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Luxembourg: State of the Nation speech

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Keith O’Donnell


Samantha Merle

There was a time where Luxembourg was known for its strict banking secrecy rules in tax and non-tax matters. In the last few years, Luxembourg adapted its legal framework and its double tax treaty network so as to comply with the OECD exchange of information standards. Each new treaty or protocol is now in full compliance with OECD standards. Within the EU, under the Savings Directive, Luxembourg was one of the few countries preferring to levy a 35% withholding tax on EU individual's savings income, rather than to exchange information about this income. From 2015 however, automatic exchange of information will apply under the Savings Directive. In addition, the prime minister announced, among other measures, an increase of the standard VAT rate from 2015.

EU Savings Directive: Automatic exchange of information

Interest income paid by a Luxembourg paying agent to an individual resident in another EU member state triggers a 35% withholding tax, unless the individual opts for exchange of information. The Luxembourg government announced that, in the light of recent international developments, such as the US Foreign Account Tax Compliance Act (FATCA), the "time has come to revisit the transitional coexistence of automatic exchange of information and withholding tax". Automatic exchange of information will apply as of January 1 2015 to EU resident individuals falling within the scope of the EU Savings Directive. The situation of Luxembourg resident individuals will remain unchanged (final taxation at source at 10%).

Increase of VAT rate as of 2015

With a 15% standard VAT rate, Luxembourg is the country applying the lowest VAT rate within the EU. Favourable VAT treatment still applies until 2015 to certain e-business transactions. With the anticipated end of this regime in 2015, expecting to generate losses in VAT revenues and considering the economical context, the government announced that an increase of VAT rate would be necessary.

The increase will occur only as from 2015 and will be implemented in such a way that Luxembourg will remain the country applying the lowest VAT rate in the EU.

Other changes: Taxation of real estate/housing amended

The prime minister announced an increase in the taxation of capital gains on the sale of land and the repeal of the interest subsidies for housing (bonification d'intérêts).

To avoid or at least reduce the number of vacant residential units, a specific tax will also be introduced.

Implications

The changes to banking secrecy, while sometimes portrayed as a seismic shift, are an inevitable move, given the international environment and the economic context. There will be a need to adapt banking systems to accommodate the information flows.

The increase in VAT will be a significant revenue raiser; however, it will be of limited consequence to most businesses as it is borne principally by consumers. It will increase the importance of carefully managing VAT issues however, notably in businesses that have limited VAT recovery.

Keith O'Donnell (keith.odonnell@atoz.lu) and Samantha Merle (samantha.merle@atoz.lu)

Atoz Taxand

Tel: +352 269 401

Fax: +352 269 40 300

Website: www.atoz.lu

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