1. Modernisation of the impatriate regime
1.1 50% exemption of annual gross remuneration up to EUR400,000
Under the former regime, allowances granted by an employer to compensate for certain costs related to an employee’s relocation to Luxembourg could, depending on the nature of the costs, benefit from a full or partial/capped tax exemption. While the regime could result in substantial tax benefits for eligible employees, it was cumbersome to operate in practice, as employers were required to track and document the nature of the underlying expenses to be able to demonstrate that the conditions were met in the case of a tax audit. For the same reason, the regime was often perceived as less straightforward and, therefore, less competitive compared to impatriate regimes of other jurisdictions.
To improve its attractiveness, the Luxembourg impatriate regime has therefore been amended to provide, as of fiscal year 2025, simply for a 50% tax exemption of the annual gross remuneration (excluding benefits in kind and most fully or partially exempt cash benefits) of eligible employees relocating to Luxembourg. The exemption applies to annual gross remunerations of up to EUR400,000 (i.e., any exceeding amounts will be fully taxable). As before, the regime is available up until the end of the eighth year following the entry into service in Luxembourg, provided the conditions for the regime continue to be met.
1.2 Conditions
The conditions for the regime have essentially remained the same. As before, the regime is available for highly skilled employees hired directly from abroad or through secondments from group companies.
General conditions
- The employee must have his tax domicile or usual abode in Luxembourg.
- During the five fiscal years preceding the relocation to Luxembourg, the employee must not have: (i) been a tax resident of Luxembourg; (ii) been subject to Luxembourg tax with respect to professional income; or (iii) have resided within a distance of less than 150km of the Luxembourg borders.
- The employee must receive an annual base remuneration (i.e., excluding cash or in-kind gratifications) of at least EUR75,000.
- The professional activity for which the exemption is sought must represent at least 75% of the employee’s overall working time (under the former regime the professional activity concerned had to be the employee’s principal activity).
- The employee must not replace employees not benefiting from the impatriate regime.
- The number of employees benefiting from the regime must not exceed 30% of the workforce of the Luxembourg company. This threshold does not apply if the enterprise has existed less than ten years on January 1, of the relevant year.
Specific conditions for direct recruitment abroad
- The employee must have an in-depth specialisation in the relevant sector.
- The employer must be an enterprise located in Luxembourg or in the European Economic Area.
Specific conditions for secondments from foreign group entities
- The employee must have worked for the international group, or gained professional experience in the relevant sector, for at least five years.
- The employee must remain in an employment relationship with the company of origin during the secondment.
- The employee must have the right to return to the company of origin.
- The Luxembourg company and the company of origin must have entered an agreement with respect to the secondment.
1.3 Option for employees benefiting from former regime
Employees benefiting from the former regime continue to do so as long as its conditions are met. They may, however, inform their employer if they wish to switch to the new regime. This would, in particular, be in their interest if they primarily receive an impatriate bonus, which is 50% exempt but capped at 30% of annual gross remuneration under the former regime. This choice to switch to the new regime is effected through the employer’s annual reporting to the Luxembourg tax authorities (see below) and is irrevocable. In the absence of any specific requirements or restrictions in the law, the employee should be able to express his choice to switch to the new regime any time during the year as well as for a fiscal year later than 2025.
Employees switching to the new regime may benefit therefrom up until the eighth year following the year they have started working in Luxembourg, provided the conditions of the regime continue to be met. For instance, an employee benefiting from the former regime since 2023 and deciding to switch to the new regime as of fiscal year 2025 would benefit from the new regime from 2025 until the end of 2031.
1.4 Annual reporting to the tax authorities by January 31
As before, the employer is required to send to the tax authorities in the beginning of each year and by 31 January at the latest a list identifying the employees who have benefited from the impatriate regime in the previous year1. The tax authorities have so far not released a standard form for this annual reporting, neither for the old nor for the new regimes. In our view, employers could perform their annual reporting obligation under the former and new regimes through a single list, as long as such list indicates if the former or the new regime applies to the relevant employees. As mentioned above, the list should further disclose if the employee has switched to the new regime with respect to the relevant fiscal year.
2. Increased thresholds for the profit-participating bonus regime
Introduced in 2021, the profit-participating bonus regime allows eligible employers to grant to some of their employees a bonus, which will benefit, subject to certain thresholds, from a 50% tax exemption.
2.1 New thresholds
Effective as of fiscal year 2025, the thresholds for the regime have been changed as follows:
- Individual employee bonus threshold: the maximum bonus amount that may benefit from the exemption has been increased from 25% to 30% of the employee’s annual gross remuneration (excluding cash and inkind benefits).
- Overall bonus threshold: the maximum amount that the employer may grant under the profit-participating bonus regime has been increased from 5 to 7.5% of the employer’s net profits of the year preceding the grant of the bonus (i.e., 2024 for bonuses granted in 2025). If the employer belongs to a tax-consolidated group, this threshold may, as before, be determined by reference the positive algebraic sum of the net profits of the members of the tax-consolidated group.
2.2 Conditions
The conditions for the regime have not otherwise changed. For ease of reference, you will find below an overview of these conditions:
Conditions regarding the employer
- The employer must generate profits from a business, agricultural/forestry or independent professional activity.
- Regular financial accounts must be maintained in the year the bonus is granted as well as in the preceding year.
Conditions regarding the employees
- They must be employed in Luxembourg.
- They must be affiliated to a compulsory social security regime in Luxembourg or in another jurisdiction.
2.3 Reporting obligations
Upon payment of the profit-participating bonus, the employer must provide the relevant tax office with a list of the names of employees having received a profit-participating bonus in the format required by the tax authorities (see website of the tax authorities for more information).
3. New incentives for young employees
3.1 Young employee bonus
Available as of fiscal year 2025, employers may grant an annual bonus to employees younger than 30 years which will be 75% exempt subject to the conditions and limits set out below. This preferential tax treatment is available for a period of up to five fiscal years provided the employee remains employed by the same employer and the conditions for the regime continue to be met.
Conditions related to then employee and the employment relationship
- The employee must have less than 30 years on January 1, of the year the bonus is granted.
- It must be their first permanent employment contract (contrat à durée indéterminée) in Luxembourg.
- The employment agreement must have been signed after December 31, 2024.
- The annual gross remuneration must not exceed EUR100,000 (excluding cash and in-kind benefits).
Maximum bonus amount that may benefit from the exemption
- EUR5,000 if annual gross remuneration does not exceed EUR50,000;
- EUR3,750 if annual gross remuneration is between EUR50,001 and EUR75,000 euros; and
- EUR2,500 if annual gross remuneration is between EUR75,001 and EUR100,000.
There are currently no specific reporting obligations regarding this new bonus regime for young employees.
3.2 Rental allowance for young employees
As of June 2024, employers may grant a monthly rental allowance of up to EUR1,000 (or the employee’s actual monthly rent, whichever is lower), to be adjusted on a pro rata basis if the employee is working part-time, to young employees which will be 25% exempt, provided (i) that the employee is younger than 30 years on January 1, of the relevant fiscal year and (ii) that their annual gross remuneration (excluding the rental allowance) does not exceed 30 times the minimum social wage for qualified workers (i.e., EUR94,959.30 as of January 1, 2025).
Footnotes
[1] While the provision could be read as requiring the employer to disclose by January 31, the identity of the persons benefiting from the impatriate regime during that year, the tax authorities’ website clarifies, with respect to the former regime, that the reporting obligation pertains to the beneficiaries of the previous year. This should also be the case for the new regime.