Employers in Luxembourg are responsible for a significant portion of labor costs through mandatory social security contributions. These contributions support various areas of social welfare.

Pension Insurance

Both the employer and employee contribute 8% of the employee's gross salary, subject to a monthly ceiling of EUR 12,854.64 (as of December 1, 2023).

Health Insurance

As part of the National Health Fund, employers contribute approximately 3.05% and employees contribute around 3.05% of the gross salary.

Accident Insurance

The employer is solely responsible for accident insurance contributions, the rate of which varies depending on the company's sector and risk profile.

Dependency Insurance

Employers contribute to a dependency insurance fund, designed to support long-term care. The contribution rate is typically around 1.4% of the employee's gross salary.

Calculation and Payment

Most employers in Luxembourg utilize a payroll system to calculate and manage social security deductions and employer contributions, streamlining the payment process. Employers are required to declare and submit payments of social security contributions to the Joint Social Security Center (CCSS).

Other Employer Considerations

The financial absenteeism rate can slightly influence the employer's share of social security contributions. Luxembourg has social security agreements with multiple countries potentially impacting how contributions are handled for workers from those countries. Some sectors might have additional contribution requirements as per collective bargaining agreements.

In Luxembourg, the tax system allows for the deduction of certain employment-related expenses. These deductions come in two main forms: the standard deduction and itemized deductions. All employees receive a minimum standard deduction of €480 annually, which is doubled for married or partnered couples filing jointly. Alternatively, you can choose to deduct actual job-related expenses if they surpass the standard deduction amount. Common itemized deductions include transportation costs between your home and workplace (up to €2,574 per year), expenses for tools or specific work clothing, and professional development or training costs.

Social Security Contributions

Employees in Luxembourg contribute to the country's robust social security system, and these contributions are tax-deductible. The primary social security contributions are sickness insurance (2.80% of gross salary up to a monthly ceiling), pension insurance (8% of gross salary up to a monthly ceiling), and dependency insurance (1.4% of gross salary up to a ceiling).

Personal and Family Related Deductions

Certain personal and family-related expenses can also be deducted. These include alimony payments made to a divorced spouse or other ongoing allowances, interest expense related to a personal loan, and donations to qualifying charities, all of which may be deductible under specific conditions.

Retirement Savings

Luxembourg encourages retirement savings through tax-deductible contributions. Contributions to a private pension plan are often tax-deductible. Participation in employer-sponsored supplementary pension schemes may also offer tax deductions.

Homeownership

For homeowners, interest paid on a mortgage for your primary residence is typically tax-deductible within certain annual limits. Contributions to specific home purchase savings schemes can sometimes be tax-deductible.

Luxembourg operates a tiered VAT system, with different VAT rates applying to various types of goods and services. The current standard VAT rate is 16%, which applies to the majority of goods and services. Reduced rates include 13% for certain supplies like wine, advertising services, and non-alcoholic beverages, 7% for gas and electricity, cleaning in private households, hairdressing, minor repairs on certain items, and several other services, and a super-reduced rate of 3% for essentials like food, water supplies, certain medicinal products, and publications.

VAT on Services

VAT is charged on services based on the "place of supply". Generally, for business-to-business (B2B) services, the place of supply is where the customer is established. For business-to-consumer (B2C) services, the place of supply is generally where the supplier is established. There are exceptions to the place of supply rule, particularly for services related to immovable property, transport, cultural activities, etc.

VAT Liability in Luxembourg

Any business or individual making taxable supplies of goods or services exceeding a certain annual turnover threshold must register and charge VAT. In certain situations, usually B2B transactions where the recipient of the services is outside of Luxembourg, the reverse charge mechanism applies. This means the recipient, rather than the supplier, accounts for VAT.

VAT Registration

Businesses exceeding certain annual turnover thresholds are obligated to register for VAT. This threshold is currently €35,000. There are some exemptions from VAT registration, even if your turnover exceeds the threshold.

Specific Situations

There are specific rules for distance sales (e.g., e-commerce) involving cross-border transactions exceeding a threshold of €100,000 in Luxembourg. If you provide digital services to non-business customers within the EU, you may need to register in an EU country for the the Mini One-Stop Shop (MOSS) scheme.

VAT Reporting and Compliance

Registered businesses need to file VAT returns periodically (monthly, quarterly, or annually). The VAT return frequency depends on the taxpayer's turnover. VAT-registered businesses supplying goods or services to traders in other EU countries might need to complete EC Sales Listings (ECLs). The submission frequency varies.

Luxembourg offers a competitive Corporate Income Tax (CIT) rate. As of 2023, it stands at 15% for companies with income up to €175,000 and 17% (plus a solidarity surcharge) for higher income levels. Municipal business tax (MBT) is additional, and varies based on location. Under certain conditions, dividends and capital gains from qualifying shareholdings are generally exempt from taxation. This makes Luxembourg attractive as a holding company location. Luxembourg also has treaties with numerous countries to prevent double taxation of income, benefiting businesses operating across borders.

Research & Development (R&D) Tax Incentives

Businesses can claim tax credits for eligible costs related to research and development activities. The credit rate depends on the company's size and the nature of its R&D projects. Luxembourg's "IP Box" regime provides a reduced effective tax rate (down to about 5%) on income derived from qualifying intellectual property assets like patents, copyrights, and certain trademarks. Expenses related to R&D activities can often be deducted, in some cases at an increased rate.

Investment Incentives

A range of investment tax credits are available, designed to encourage investment in fixed assets, new technologies, environmental protection, and job creation. Accelerated depreciation schemes can significantly reduce tax liabilities in the early years of investment in specific assets.

Financing Incentives

Interest expenses on certain loans are generally tax-deductible, reducing the cost of borrowing. Favorable tax treatment applies to financing raised through risk capital instruments, which is beneficial for innovative companies and startups.

Other Important Incentives

Programs are in place to support job creation, including reduced social security contributions and subsidies for hiring specific target groups, such as young or long-term unemployed individuals. Tax credits may be available to companies for costs associated with training employees, encouraging businesses to invest in their workforce. Tax deductions, credits, and other incentives can be available for investments in energy-efficient technologies and measures.

How to Access Tax Incentives

Some incentives are applied automatically, while others require specific applications and approvals. It's important to understand the requirements for each incentive. Consulting a tax advisor is strongly recommended to navigate the application processes and ensure that you're maximizing available incentives.