On 14 October 2020, the Luxembourg government issued bill n° 7666 regarding the 2021 budget (the Bill), introducing changes to Luxembourg tax law applicable from 1 January 2021. The Bill is strongly influenced by the Covid-19 crisis on the expenditure side, but also by a political decision to limit speculation on housing, as well as Luxembourg’s sustainability goals on the revenue side of the 2021 budget.
This blog focusses on the aspects that are likely to have the biggest impact on corporate entities and investment funds; in particular in the real estate sector.
The Bill still needs to undergo the legislative process before being adopted by parliament. It is, however, expected that most measures will be adopted as is. Taxpayers should therefore assess the impact that the measures will have on their position and evaluate steps for mitigating the impact of such changes to the law, or benefiting from the new tax incentives.
Controlling the surge in Luxembourg real estate prices
The Luxembourg government proposes changes that are likely to have an impact on the profitability of real estate investments in Luxembourg, with the aim of clamping down on speculative investments in real estate.
Amortisation of rented residential buildings
Up until now, the amortisation rate for new rented residential buildings has been 6 per cent for the first six years following construction. Following the changes introduced by the Bill, the amortisation will remain possible for only five years, and at a rate of 4 per cent. The rate of 6 per cent should remain applicable for real estate acquired before 1 January 2021.
In contrast, costs of renovation aimed at energetic efficiency of rented residential buildings should, subject to certain conditions, be subject to amortisation for nine years, at a rate of 6 per cent.
Introduction of a real estate tax
The government wishes to introduce a real estate tax. The real estate tax will impact income generated by real estate situated in Luxembourg and earned by specialised investment funds (SIF), undertakings for collective investment (UCI) and reserved alternative investment funds (RAIF) (each a Fund).
Gross rental income, capital gains realised by a Fund on the real estate itself (asset deal), or on the sale of shares or units in certain Fund entities themselves holding real estate situated in Luxembourg (share deal) should be subject to tax at a 20 per cent rate, without deductions.
Like the subscription tax paid by certain investments vehicles in Luxembourg, the Fund itself will be liable for this tax and will be required to file an annual tax return.
Also, a mandatory disclosure obligation regarding the holding of Luxembourg real estate is introduced. Any Fund that holds or has held a real estate situated in Luxembourg during 2020 or 2021 will have to inform the tax administration.
Increase of registration and transcription fees
In Luxembourg, the contribution of a building to a company in exchange for shares is subject to registration and transcription fees significantly lower than the contribution of a building to a company in exchange for remuneration other than shares. To avoid important discrepancies in the taxation of two rather similar taxable events, it is proposed to increase registration fees from 0.5 per cent (increased by 2/10th) to 2 per cent (increased by 2/10th), and to increase transcription fees from 0.5 per cent to 1 per cent on the contribution of a building in exchange for shares.
SPF holding real estate
The holding of real estate by Luxembourg private wealth management companies (SPF) has long been subject to debate. The Bill now puts an end to that debate as it states that an SPF may not hold real estate through one or more partnerships or mutual funds (FCP).
Luxembourg wishes to be a sustainability frontrunner and continues to implement new measures to support the transition to a more sustainable economy.
Introduction of a CO2 tax
A CO2 tax is introduced and will be levied on certain goods such as products derived from petrol and gas. The tax should correspond to €20 per CO2 ton for the tax year 2021 and be increased to reach €30 per ton in 2023. Part of the CO2 tax levied will be for the benefit of the Luxembourg Climate and Energy Fund.
Reduction of subscription tax rate for UCI (including UCITS)
In Luxembourg, UCI are generally subject to a subscription tax of 0.05 per cent levied annually on the net asset value of the fund.
In order to foster investment in assets that fulfil certain criteria for environmentally sustainable economic activities as defined by the EU taxonomy directive (Sustainable Assets), the Government wishes to offer a tax incentive specific to UCI. The incentive will be in the form of a reduction of the subscription tax rate depending on the holding percentage of Sustainable Assets as follows:
- 0.04 per cent for UCI or compartments holding between 5 per cent and 20 per cent of Sustainable Assets
- 0.03 per cent for holdings of between 20 per cent and 35 per cent
- 0.02 per cent for holdings of between 35 per cent and 50 per cent
- 0.01 per cent for holdings of at least 50 per cent
For the time being, similar tax incentives are not foreseen for other types of investment vehicles.
 ie investments funds (fonds commun de placement) and entities considered transparent by the Luxembourg income tax law and listed under article 175 of the Luxembourg income tax law (eg the special limited partnership (société en commandite spéciale) and the common limited partnership (société en commandite simple)).