Romain Tiffon
ATOZ Tax Advisers, Luxembourg
romain.tiffon@atoz.lu

Marie Bentley
ATOZ Tax Advisers, Luxembourg
marie.bentley@atoz.lu

Luxembourg continues to consolidate its position as a leading jurisdiction for wealth management and investment structuring, being notably the first fund centre in Europe and second only to the United States globally. This situation is underpinned by a series of legislative reforms, fiscal incentives and regulatory enhancements in the country. In this context, the Minister of Finance, Gilles Roth, has recently underscored the strategic imperative of leveraging current geopolitical and technological developments to reinforce Luxembourg’s global competitiveness.

One of the main aspects of the Luxembourg government’s strategy to maintain its competitiveness is attracting talent. Having a skilled and talented workforce is a key factor in terms of a country’s competitiveness. In this respect, Luxembourg is a top performer in attracting talent. In the last Global Talent Competitiveness Index for 2023,^[1] as in previous years, Luxembourg ranks first in the world for its ability to attract talent. The country also achieves a top ten position (ninth out of 134) for its ability to retain talent. One can also note Luxembourg’s superior performance in regard to all five indicators relating to countries’ external openness towards overseas business and people (also ranking first), as well as its world-class performance in terms of environmental and social welfare that contribute to its high (second) sustainability ranking.

Recent legislative and regulatory developments

Over the past year, the Luxembourg legislature has proposed and enacted several measures aimed at enhancing the jurisdiction’s attractiveness.

Reform of the impatriate tax regime

Pursuant to the Law of 20 December 2024,^[2] effective from the 2025 tax year, the impatriate regime has been substantially modernised. The revised regime provides for a 50 per cent exemption on gross annual remuneration (inclusive of benefits in kind), capped at €400,000. This replaces the prior partial exemption applicable to impatriate bonuses and relocation costs. The reform aligns Luxembourg with comparable regimes in France and Italy, simplifies the eligibility criteria and improves legal certainty.

An impatriate is defined by the law as:

• an employee who, usually working abroad, is seconded from an undertaking of an international group located outside the Grand Duchy of Luxembourg in order to carry out an activity as an employee in a Luxembourg local undertaking belonging to the same international group; or
• an employee directly recruited abroad by a Luxembourg local undertaking or by an undertaking established in another state party to the Agreement on the European Economic Area, in order to work as an employee for the Luxembourg undertaking.

While the impatriate regime has been substantially modified in terms of tax incentives, the conditions for its application remain almost identical. To be applicable, the following conditions must be met:

• the impatriate is an individual whose tax domicile or habitual residence is in the Grand Duchy of Luxembourg. The impatriate must be resident for tax purposes in Luxembourg, in accordance with the Luxembourg Income Tax Law;
• during the five tax years preceding the year in which the impatriate took up employment in the Grand Duchy of Luxembourg, the impatriate has neither been domiciled for tax purposes in the Grand Duchy of Luxembourg, nor lived at a distance of less than 150 km from the border, nor been subject to personal income tax in the Grand Duchy of Luxembourg on their professional income;
• the impatriate carries out the professional activity for which they benefit from the exemption for at least 75 per cent of their working time. The previous regime required that the impatriate was employed for a job that was their main professional occupation. However, to assess the 75 per cent threshold, it is still unclear what type of activities (ie, volunteering, non-remunerated mandates, etc) fall within the scope of ‘working time’ and whether this threshold must be assessed annually, monthly or even weekly;
• as under the previous regime, the impatriate earns a fixed annual remuneration of at least €75,000; the fixed remuneration to be taken into consideration being the gross amount, before the incorporation of benefits in cash and in kind;
• the impatriate does not replace one or more other employees who are not considered impatriates but meets all the criteria to benefit from the regime;
• in the case of a secondment:
  • the seconded impatriate has a seniority within the international group of at least five years or has acquired at least five years of specialised professional experience in the sector concerned;
  • an employment relationship exists between the seconding company and the employee during the period of secondment;
  • the temporary assignment of the seconded employee provides for a right for the employee to return to the seconding establishment at the end of the period of secondment; and
  • a contract relating to the secondment of the employee is concluded between the seconding company and the local company.
• in the case of direct recruitment, the impatriate has acquired in-depth specialisation in the sector concerned; and
• the number of impatriates entitled to the exemption does not exceed 30 per cent of the total workforce of the local company in which the impatriate works. This condition is only applicable where the company has at least ten years of existence. Part-time employees, including impatriates, are counted in proportion to their workload.

The impatriate regime is applicable until the end of the eighth tax year following the year during which the impatriate started to work in the Grand Duchy of Luxembourg. Accordingly, the impatriate may benefit from the new regime for nine years (ie, the year in which they relocate to Luxembourg and the full eight fiscal years thereafter).

Profit-sharing tax incentive

Following the repeal of the 2017 administrative circular on stock options/warrant plans, a profit-sharing regime has been introduced^[3] for employees, with effect from the 2021 tax year. According to the previous version of the regime, a profit-sharing bonus paid by a Luxembourg company to its employee(s) was 50 per cent exempt from Luxembourg income tax, provided the two following conditions/limitations were met: (1) the total amount of the profit-sharing bonus paid by the employer to its employees does not exceed five per cent of the accounting profits of the employer as of the end of the accounting year preceding the allocation of the profit-sharing bonus; and (2) the amount of the profit-sharing bonus paid by the employer to the employee does not exceed 25 per cent of the annual gross salary (excluding the amount of the profit share) of the employee concerned.

To enable companies to further retain their employees, but also to attract talent to Luxembourg, enhancements to this profit-sharing (prime participative) regime have recently been introduced. The Luxembourg legislature^[4] has amended the conditions for being able to benefit from the 50 per cent exemption on a profit-sharing bonus. Effective as from tax year 2025, the maximum total amount of the profit-sharing bonus an employer can grant to its employee(s) has been increased from five per cent to 7.5 per cent of the positive result of the employer for the operating year immediately preceding the one for which the profit-sharing bonus is allocated to the employee(s). In addition, the maximum amount of the partially tax-exempt bonus has been increased from 25 per cent to 30 per cent of the beneficiary’s gross annual remuneration, before the incorporation of benefits in cash and in kind.

A new bonus exemption for young employees

Also effective from tax year 2025, a new discretionary bonus scheme has been introduced for the benefit of employees under the age of 30 who enter their first permanent employment contract in Luxembourg. The bonus, granted at the employer’s discretion, is subject to a partial tax exemption of 75 per cent, provided that the gross annual remuneration of the employee does not exceed €100,000.

The maximum annual amount of the young employee’s bonus that may benefit from the 75 per cent tax exemption is capped at €5,000 and depends on the gross annual remuneration of the employee. No exemption shall apply where the gross annual remuneration exceeds €100,000.

The exemption is available in regard to bonuses paid within a period not exceeding five years from the date of the employment contract and shall cease to apply in the event of a change of employer, reflecting the legislative intent to promote long-term employment relationships and employee retention.

Upcoming legislative and regulatory developments

In parallel with the recently published draft law introducing a new startup tax credit that is still under discussion at parliament level, Luxembourg’s Minister of Finance has announced a broader set of tax initiatives aimed at strengthening the country’s position in the financial sector. A key element of these measures is the planned revision of the carried interest regime, intended to attract more fund managers to Luxembourg and to align the jurisdiction with competitive developments in the United Kingdom and southern Europe. Additionally, a new stock option framework for startup employees, featuring favourable capital gains tax treatment, is expected to be submitted to Parliament before the end of the year.

Startup incentives

At the beginning of April 2025, a draft law^[5] was submitted to Parliament proposing a new tax credit to encourage individuals to invest in young innovative companies. The aim of this draft law is to strengthen the country’s entrepreneurial ecosystem and make Luxembourg’s ecosystem more attractive for young innovative companies by improving their access to financing during the early stages of the company’s existence. This new startup tax credit would apply from the 2026 tax year.

The draft law provides strict eligibility criteria for both investors and startups, including innovation requirements, size limits and holding periods. These provisions are currently under review, following the Council of State’s opinion, which raised concerns regarding the overly restrictive scope of the proposed regime. It is therefore anticipated that the legislative framework may be broadened during the parliamentary process.

Notwithstanding these reservations, the proposed measure reflects Luxembourg’s broader strategy to enhance its competitiveness and support innovation-driven growth.

In parallel, the government has announced the forthcoming introduction of a new stock option regime specifically tailored for the employees of startups. This regime is expected to provide favourable capital gains tax treatment to incentivise early-stage innovation and investment in Luxembourg.

Carried interest

In 2013,^[6] Luxembourg established a specific tax framework for carried interest, targeting individuals who are employees of alternative investment fund (AIF) managers or AIF management companies.

In summary, the tax regime firstly provides that carried interest is categorised as a miscellaneous income, in the subcategory speculative gains (ie, a form of capital gain) and not as employment, professional or business income^[7] and, secondly, determines under what conditions these speculative gains are taxable or exempt.

This framework differentiates between two types of carried interest:

• one type is granted as a contractual right unrelated to investments, which is taxed as speculative income in principle to be aggregated with the taxpayer’s other income and taxed in accordance with the rates applicable to direct taxes. This type of carried interest is therefore fully taxable at the progressive income tax rate (marginal rate of 45.78 per cent). For impatriates, the tax framework also provides for the taxation of carried interest at a quarter of the tax rate determined on the basis of the progressive scale under certain conditions. This regime has since expired; and
• another type is embedded in financial instruments (like limited partnership units or carried shares), which may qualify for a full capital gains exemption if held for over six months and representing less than ten per cent of the relevant entity’s capital. It is worth noting that the relevant entity is not necessarily the carry vehicle whose limited partnership units are held by carry beneficiaries as Luxembourg tax law will look at any tax transparent entity to assess the ten per cent computation.

While the current regime is clearly defined, it remains complex and narrow in scope. We understand that this is the reason why the government has announced plans to revise it, particularly by simplifying and enhancing the tax treatment of non-investment-linked carried interest to attract more fund managers to Luxembourg.