Luxembourg – new Profit Sharing Scheme, repeal of Stock Option Circular and Impatriate Regime

In the on-going COVID-19 context, on 14 October, the Luxembourg Ministry of Finance disclosed several tax measures as part of the budget bill for the tax year 2021 (the Bill). The Bill aims to increase tax and social equity and contains various measures related to employee incentives.

Subject to any amendments, these changes will come into force on 1 January 2021.

Profit Sharing Scheme

The Bill includes a proposed new Profit Sharing Scheme (PSS). The eligibility criteria for the PSS include the following:

• Participants must be employees of a Luxembourg entity and Luxembourg taxpayers;
• The total value of all awards must not exceed 5% of the employer’s profits for the financial year immediately preceding the financial year in which the award is granted (note, for foreign owned companies, the 5% must be calculated by reference to their local entity’s profits, not the profits of the global group); and
• Upon grant, a filing is required with the local tax withholding office to confirm details of the PSS.

The benefits are that:

• Participants will receive a 50% reduction in their income tax liability in relation to those amounts paid under the PSS not exceeding 25% of their ordinary annual gross remuneration (i.e. their salary excluding any cash or other bonuses, premiums etc.);
• The award will be tax deductible for the local employer;
• The PSS is available for both cash or share awards (subject to further clarifications); and
• Employers can choose which of their local employees will participate.

2017 Circular

The existing 2017 circular which dealt with valuation methods for stock options and warrants will be abolished. This means that a lump-sum valuation method cannot be used to calculate taxable gains in respect of any options or warrants granted from 1 January 2021. The new valuation method to determine fair market value is likely to result in higher valuations.

Impatriate regime

The Bill will improve the treatment of individuals relocating to Luxembourg. The key benefits are:

• Bonuses given to such individuals will qualify for a 50% tax exemption (up from 30%);
• Minimum salaries to rely on this regime will be decreased from EUR100,000 to EUR50,000;
• Companies will no longer need to have at least 20 employees on the local payroll to obtain the tax benefits; and
• The regime will be available for 9 years from the year of the individual’s arrival instead of 6 years.

If you would like to discuss any of this our team is at your disposal.