Laura Foulds is the Founder of Analie Tax & Consulting, a qualified Chartered Tax Adviser and a member of the Chartered Institute of Taxation
Luxembourg is introducing a series of significant tax changes for 2024 and 2025, aimed at supporting low-income families, attracting young professionals, and tackling housing challenges. These reforms reflect the government’s efforts to address economic, social, and environmental priorities. Here’s an overview of the key updates and their potential impact on taxpayers.
Personal Income and Tax Relief Adjustments
To help ease the pressure of inflation and rising living costs, Luxembourg has adjusted its personal income tax brackets. In 2024, the brackets were shifted by four indexations, with an additional 2.5 indexations planned for 2025. These adjustments are expected to reduce the tax burden for all households, particularly for lower-income earners.
The government is also improving tax treatment for those in Tax Class 1A, which includes single parents, widows, and individuals over 64. Starting in 2025, an updated formula will align their tax liabilities more closely with those in Tax Class 2, providing meaningful relief for these groups.
Additionally, the CO₂ Tax Credit, designed to offset environmental levies, will increase to €192 per year from 2025. This credit will primarily benefit low- and middle-income earners, with the full amount available for incomes up to €40,000, phasing out entirely at €80,000.
Tax Benefits for Low-Income Families
Supporting low-income households is a central focus of the reforms. Starting in 2025, individuals earning the non-qualified minimum wage (€2,635.21 per month) will no longer pay income tax. This exemption is expected to provide an immediate boost to the take-home pay of lower-wage workers.
Single-parent households will also benefit. The Single-Parent Tax Credit will increase to €3,504 for incomes under €60,000, with a gradual reduction for incomes up to €100,000. This adjustment will ease financial strain for families facing the unique challenges of single parenting.
For those supporting dependents who live outside the household, the deduction for extraordinary expenses will increase from €4,422 to €5,424 annually, offering additional financial relief.
Attracting and Retaining Young Talent
The government is also introducing targeted incentives for young professionals. Starting in April 2024, employers will be able to offer a tax-efficient rental allowance. From 2025, a new bonus scheme is anticipated which will allow employers to provide tax-free bonuses to under 30’s during the first five years of their initial contract. Bonuses will be capped as follows:
- €5,000 for annual salaries up to €50,000.
- €3,750 for salaries between €50,001 and €75,000
- €2,500 for salaries between €75,001 and €100,000.
These measures aim to make Luxembourg an attractive destination for young talent while easing the financial burden of housing and living costs for early-career professionals.
Profit-Sharing and Inpatriate Tax Adjustments
The “Prime Participative” Scheme, which enables companies to share profits with employees, will become more generous in 2025. Employers will be able to allocate up to 7.5% of their annual profits (up from 5%) as bonuses. For employees, the cap on profit-sharing bonuses eligible for a 50% tax exemption will rise from 25% to 30% of their annual salary.
Luxembourg is also overhauling its Inpatriate Tax Regime to attract highly skilled foreign workers. The updated regime offers a 50% tax exemption on salaries and benefits, up to €400,000 annually. Existing participants can opt into the new structure, providing more flexibility for individuals and businesses alike.
Support for Cross-Border Workers
Cross-border employees make up a significant portion of Luxembourg’s workforce, particularly in finance and services. For residents of neighboring countries, the permitted number of workdays outside Luxembourg without triggering local taxation has been standardized at 34 days annually. For workers living in non-border countries, however, any day worked outside Luxembourg will trigger taxation in their home country.
In 2025, cross-border workers earning at least €1,200 in overtime pay can also claim, via their tax return, a new overtime tax credit of up to €700 annually. This credit aims to offset tax discrepancies that occur when overtime is taxed in the worker’s home country but not in Luxembourg.
Changes to Company Car Taxes
Luxembourg is aligning its tax treatment of company cars with its environmental goals. Starting in 2025, Benefit-in-Kind (BIK) rates will change to reflect vehicle emissions:
- Electric Vehicles: The lowest rate of 1% applies to vehicles consuming less than 18 kWh/100 km. Vehicles with higher consumption will be taxed at 1.2%.
- Non-Electric Vehicles: These will face a flat BIK rate of 2%.
For leases agreed upon in 2024 but delivered in 2025, the old BIK rates will still apply. These changes are designed to encourage environmentally friendly vehicle choices while supporting Luxembourg’s sustainability agenda.
Boosting Housing and Real Estate
The housing market is also receiving attention. From October 2024 to June 2025, the taxable base for registration and transcription duties on real estate purchases will be halved for main residences and qualifying rental properties. Additionally, the government is considering making the mortgage interest deduction for primary residences unlimited starting in 2025, potentially providing significant relief for homeowners.
For sellers, Luxembourg is introducing rollover relief for capital gains on real estate, provided the proceeds are reinvested in social housing or energy-efficient properties. At the same time, the holding period required to classify real estate sales as long-term gains will increase from two years to five years. These changes aim to reduce speculative activity in the property market while encouraging long-term investment in housing.
A Balanced Approach to Tax Reform
Luxembourg’s tax reforms for 2024 and 2025 reflect a comprehensive effort to address social, economic, and environmental challenges. Whether it’s lightening the tax load for families, making the housing market more accessible, or incentivizing greener choices, these changes aim to improve life for residents and ensure Luxembourg remains competitive on the global stage.
As these updates take effect, taxpayers are encouraged to seek professional advice to fully understand their implications.
