Tax policy: Strengthen purchasing power and relieve the middle class

The DP advocates a socially just and contemporary tax policy that corresponds to the realities of our modern society. The tax relief of the middle class and the competitiveness of businesses remain central concerns of the DP.

The DP-led government has already taken important steps towards more social justice with the tax reform in 2017: The reform brought considerable relief for those with low and medium incomes and targeted support for single parents.

The support for households and businesses has continued throughout this crisis-ridden legislature. The impact of the energy crisis was well cushioned due to a functioning social dialogue and comprehensive packages of appropriate measures. The measures of the “Solidaritéitspäck” have yielded positive results: According to STATEC, households had on average at least the same, if not more, purchasing power than before the crisis. With retroactive effect from 1 January 2023, a tax credit amounting to two index instalments for the year 2023 was also made available. Starting next year, the tax table is to be adjusted by 2.5 index instalments, which is going to lead to a further, noticeable reduction in the tax burden of citizens.

The DP will continue to advocate for tax relief in the future: This is why the DP intends to regularly adjust the tax table to inflation in the coming legislative period.

Furthermore, the DP advocates for a modern tax system that reflects the diversity of our society. Our medium-term goal remains to introduce a uniform tax class that treats all ways of living equally. By doing so, we want to put an end to the structural injustices in our tax system.

In line with the principles of fair competition, the DP supports the initiatives of the OECD and the European Union to fix the taxation of large corporations, including the introduction of a minimum tax rate. At the same time, it is important to us that our tax measures remain attractive and competitive.

The DP will strengthen our economic location through a competitive tax landscape, because this is the prerequisite for good jobs and solid tax revenues that finance our social system. Furthermore, we will relieve the burden on businesses, especially small and medium-sized enterprises, and provide them with increased support for the energy and digital turnaround.

Private individuals

Income taxation is an important factor in a country’s attractiveness as a place to work. Income tax must therefore be competitive. Within the framework of the desired individualisation, the DP will continue to advocate for tax relief for households with small and medium incomes. As Luxembourg is in direct competition with the other EU countries, the top tax rate must also be competitive. To be able to finance a strong welfare state, we need a dynamic economy and for this our country must remain a good choice for workers from home and abroad; this is why the DP rejects a further increase in the top tax rate as well as a general increase in income tax.

The DP wants to sustainably relieve the middle class. The government has already done much to maintain purchasing power through financial aids and measures under the Tripartite Agreements. The retroactive tax credit and the partial adjustment of the tax table by 2.5 index instalments for the coming year will further reduce the tax burden of citizens. To protect the middle class from the effects of cold progression, we want to regularly adjust the tax table to inflation.

The DP advocates equal tax treatment of all ways if living. No one should be at a tax disadvantage because of their life situation (married, in a civil partnership, widowed, etc.). We therefore advocate the introduction of a uniform tax class. The changeover to a new and uniform tax table is to take place gradually. Furthermore, during the transition period, our goal is to ensure that civil partnerships and married couples are treated equally for income tax purposes. This means that couples in a civil partnership also benefit directly from potential tax relief on income tax without having to wait for a refund via the tax return.

The DP still rejects a wealth tax for private individuals. This tax would entail a disproportionately high administrative burden and affect the attractiveness of the country.

Inheritance tax has undergone only minor changes in recent decades, while wage tax rates have been regularly adjusted downwards. For inheritance tax in the indirect line, we want to adjust the thresholds downwards in line with the inflation trend of the past years. We strictly reject the introduction of an inheritance tax in direct line.

To facilitate transfers of wealth in direct line, we will also reduce the taxation of gifts made during lifetime accordingly. This allows for fair and appropriate treatment of transfers of assets between family members.

The current tax system sets a maximum amount for the depreciation categories. The DP will review to what extent the depreciation options can be made more flexible. This should enable citizens at different stages of life to claim their expenses more optimally for tax purposes.

The DP will analyse to what extent the tax treatment of benefits in kind granted by businesses to their employees can be simplified and as such provide more clarity and transparency. 

Currently, workers pay towards the National Health Fund and their long-term care insurance contributions for all hours worked. The DP will aim for a complete exemption from social contributions for overtime, thus allowing people to receive a higher net income. In addition, the DP will introduce the overtime tax exemption, as it applies in the private sector, also in the public sector.

The DP continues to advocate for a flexible working environment that meets the needs of workers. This includes the possibility of teleworking, which gives people more flexibility and freedom in organising their daily lives. In the coming legislative period, we will review the allowances and deductibility for income tax and, if necessary, adjust the tax laws to meet the demands and realities of the modern working world.

DP Finance Ministers have already successfully lobbied for the recognition of up to 34 days of telework for cross-border workers from France and Belgium. We will continue to work towards bilateral agreements to expand telework for commuters. These measures will also benefit other sectors of our economy. Start-ups can better attract talent and retain them in the business long-term.

Start-ups play an important role in diversifying the economy and driving innovation and progress. Often, however, these young businesses have difficulty raising the necessary funds to turn their ideas into reality and develop them further. The DP wants to create additional tax incentives for private individuals to invest in young and innovative businesses (including trade and crafts).

The DP wants to introduce the possibility of a tax-free rent premium. This allows businesses to additionally reward young workers for their achievements. This premium is targeted at young tenants aged 18 to 35.

The DP government has already implemented a large number of tax incentives in the field of climate and environmental protection. This includes, among other things, the application of the super-reduced VAT rate of three per cent to renovation works on residential houses and buildings of ten years or older (instead of 20 years) and to the purchase of photovoltaic systems.

The DP will consistently pursue this path and campaign for the introduction of the super-reduced VAT rate of three percent for electric means of transport in the field of soft mobility, such as bicycles and scooters, at EU level. This way, environmentally friendly alternatives in the transport sector can be additionally promoted.

The DP ensures that the statutory pension insurance remains the mainstay of the pension system. The DP also advocates for a diverse and flexibly designed pension scheme that meets the needs of the insured and promotes sustainable investments. In this context, we will give insured persons the opportunity to increasingly deduct their private old-age provision (third pillar).

For the second pillar of pension insurance, we will link the amount deductible to a certain percentage of the worker’s wage and provide for a higher deductibility if the contributions go into sustainable investments.

The DP wants to improve the contact with the administrations in general. To this end, contact points are to be opened in the various regions of the country, including for tax issues. In addition, the DP wants to further expand the digital ways of contacting tax administrations and digitise administrative procedures. A central dashboard in the MyGuichet area is intended to give taxpayers an overview of their tax situation and the possibility to carry out various administrative procedures in a straightforward manner, for example the determination of advance tax payments. The DP will also ensure that letters from tax administrations are worded as clearly as possible to facilitate the communication with citizens. 

Last year, the DP-led government took the first steps to further promote a profit-sharing bonus (“Prime Participative”) for workers. The DP will continue to work on this in the coming legislative period and take additional measures to make the profit-sharing bonus even more attractive for workers and businesses.

In addition to the “Prime participative”, the “Régime d’impatrié”, which was already adapted during the last legislative period, is also an important instrument for attracting talent. The DP will study the effectiveness of this instrument and make further adjustments if necessary.

The DP will promote the participation of workers in the capital of their business through taxation, thus giving them a greater share in the success of the enterprise. Especially with regard to start-ups, an attractive new stock option regime is to be introduced.

Refer to the chapter on Sustainability

The DP recognises the great importance of sports, culture and volunteering for social life and therefore plans to increase the tax-deductible amount for expenses in these areas from €5,000 to €7,500 per year. This way, we want to further promote involvement in sports clubs, culture and voluntary work and reduce the financial burden on citizens.

In this legislative period, the deadline for submitting tax returns has already been extended by nine months. The DP now wants to lobby for the processing time of tax returns by the administration to be limited to a maximum of three months. To achieve this goal, the tax administrations will be further strengthened in terms of personnel. In addition, the DP will ensure that the digital tax return is further improved, in particular through the automatic transfer of existing data following the “once-only principle”. In addition, information from other state registers is to be automatically inserted into the tax return, provided that data protection regulations permit it.

Refer to the chapter on Financial Centre

Real estate taxation

The DP is aware of the pressing problems in the housing market and plans to take further tax measures in the coming legislative period to boost the housing market, facilitate home ownership and reduce the financial burden on citizens.

In this context, the DP-led government has already increased the “Bëllegen Akt” tax credit from €20,000 to €30,000 in recent months. In addition, the deductibility of debt interest for financing owner-occupied housing was adjusted from €2,000 to €3,000 per household member.

Refer to the chapter on Housing

The DP wants to make it easier for young people to acquire housing. To this end, first-time buyers who purchase a property for personal use are granted a one-time exemption from registration fees. This model is similar to the one in the Netherlands and is intended to help young people take the step into their own four walls.

Refer to the chapter on Housing

Business and commerce

The DP will reduce corporate income tax and trade tax towards the average rates of the EU and OECD countries. Reducing tax rates will increase Luxembourg’s attractiveness as a business location. The DP is convinced that these measures contribute to the promotion of the economy and the creation of an attractive business environment. In addition, the DP also wants to provide targeted support to small and medium-sized businesses.

The DP intends to provide more support to businesses investing in digital and environmental transformation as well as in research and development. To this end, we will further expand the catalogue of incentives in the form of tax credits or super deductions. This is to encourage businesses to push ahead with innovation and promote the transition to a sustainable and digital economy.

Refer to the chapter on Private Individuals

The wealth tax for businesses is a special feature of the Luxembourg tax landscape. This leads to a competitive disadvantage compared to foreign companies. For this reason, the DP wants to reduce the wealth tax and limit its application in order to strengthen the attractiveness of Luxembourg as a business location.

The DP-led government introduced a reduction of the subscription tax (“taxe d’abonnement”) for investment funds that are compliant with the most demanding criteria of the European taxonomy in the last legislative period in order to increasingly promote sustainable investments. The DP will study the effects of this reduced subscription tax and examine to what extent further incentives can be created to additionally encourage investments in environmentally and climate-friendly activities.

To increase legal certainty for businesses, the DP advocates simplifying administrative procedures and modernising tax legislation. At the same time, communication between taxpayers and tax authorities is to become faster through more staff and the digitisation of the tax authorities.

The DP is aware of the challenges of the 21st century, and is convinced that taxation in a globalised world has to be addressed in large parts together. That is why the DP has actively followed developments in tax law at European and international level from the very beginning and will continue to do so in the future. At the same time, the DP takes a critical stance towards new regulations that do not achieve or go beyond  their goal.

The DP recognises the importance of double taxation agreements as important instruments for strengthening Luxembourg’s trade relations and its financial centre. We are therefore actively working to further expand the network of double taxation agreements.