Finance Minister Gilles Roth has unveiled details of a package of tax cuts that will cost the state around €500 million a year from 2025, including reductions to personal and corporate taxes, tax credits for single parents, and financial incentives for expats. The government has approved plans to adjust tax brackets by 2.5 indexations or 6.4% from next year, on top of an adjustment of four indexations which took effect at the start of this year, Roth said at a press conference on Wednesday, confirming a measure Prime Minister Luc Frieden first announced in his state of the nation speech in June.
A single earner with an annual gross wage of €50,000 – who currently pays €5,710 in tax – will save €502 in taxes compared to 2024 and €927 or 15.1% compared to 2023, Roth said. A single person with a gross salary of €75,000 will pay €747 less in tax compared to this year and €1,314 compared to 2023. A married couple with one or more children and a household income of €75,000 a year will pay €444 less in tax from 2025, according to scenarios presented in Wednesday’s press conference. The same family set-up, but with an annual income of €125,000, will save €1,460 in tax.
Once parliament passes the measures, Luxembourg’s tax brackets will have been adjusted equivalent to six-and-a-half of the eight indexations that have been triggered. The package of tax cuts alone will cost the state €300 million each year.
Single Parents
Single parents will also see their tax burden go down under Roth’s plans, a measure he said was designed to combat child poverty. Single parents in the 1A tax class will see their tax-free income rise from €24,876 to €26,460 from 2025. Widows and widowers, as well as people aged 64 or older, will benefit from that adjustment too. On top of that, a tax credit for single parents will rise from a maximum amount of €2,500 to €3,500 from next year.
“From 1 January, a single parent with an annual income of roughly €52,400 will not pay any tax,” Roth said, calling the cuts “historic.” A single parent with an annual income of €75,990 – the average wage in Luxembourg – will pay €3,782 less in tax or 31% less than in 2023, the finance minister said. The tax cuts for single parents and widows will cost €82 million per year.
Small and Big Wages
Luxembourg’s minimum wage for so-called ‘unqualified’ workers – currently €2,570 – will become tax-free through a tax credit, Roth said. This measure will cost €11 million per year. Prospective home buyers, who have been hit by rising interest rates, will also get tax support. This year and next year, interests paid on mortgages for existing flats will become fully tax deductible, at a cost of €40 million to the state budget, Roth said.
Roth’s so-called “relief package” (Entlaaschtungs-Pak) also foresees further tax incentives. The prime participative, a profit-sharing bonus which employers can offer to staff, will also be reformed. The share of an employee’s wage that can be paid out in the form of this bonus will rise to 30% from the existing 25%. Companies can also pay out 7.5% of their profits as a bonus from next year, instead of 5% currently.
The government also plans to make changes to the so-called ‘expat regime’ aimed at attracting and retaining highly-skilled staff through tax credits. Eligible expats will see 50% of their gross annual wage go untaxed, up to an amount of €400,000. The other existing criteria that expats need to fulfill remains unchanged.
“It is a fact that it is becoming harder and harder to attract talents to Luxembourg,” the finance minister said. “We are in a fierce competition with countries that have such regimes, such as France, Belgium, Netherlands and Italy,” he added.
Cross-border workers from Germany will also see the state pay out a tax credit of up to €700 to balance out taxes that Berlin could levy on overtime worked in Luxembourg. Overtime in the private sector is not taxed in Luxembourg but is in Germany.
“We would have wanted to avoid this measure,” Roth said, after months of uncertainty during which it was revealed that Luxembourg had agreed to a tax treaty with Germany which gave Berlin the powers to tax overtime by German-based workers. The tax credits could cost €10 million a year.
Surprise Cut for ETFs
In a surprise announcement, Roth said that actively managed exchange-traded funds (ETFs) will not pay any subscription tax, an annual levy of 0.05% on net assets under cuts approved by the government. Under the current regime, passive ETFs, which track a benchmark like the S&P 500, for example, are already exempt from paying subscription tax.
The prime minister, in his state of the nation speech in June, had announced an unspecified subscription tax cut for actively managed ETFs – in which portfolio managers pick securities to try to beat the benchmark – but did not say the funds would be freed from the tax altogether.
Roth on Wednesday also confirmed a single percentage point cut to corporation tax, which will see the state take in €70 million less in revenues every year.
However, Roth declined to answer press questions on how the government will fund the series of tax cuts, saying that the measures were necessary to support households and businesses through the cost-of-living crisis.
“We do not want to further tax our households and businesses on our way out of the crisis but to cut their taxes. Tax relief creates new dynamic, new upswing, new growth. Relief brings new consumerism and new investments. Relief brings more tax revenues,” he said.
All of the tax cuts presented on Wednesday still require parliamentary approval before becoming law.
