Aude-Marie Breden Senior manager personal tax Mazars
Photo: Mike Zenari (archives)
It’s that time of year again: glühwein at the Christmas market, finalising complicated holiday travel plans, and cutting your tax bill. There has been no change to the tax breaks on offer since last year, but a recent agreement with the French authorities has put many frontaliers’ minds at rest.
Some of the ways you can reduce your tax base are eminently sensible, but some verge on the bizarre. Encouraging us to save for our retirement is logical, as few economists think Luxembourg’s state pension system is sustainable over the long term.
It’s also not sustainable for us to carry on burning fossil fuel at current rates, so offering tax advantages for those who buy zero or low emission cars helps. Encouraging people with children to return to work by helping them with child-minding/crèche bills boosts the economy and gives people more choice.
However, what is the justification for being able to write off the interest on personal loans? Yes, it helps the domestic economy when we borrow to buy a new car, sofa or kitchen from a local supplier, but there are easier ways to stimulate demand. Offering tax advantages to people who get married or form a civil partnership, and then also allowing alimony to be written off has a certain internal logic.
Being able to write off a household cleaner’s salary costs also looks odd. Advocates point out that it encourages employers to declare this contract and pay the legally required social charges, to the benefit of the employee and the state. Yet if this is right, why not give a tax advantage for every law we don’t break?
Whether these moves are sensible public policy designed to encourage beneficial behaviour, or what a cynic might think are ways to curry electoral favour, taxpayers need to understand what is on offer. Luxembourg’s personal income taxes are towards the high end of the spectrum in Europe, and there is the implicit expectation that we should take advantage of these policies when we can.
One of the least complicated ways to cut your tax bill is to subscribe to a particular type of pension plan, as defined in paragraph “111 bis” of the tax code. Your bank and insurance company can talk you through the options, with annual payments of between €1,500 and €3,200 leading to a reduced tax base. The nearer you are to retirement, the more you can invest.
These products are practical for expats who do not intend to spend a long time working in Luxembourg, as these savings can be tapped from wherever you end up retiring. They are accessible from 60 years of age onwards, as a lump sum, as a life annuity that pays out a regular pension, or as a mix of both solutions.
All non-resident workers had to rethink their tax arrangements last year following a Luxembourg tax reform. It mainly concerned married couples with one spouse working here. It involved a range of questions about which tax regime to choose, which tax class to take, which deductions to use and other such questions.
A redrafted tax treaty complicated matters for cross-border commuters living in France, but these problems were solved when a new treaty was signed on 10 October 2019. Without this, residents of France who work in Luxembourg would have had to pay extra tax to the French authorities. According to the new text, Luxembourg income will be taxed in France, but with a tax credit granted equivalent to the French tax.
“This is quite a technical solution, but it means that nothing will change for French workers in their home country,” commented Aude-Marie Breden, senior manager personal tax of the consultancy Mazars. “The impact of this new method is the same as the historic method of exemption.”