Main tax measures from the budget 2021

ABBL Published 21.10.2020

Last week the Minister of Finance announced the budget for 2021. There were no real surprises, but a few points are of particular interest to ABBL Members, notably tax measures intended to help attract and retain talent in our sector.

Firstly, the stock options and warrants framework will be abolished from January 2021, to be replaced by a profit participation scheme. This step was anticipated in the agreement of the current coalition and will eventually create a more transparent mechanism based on a solid legal framework, which was missing from the stock options regime.

The profit participation scheme (“prime participative”) should function as follows (based on the draft legislation):

  1. the employer must realise a profit (according to the law on income tax)
  2. the total amount of the bonus which can be allocated under profit allocation scheme to employees is limited to 5% of the company’s profit of the period immediately preceding the period for which the bonus is allocated
  3. the (profit allocation scheme) bonus amount per employee must not exceed 25% of its annual gross salary (excluding any other possible extra remuneration)
  4. this bonus would benefit from a tax exemption of 50% at the level of the employee.

Changes to the impatriate taxation regime are welcomed, as they will enhance the attractiveness of this regime and simplify its implementation.  Details are as follows:

  1. An impatriate premium would be introduced which could benefit from a 50% tax exemption at the level of the employee, for an amount not exceeding 30% of its annual gross remuneration
  2. When borne by the employer, the cost of moving to Luxembourg as well as some corresponding regular charges (housing, tuition, etc.) would be still exempt from taxes at the level of the impatriate employee (subject in some cases to  limits)
  3. The impatriate employee would benefit from the favorable tax regime for up to 9 years (instead of 6 years), provided that all the conditions are met, including that the employee has not been domiciled in Luxembourg for tax purposes, nor has been subject to personal income tax in Luxembourg on professional income, nor has lived within 150 km of the border in the previous 5 years. The minimum required annual remuneration of the employee to benefit from the favorable tax regime would be increased from EUR 50,000 to EUR 100,000.

Missing from the budget were specific measures to support the transition to a sustainable economy, and measures to further support the digitalization of services. The ABBL believes that these two areas are particularly important for the banking sector and will continue to lobby for such measures over the coming months.

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