Tax regime for highly skilled employees

On 1 January 2011, the Luxembourg tax authority issued a circular on employing highly skilled and specialised international workers.

The introduction of this new special tax regime for highly skilled employees represents an important step in making the Luxembourg economy more attractive and maintaining a competitive edge.

In order to attract specialists and to encourage them to settle in Luxembourg, employers are often required to cover a large part of the expenses of the person they hire.

The circular aims to provide a framework – at the level of the taxation of wages – for dealing with the expenses and costs borne by a company when hiring highly skilled international employees. This type of framework already exists in other European countries such as Belgium, Switzerland or Sweden, for instance.

The main benefits of the regime:

At the level of the employee

Exemption of a number of recurring and non-recurring expenses and costs, incurred by the employer, linked to the expatriation to Luxembourg.

At the level of the employer

Tax deduction of the above expenses as operating costs.

These provisions present new opportunities for the financial centre in its efforts to attract a highly skilled workforce. They also allow the financial centre to avoid previous constraints in terms of costs linked to the expatriation of a certain category of employee.

The circular covers the following expenses and costs relative to hiring expatriates*:

Moving expenses
Housing costs
School fees of children
Tax equalisation – difference in Income tax charge between Luxembourg and the home country
Exemption of certain recurring expenses and costs
Lump-sum compensation

*Non-exhaustive list. For a more complete listing, please consult the circular

Main eligibility requirements for this tax regime:

Employer	Employee
Belong to an international group established in at least 3 different countries.	Qualify as a tax resident under Luxembourg law.
Employ at least 20 full-time employees in Luxembourg.	Hold a higher education degree or have at least 5 year’s business experience.
The number of beneficiary employees cannot exceed 10% of the company’s entire staff.	Bring significant added value to the Luxembourg economy.
	Principally exercise their profession in Luxembourg.

Circular L.I.R. - n° 95/2 (translation, original document only available in French)
(Administration des contributions directes):

Highly skilled employee refers to:

- Employees who usually work abroad and are detached from a firm outside of Luxembourg that is part of an international group in order to temporarily exercise their professional activities in a Luxembourg firm of the same group;

- Employees that are directly recruited abroad by a Luxembourg firm in order to temporarily exercise their professional activities in the firm, provided that they fulfil the following conditions:

She or he must make a significant economic contribution or contribute to the creation of new high added-value economic activities in Luxembourg;
She or he must qualify as a tax resident;
She or he must neither have had their tax domicile in Luxembourg nor been subject to Luxembourg personal income taxes on a professional income within 5 years preceding the year in which she or he starts working in Luxembourg;
She or he must hold a higher degree and have extensive technical knowledge, or have at least 5 year’s specialised experience in the concerned sector required by the local firm or that the firm intends to develop;

As to the local firm, it must employ or commit itself to employing in the medium term at least 20 full-time employees in Luxembourg.

“International group”, as defined in this circular, refers to firms that are financially linked and established in Luxembourg as well as in at least to other countries besides Luxembourg. Concerning companies, it is assumed that a company forms a group with an other company if the latter directly or indirectly holds 25% or more of the former’s shares or voting rights.

The present circular does not apply to employees hired on the basis of an assignment contract by a temporary work contractor or in the context of labour leasing.

2.1. Specific requirements for

2.1.1. Seconded employees

The following conditions must be fulfilled:

The seconded employee must have 5 year’s work experience within the international group or have at least 5 year’s specialised experience in the concerned sector ;
An employment relationship must exist between the sending firm and the employee during the assignment period;
The temporary assignment must include the right to resume employment with the sending institution at the end of the assignment period;
There must exist a secondment agreement between the sending firm and the local firm;

2.1.2. Employees directly recruited abroad

The employee must have acquired extensive specialisation in a sector or profession marked by recruitment difficulties in Luxembourg;

2.1.3. Employers

The number of highly skilled employees cannot exceed 10% of the total staff (full time) of the firm. This requirement does not apply for firms that have been established in Luxembourg for less than 10 years.

2.2. Requirements governing the new salaried employment in Luxembourg

The highly skilled employee must primarily exercise her or his professional activity;
The highly skilled employee must receive in Luxembourg a monthly fixed remuneration that is at least equal to the maximum contribution threshold, as determined by Luxembourg social security. The fixed remuneration to be taken into account is the gross amount before additional benefits in cash or kind;
The highly skilled employee must not replace (an)other employee(s) not covered by the present circular;
The highly skilled employee must share her or his specific knowledge and know-how to the benefit of the personnel of the local firm with a view to promote sustainable activities in Luxembourg.

During their assignment to Luxembourg, highly skilled employees falling under the present circular are confronted with a number of financial charges that are unavoidable due to the nature of their split situation between the host country and the country of their prior residence. In order to counter the financial difficulties that highly skilled employees encounter in their host country, employers are compelled to cover the majority of costs generated by the relocation of the hired employee.

For this reason, the scope of the present circular only extends to cost differential between expenses linked to expatriation and the costs that the employee would have incurred had she or he stayed in her or his home country.

Thus, the following expenses and costs, covered by the employer, are considered to be expatriation expenses, provided that they do not exceed a reasonable amount.

3.1. Non-recurring expenses and costs linked to relocation

The following expenses are only taken into account if they are incurred as a result of a cross-border relocation to Luxembourg:

Moving expenses for the transfer of residence of the highly skilled employee

Qualifying moving expenses are the moving expenses of the employee herself or himself, of their spouse or partner and of the children in the household, including accommodation costs during the journey, fees for the removal, packing, loading, transport, unloading, unpacking and assembly of furniture belonging to the employee or a member of her of his family, as well as the costs for transformers or adapters for foreign household appliances. Selling expenses or expenses linked to the termination of a lease contract of the previous residence, as well as travel expenses in the context of finding a new residence are not included under the present circular;

Furnishing costs for a Luxembourg residence

Qualifying furnishing expenses are expenses for the acquisition of furniture, household appliances (local norms), such as dishwashers, washing machines, tumble dryers;

Travel costs for specific circumstances (birth, marriage, death of a family member)

Qualifying expenses are travel costs;

Expenses for the final return to the home country at the end of the highly skilled employee’s assignment, including moving costs.

3.2. Recurring costs and expenses related to the move

The following expenses only qualify if they result from a cross-border transfer of residence:

3.2.1. Expenses related to the move

Housing expenses for the residence in Luxembourg

Provided that the highly skilled employee has kept her or his previous residence in the home country, qualifying housing expenses are rent, expenses for heating, gas, electricity, elevator, and the relevant taxes. Maintenance and cleaning expenses are not covered, neither for the previous residence in the home country nor for the new residence.

In case the highly skilled worker does not keep her or his previous residence in the home country, the qualifying expenses will be limited to excess of Luxembourg housing costs over housing costs in the home country;

Travel expenses for a yearly trip between Luxembourg and the home country for the employee herself or himself, spouse or partner and the children in the household

Qualifying expenses are travel costs;

Tax equalisation of local taxes with a view to compensating the difference in the tax charge between Luxembourg and the home country;

The recurring expenses in this section may not exceed 50’000 Euros per year, nor 30% of the highly skilled employee’s fixed annual base salary. If the highly skilled employee shares a residence with a spouse or partner, the limit of 50’000 is extended to 80’000 Euros.

3.2.2. School fees

Additional expenses for the schooling of the children of a highly skilled employee, their spouse or their partner, if they move with their father and mother, or with one of them, and who consequently have to change schools

Qualifying expenses are the enrolment fees for children attending primary and secondary school.

3.2.3. Lump-sum compensation for certain other recurring expenses

The difference in cost of living between the host country and the home country, as well as other expenses linked to the move that are not mentioned in this circularIn order to compensate certain expenses linked to the move incurred by the employee, the employer may grant a specific allowance. This compensation covers the difference in cost of living between the host country and the home country, as well as other expenses linked to the move. These expenses are limited to the following lump-sum amount.

The flat-rate monthly amount of the compensation is limited to 8% of the highly skilled employee’s fixed monthly base salary, and may not exceed a monthly amount of 1’500 Euros.

If the highly skilled employee shares a residence with a spouse or partner, the respective limits of 8% and 1’500 Euros are extended to 16% and 3’000 Euros, provided that the spouse or partner does not exercise a professional activity.