amount is multiplied by 2 at the end.
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.
If you are not a tax resident in Luxembourg, you are required to file an income tax return if you fall into any of these categories:
1. You have been employed in Luxembourg for at least 9 continuous months and
- your annual income exceeds 100,000 euros or
- you have multiple income streams, and your annual income exceeds 36,000 euros for tax class 1 or 30,000 euros for tax class 1A.
2. You have an annual income from a pension in Luxembourg that exceeds 100,000 euros.
3. Your income in Luxembourg is not subject to tax withholdings at source, such as:
- earnings from self-employment,
- income from the rental of property located in Luxembourg,
- salaries or pensions paid by a foreign entity.
4. Your income includes
- net investment income, such as dividends, and the debtor is the State of Luxembourg,
- a commune,
- a Luxembourg public-sector establishment,
- a company under private law whose registered office or central administration is in Luxembourg,
- or a natural person who has their fiscal domicile in Luxembourg.
5. Your income from Luxembourg sources consists of directors' fees and the amount exceeds 100,000 euros.
6. You are married and either you or your spouse is a Luxembourg tax resident, and you choose to file taxes jointly and you have requested to be taxed under tax class 2.
Otherwise, you may file a tax return, but you are not required to do so, however, in some cases, it may be useful. To know all the details and particularities we recommend you to visit the government page dedicated to this topic.
As a Luxembourgish taxpayer, you are required to file an income tax return if you fall into any of these categories:
1. Your annual taxable income in Luxembourg exceeds 100,000 euros.
2. You have multiple income streams taxable at source in Luxembourg and the annual income exceeds:
- 36,000 euros for tax classes 1 or 2, or
- 30,000 euros for tax class 1A.
3. You have taxable income in Luxembourg that is not subject to tax withholdings such as:
- earnings from self-employment,
- rental property income,
- salaries or pensions paid by a foreign entity.
4. Your taxable income includes more than 1,500 euros in net investment income subject to withholding tax, such as dividends.
5. Your taxable income includes more than 1,500 euros in directors’ fees.
6. If you are married and either you or your spouse is a Luxembourg tax resident, and you choose to file taxes jointly and you have requested to be taxed under tax class 2.
If you don’t fall into these categories filing a tax return is optional but sometimes is a good idea to do so. To know all the details and particularities we recommend you to visit the government page dedicated to this point.
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.
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:
- Luxembourg Y is open for residents of France;
- Luxembourg Z is open for residents of Germany;
- Luxembourg X is open for residents of Belgium and other countries.
Frequently Asked Questions (FAQ)
Who is required to pay income tax in Luxembourg
What is the tax rate for individuals in Luxembourg
When is the deadline for filing income tax returns in Luxembourg
Sources: impotsdirects.public.lu, impotsdirects.public.lu, impotsdirects.public.lu, impotsdirects.public.lu, www.lessentiel.lu, guichet.public.lu, guichet.public.lu, guichet.public.lu, guichet.public.lu
We took photos from these sources: Llibert Losada for Unsplash