[Talent Focus] Tax incentives supporting talent attraction: impatriate tax regime, young employees and profit participation bonuses

A new, modernised impatriate tax regime

The new impatriate regime, applicable since 1 January 2025, provides, under conditions, a 50% tax exemption on gross annual remuneration before incorporation of benefits in kind and of certain exempted cash benefits (e.g. profit participation bonus, additional pay for work at night, on Sundays and public holidays, interest subsidies). The main features of this regime are as follows:

• The gross amount of the total annual remuneration to which the 50% exemption applies may not exceed €400,000;
• The tax exemption is available for eight tax years (up to nine tax years including the tax year of arrival in Luxembourg).

These provisions replace the former impatriate tax regime (which can still be applied to taxpayers who previously benefited from it). As a result, there is no longer any tax exemption for the impatriation bonus and reimbursed expenses linked to impatriation (e.g. moving expenses, certain accommodation expenses in respect of the Luxembourg residence, costs for the schooling of the employee’s children).

Bonus for young employees

To support youth employment, the Law also introduces a partly tax-exempt bonus for employees under 30 (under conditions). This exemption can only apply to employment contracts signed on or after 1 January 2025. The main features of this exemption can be summarised as follows:

• Eligibility: The employee must be under 30 at the beginning of the tax year, on their first open-ended employment contract (CDI) in Luxembourg, and remain with the same employer. Changing employers ends eligibility. The first payment of the partly tax-exempt bonus must date back, on 1 January of the tax year, less than five years.
• Tax benefit: A 75% exemption applies to the discretionary bonus, with the following annual ceilings:
  • €5,000 for gross annual remuneration ≤ €50,000;
  • €3,750 for gross annual remuneration > €50,000 and ≤ €75,000;
  • €2,500 for gross annual remuneration > €75,000 and ≤ €100,000.

Profit participation bonus

The profit participation bonus regime has been in place since 2021 and has been amended as of 1 January 2025.

As a reminder, this regime provides a 50% exemption at employee level on discretionary bonuses (under conditions). For the employer, the profit participation bonus is deductible as an operating expense.

The updated framework gives employers greater room to grant discretionary bonuses under favourable tax conditions by providing higher thresholds as follows:

• The total amount of the (profit participation) bonus allocated to all the company’s employees may now reach up to 7.5% of the company’s previous year’s profit (previously up to 5%);
• The individual (profit participation) bonus ceiling has been raised to 30% of the employee’s gross annual remuneration (previously 25%) for the tax year in which the bonus is paid to the employee.

In addition, for groups of companies benefiting from the tax consolidation regime, the ceiling of 7.5% (see above) can be calculated based on the positive algebraic sum of the results of the members of the integrated group.