Taxation in Luxembourg is a broad and quite complex topic. We should start with the basic principles and existing types of taxes.
The first thing that should be clear for you — the tax payments are different for residents and non-residents. The tax residency status does not automatically come with obtaining the residence permit.
A person becomes a tax resident by having a tax domicile or a permanent residency. Domicile is a legal term that applies to individuals and determines how permanent residents are taxed.
Nevertheless, even if you have your own housing property in the country, you still can be considered non-resident, if you can prove that your basic life necessities are located outside the Grand Duchy.
The key difference between resident and non-resident is that a resident pays taxes in Luxembourg for any source of income, wherever it is located. And non-residents only pay taxes for their income directly from Luxembourg.
There is also a dual taxation agreement with a number of countries. This agreement works like this: if a person also pays taxes in the country of nationality (citizenship), they can subtract the paid amount from the Luxembourgish taxes.
There are three categories or classes of taxpayers.
Being single does not mean that you have no lifepartner. The term implies the absence of marriage.
That includes single parents and people over the age of 65.
This taxation class will remain with you for 3 years after a divorce or the spouse's death.
Needless to say, there are nuances to this system. For example, if spouses file tax declarations individually, they will fall into Class 1, and if they file a joint tax return, they will fall into Class 2.
Non-residents pay their taxes as Class 1, even if they are married. This rule can be disputed in court, for example, if 90% of the income of one spouse is being taxed.
Your tax category directly affects the amount of money you are supposed to give to the government. To calculate it correctly, a rather complicated system of coefficients and deductions, as well as other factors, like having children, is used.
There are quite a few.
The basic tax of any country. In Luxembourg the tax system is progressive, i.e. the higher the income, the higher the rates are.
Important to understand that the tax is calculated from the total annual income. Thus, if it is below 11.3 thousand euros (about 900 euros per month), then you will not pay any income tax at all.
The maximum rate of 42% applies to those whose income exceeds 200 thousand euros per year.
A tax with an unusual name is an addition to the income tax. It ranges from 7% to 9% of the income tax.
The amount of the solidarity tax depends on the amount of tax, not on the amount of income. That is, if the income tax is 0%, there will be no solidarity taxation.
This way, the basic tax in Luxembourg is between 0% and 45.78%.
When selling the property, a seller is also obliged to pay taxes.
For movable property, such as a car, if you sell it for more than 500 euros, you have to consider the length of time you have owned it.
The real estate sale is tax-free if you are selling your primary residence. If you sell other types of property that have been owned for less than two years, the standard formula will apply. If it has been owned for more than two years, you can get a reduced tax rate.
In Luxembourg, the amount of tax is calculated based on the type of vehicle. The tax itself is calculated according to the scales of the Customs and Excise Administration depending on:
The bank deposit tax rate is 20% and is assessed if the deposit amount exceeds 250 euros.
Dividends from shares and bonds are taxed at 15%. They are paid by the emitter itself, i.e. the organization in which you invested.
Property taxes are calculated differently in each municipality. Their amount depends on the purpose of the property, its location, and cadastral value.
The VAT rate (taxe sur la valeur ajoutée) in Luxembourg is 17%. Reduced rates are possible in some cases: 14, 8 and 3%. As VAT is an indirect tax, the person purchasing a good or service pays it indirectly rather than directly but still has to pay the tax.
Salaried employees are required to contribute to the budget for social needs. Usually, they are deducted directly by the employer. The pension fund receives 8%, and the medical insurance fund receives 3.05%.
Registration fee is a special tax that applies to the sale of the property. In Luxembourg, it is 7% of the amount of the transaction. In the capital of the Grand Duchy, an additional 3% is added.
Both residents and non-residents must submit their tax reports to the state. Exceptions are made for categories 1 and 1a, who receive less than 100,000 per year from a single source, such as a pension.
The tax declaration is usually filled out on paper and sent to the Luxembourg Tax Office (ACD).
You must file a declaration no later than March 31 of the year following the reporting year. That is, you must file a tax return for the year 2022, you must do it by March 31, 2023.
This is monitored strictly, and the penalties are severe: 10% of the amount of tax for late filing and another 0.6% of the penalty for each month of delay.