Luxembourg 2009 Budget Heralds Welcome Tax Relief Measures

by Ulrika Lomas, Tax-News.com, Brussels

07 October 2008

In a speech before the Chamber of Deputies, the treasury and budget minister, Luc Frieden, unveiled the government’s budget bill for 2009, containing key tax reforms aimed at strengthening purchasing power and supporting the economy whilst at the same time preparing Luxembourg for the future.

The measures included in the bill form part of initial proposals for 2009 delivered by the Prime Minister and finance minister, Jean-Claude Juncker back in May of this year.

According to Frieden, despite the global economic crisis and in the face of difficult times, the 2009 budget is a confident one based on a predicted growth of 3% for the coming year.

The main tax initiatives, due to come into effect as from January 1, 2009, will affect both corporate and individual taxation.

Firstly, regarding the business economy, the government is striving to increase its competitiveness and raise the attractiveness of Luxembourg as a business location as a result. The key changes designed to provide the necessary boost include:

• Reducing the federal corporate income tax rate by 1% from 22% to 21%.
• Reducing the withholding tax on dividends paid to treaty country “corporate” shareholders to 0%.
• Abolishing capital duty.
• Providing an incentive to employers selecting unemployed candidates by increasing the rate of subsidised income tax from 10% to 15% and extending the subsidy to three years.
• Applying the benefit of the new IP (Intellectual Property) regime to domain names retroactively.
• Removing tax deductions for tax on automotive vehicles used to transport people (other than buses and taxis).
• Encouraging patronage by doubling the tax deductible amount and by, for example, taking into account the initial grant given by the creator of a foundation and the deduction of gifts and donations for the calculation of trade tax.

Secondly, pertaining to personal income tax, the legislation has been fundamentally modified in order to comply with the new “International Financial Reporting Standards” used by the banking sector. The main changes from next year include:

• Adjusting the rate of tax on personal income linearly at a rate of 9% instead of 6% as proposed in May. Introducing three types of tax credit: a tax credit for employees and pensioners of EUR300 together with a tax credit for single parents of EUR750. In so doing, the existing compensatory tax reductions for these categories are to be abolished
• Exempting the child allowance from taxation.
• Permitting tax exemption on interest income from household savings banks.

The government reductions on income tax are intended to help low earners and pensioners. According to calculations, families who earn EUR25,000 will see their tax halved, whilst those earning more than EUR100,000 will pay 7% less tax.

Around 4.5% of GDP will be diverted into public investment such as road, rail, schools and retirement. EUR200mn, or 0.55% of GDP, will be devoted to public research such as biotechnology.

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