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Luxembourg Budget Law 2023

02 February 2023

Adopted on 23 December 2022, the Luxembourg Budget Law 2023 sets out tax measures spreading across various aspects of the Luxembourg taxation regime.

Although the adopted tax measures do not represent any drastic changes or substantial reforms for individual or corporate taxpayers within the funds industry, they provide for useful clarifications and are worthwhile noting.

We summarise some of the most relevant changes for the asset management industry and its employees.

Reverse hybrid mismatch

One of the most important clarifications provided by the Luxembourg Budget Law 2023 is the confirmation on the application of reverse hybrid mismatch rules in the presence of foreign tax-exempt investors.

Effective since the 2022 tax year, the reverse hybrid mismatch rules tackle investment structures, between associated enterprises, resulting in double non-taxation dues to a mismatching classification (tax transparent vs tax opaque) of a Luxembourg tax transparent vehicle between Luxembourg and the investor jurisdiction.

In this context, it has been confirmed that these rules target eliminating double non-taxation triggered by the hybridity of a Luxembourg tax transparent vehicle and not derived from the tax-exempt status of a foreign investor.

In practice this is a welcome clarification which was much awaited by the fund industry and provides legal certainty (on potential tax exposure) to foreign institutional investors such as pension funds, sovereign wealth funds, which typically benefit from a subjective exemption in their home jurisdiction. The changes are relevant for investments made into Luxembourg tax transparent vehicles (such as FCP, SCS, SCSp) both regulated and unregulated, and these clarifications have been applicable since the 2022 tax year. 

Reduced subscription tax

Luxembourg UCITS and Part II UCIs, subject to the annual subscription tax benefit from a reduced tax rate (from 0.05% to 0.01%) for the portion of their assets invested in sustainable economic activities in line with the EU Taxonomy.

In the course of 2022, the EU Taxonomy has been expanded to include nuclear power and gas as meeting sustainability criteria. Further to this expansion, the Luxembourg Budget Law 2023 explicitly excludes such activities / assets from the reduced subscription tax and does not allow Luxembourg UCITS and Part II UCIs investing in such energy resources to benefit from the reduced 0.01% rate.

This exclusion can be understood as an expression of Luxembourg opposition to nuclear power / natural gas developments and its desire to accelerate energy transition towards more sustainable and environment friendly alternatives.

Filing deadline extension

Another measure that was welcomed by Luxembourg taxpayers is the extension of the filing deadline for the corporate tax returns and individual tax returns which is now set at 31 December as from the 2022 tax year. This deadline extension legitimizes previous administrative practice and does not concern the filing of subscription tax returns or any other tax returns due in Luxembourg.

Individual taxation

The Law does not only bring clarifications and changes to Luxembourg corporate taxpayers but also provide measures for individual taxpayers such as additional reliefs in the form of single-parent tax credits, lowering of the impatriate tax regime eligibility conditions, widening of the participative premium in group context and restricting the accelerated depreciation regime on rental property.

Another clarification concerns the levy of the final 20% withholding tax on interest payments under the so-called Relibi regime confirming that a paying agent must be a professional of the financial sector that pays the interest in the course of its normal business activities and confirms the exclusions of the regime.

VAT measures

On top of corporate and individual tax measures, the Luxembourg Budget Law 2023 also foresees minor adaptations in the VAT regime such as various extensions of the reduced (8%) and super-reduced (3%) rates to repairing of household appliances, electric bicycles and photovoltaic installations.

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