Luxembourg has long been recognized as a leading international financial center, prized for its stability, strategic location, and business-friendly environment. In a decisive move to further solidify its position on the global stage, the Luxembourg Parliament approved a comprehensive package of tax measures in December, set to take effect on January 1, 2025. These reforms are strategically designed to enhance the country’s competitiveness, stimulate economic growth, attract top-tier talent, and increase its appeal to international investors and financial firms. Let’s delve into the specifics of these significant changes.
Lowering the Corporate Income Tax
One of the most notable changes is the reduction of the Corporate Income Tax (CIT). Recognizing the importance of maintaining a competitive edge, Luxembourg is reducing the CIT rate by one percentage point. For companies with taxable income exceeding €200,000, the rate will drop from 17% to 16%, bringing the overall taxation rate down from 24.94% in 2024 to 23.87% in 2025. Small businesses will also benefit from this change, with the CIT rate decreasing from 15% to 14%, resulting in an overall taxation rate of 21.73% in 2025, compared to 22.80% in 2024. This strategic move aligns Luxembourg with the OECD average, signaling its commitment to remaining an attractive destination for international businesses.
Streamlining the Expat Regime
Luxembourg acknowledges the critical role of attracting and retaining top talent, particularly in the thriving financial sector. To that end, the country is introducing a streamlined and simplified expat tax regime, making it even more appealing for highly qualified professionals to relocate. The financial sector has experienced substantial growth in Luxembourg over the past decade, now accounting for a significant portion of Europe’s alternative investment funds. To support firms in their recruitment efforts, the government is introducing a highly attractive expat regime. Starting January 1, expats will be able to enjoy a 50% tax exemption on the first €400,000 of their gross annual compensation for a period of eight years. This substantial tax break can significantly improve the financial prospects for expats working in Luxembourg.
Enhancing the Profit-Sharing Scheme
Recognizing that retaining talent is as important as attracting it, Luxembourg is enhancing its profit-sharing scheme to foster employee loyalty and incentivize top performance. From 2025, the maximum bonus will increase from 25% to 30% of the employee’s annual gross salary, and companies can now distribute up to 7.5% of the previous year’s profit, instead of the current 5%. Employees will benefit from a 50% tax exemption on their bonus, creating a compelling incentive for companies to reward hard work and strengthen employee loyalty. This enhancement can boost morale and contribute to a more engaged and productive workforce.
Offering a Bonus for Young Employees
Luxembourg is dedicated to nurturing the next generation of financial talent, in line with the partially tax-exempt bonus for housing costs introduced in the summer of 2024. A new scheme will be added to further support young professionals at the start of their careers. Starting January 1, 2025, employees under 30 who sign their first permanent employment contract in Luxembourg can receive an employer-granted bonus ranging from €2,500 to €5,000, depending on the salary. This bonus benefits from a 75% tax exemption, ensuring young professionals take home more while launching their careers. The qualifying bonus decreases based on salary and is no longer granted for an annual gross compensation exceeding €100,000. This initiative is designed to attract young professionals and provide them with a strong start to their careers in Luxembourg.
Abolishing Subscription Tax for Active ETFs
As Europe‘s premier hub for global fund distribution, Luxembourg is consistently at the forefront of innovation. To capitalize on the growing demand for actively-managed ETFs and strengthen its fund industry, Luxembourg is abolishing the subscription tax on active ETFs starting January 1, 2025. This strategic move ensures that all ETFs in Luxembourg – both active and passive – will now benefit from full subscription tax exemption. With all major global asset managers already operating in Luxembourg, this reform, alongside the existing expertise, positions the country to capture significant market share in this fast-growing sector.
Impact and Outlook
Collectively, these measures are expected to increase Luxembourg’s overall attractiveness and solidify its role as a stable, AAA-rated base of operations in the EU for global firms and a center of excellence for the world’s leading financial institutions. By strategically adjusting its tax policies, Luxembourg is signaling its commitment to innovation, talent acquisition, and long-term economic growth. These reforms should strengthen Luxembourg’s position as a premier destination for international business and finance in the years to come.
Damalion supports entrepreneurs, investment groups and families who register their Luxembourg commercial company. We also provide local resident directors. Please contact your Damalion expert now.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
