What are the tax implications of civil partnerships in Luxembourg?

Have you recently entered into a civil partnership? Are you about to? Congratulations! But do you know what the tax implications will be? How is it different from being married? In what circumstances are these unions a good move financially? myLIFE explains the tax implications of civil partnerships in Luxembourg.

The big day has arrived. Mary and Rory have an appointment at their local registry office in Luxembourg (with a person known as the officier d’état civil) to make their relationship official. They have chosen to enter into a civil partnership, which they see as more flexible than a marriage and a better fit with their preferences and values. But what are the tax implications and are there any pitfalls they should watch out for?

Individual or joint taxation?

The declaration signed by Mary and her partner does not change the fact that tax will be levied at source (the withholding tax principle). However, they now have several different modes of taxation to choose between.

• Individual taxation: in class 1 or 1a with a special rate applied separately to each partner’s income (this is the default system)
• Joint taxation: in class 2 with an average rate applied to the couple’s total income in Luxembourg (this system can be selected when filing tax returns)
• Individual taxation with reallocation of income (for people who meet certain conditions): in class 1 with a specific rate applied to the adjusted joint taxable income. The couple’s income is split equally between the two partners, or in the proportions of their choice (this system can be selected when filing tax returns).

Joint taxation under class 2 is not necessarily more advantageous than individual taxation.

There are plenty of circumstances in which two people will pay less tax as a couple than as separate individuals because the system lowers their overall tax burden. Certain tax deductions  are larger (on interest expenses, insurance premiums and payments, etc.) and it is possible to benefit from an extra-professional tax allowance.

For Mary and Rory, both of whom have Luxembourg income taxed in class 1, filing joint returns should theoretically be the better choice. All the same, you may be surprised to learn that joint taxation under class 2 is not necessarily more advantageous than individual taxation. Sometimes, it even leads to a higher tax bill.

That’s why it is so important to answer a few key questions before picking a mode of taxation. Do you have dependent children? Do you benefit from tax deductions? How much income do you receive, what category does it fall into and where does it come from? Let’s try to unpick this together.

The tax authorities will apply your chosen mode of taxation even if it ends up costing you more money than the alternative method.

When can joint taxation be costly?

It can sometimes make financial sense for a couple to be taxed separately rather than jointly. Partners should compare the modes of taxation, especially when they both fall under tax class 1a, or if one of them is in class 1a or 1 and the other is in class 2 (for example, if they recently divorced). The same is true for couples who earn more abroad (in salary, rental income, etc.) than they do in Luxembourg.

To make sure you make the right choice, it’s a good idea to speak with a tax specialist to run simulations. They will check whether you’re at risk of paying more tax if you file joint returns.

Useful info: If civil partners ask to be taxed jointly, the tax authorities will apply their chosen method of taxation even if opting for joint rather than individual taxation costs the couple money.

What are the eligibility criteria for joint taxation?

Mary and her partner have spoken with a tax expert to make sure they’re making the right choice. They would prefer to be taxed on their total income as a couple so that they fall under tax class 2. For this to happen, several criteria must be met:

• they must have been civil partners for the entire tax year covered by the return, i.e. from 1 January to 31 December
• they must have shared a common home or residence for the entire tax year
• they must be declaring all of their income as a couple (received in Luxembourg and abroad)
• they must make their request using the “form 100” tax return, which must bear the signatures of both parties
• they must provide: (i) if the civil partnership was formed in Luxembourg, a civil partnership certificate issued by the public prosecutor’s office (Parquet général), or (ii) if the civil partnership was formed abroad, a document issued by the relevant foreign authorities attesting to the existence of the civil partnership
• lastly, if the couple live abroad, they must meet the criteria for opting to be treated as resident taxpayers

Mary and Rory have looked through these criteria and realised that their civil partnership won’t entitle them to any tax benefits straight away. That’s because, even though they live together, they’ve only just made their relationship official. They’ll have to wait a full year before they can benefit from joint taxation.

⇒ Mary and Rory entered into a civil partnership on 10 February 2020, so they won’t be eligible for joint taxation until 2022, i.e. when they file their income tax return for 2021. If their civil partnership had begun in December 2019, for example, they would have been eligible for joint taxation in 2021, on their income in 2020 (because they would have been civil partners between 1 January and 31 December 2020).

What’s the difference between a civil partnership and a marriage from a tax perspective?

Now that they’ve been fully briefed by a tax specialist, Mary and Rory know that there are four major differences between a civil partnership and a marriage from a tax perspective. These relate to:

• the application of joint taxation: income is only taxed jointly after the first full year of a civil partnership and only if the couple file a joint request. Married couples fall under tax class 2 immediately and this new status is applied retroactively from the start of the year.
• change of withholding tax: the practice of levying tax at source (i.e. withholding tax) does not change when two people enter into a civil partnership. This is adjusted on the following year’s tax return.
• change of tax class: the tax class or rate shown on each civil partner’s tax card will not change (this is only the case for married couples).
• the transition period: the three-year transition period after the union is dissolved does not exist for civil partnerships. By contrast, married people who divorce continue to fall under tax class 2 (although they aren’t taxed jointly) for the three years after they separate.

*By default, married non-residents fall under class 1 unless they ask to be taxed jointly and meet the criteria to be treated as resident taxpayers (under article 157ter of the LIR or article 24 §4 of the Belgium-Luxembourg double taxation treaty).

Useful info: Civil partners are eligible for the same tax relief as married couples when they pass on their assets (i.e. on estate tax, gift tax and transfer tax on death). To benefit, the civil partnership must have been registered with the Luxembourg public prosecutor’s office (Parquet général) for at least three years.

If you are a cross-border worker or foreigner, it is not mandatory to have your civil partnership recognised in Luxembourg in order to enjoy tax benefits when filing your tax return.

Do foreign civil partnerships have to be recognised in Luxembourg?

If you are a cross-border worker or foreigner and you entered into a civil partnership outside the Grand Duchy, it is not mandatory to have your civil partnership recognised in Luxembourg in order to enjoy tax benefits when filing your tax return.

The French civil solidarity pact (pacte civil de solidarité or PACS), the Belgian legal cohabitation contract (contrat de cohabitation légale) and the German registered partnership (eingetragene Lebenspartnerschaft) are all recognised by the Luxembourg tax authorities. To ask to be taxed jointly, all you have to do is provide a document issued by the relevant foreign authorities attesting to the existence of the partnership for the duration of the tax year in question.

Useful info: A couple in a foreign civil partnership can register with the Luxembourg public prosecutor’s office (Parquet général) to enjoy the same social benefits (extraordinary leave, survivor’s pension, family hospice leave, etc.) and tax relief on asset transfers as Luxembourg couples.

Now that Mary and Rory know the main tax implications of their civil partnership, they can relax and enjoy their life as a family – especially since they’ve just found out that their family is about to get bigger!