Filing a tax return is not particularly straightforward matter for the vast majority of people. Although filing a tax return in Luxembourg may appear to be more straightforward than in some neighbouring countries, many questions remain for the taxpayer. Starting with: do I need to just file one tax return? What should declare? When do I have to do it? If I have a second home in France, does that matter? We sat down with tax experts Julie Ugolini and Amelie Rosley, both chartered accountants with Néo Fiduciaire Luxembourg, who brought us through some of the main points to be aware of, and gave us a number of helpful tips and tricks for filing tax returns.
Who needs to file a tax return in Luxembourg?
Amélie Rosley: “The situation in a nutshell is that before the recent tax reform, everyone had to file a tax return, except for taxpayers in the tax class 1 and 1a bracket (residents and non-residents) in receipt of a salary or pension less than €100,000 (annual amount) and subject to withholding tax. The same was true for non-resident tax class 2 taxpayers, who benefited from a derogation that allowed non-resident married taxpayers have tax class 2 status if more than 50% of the household’s professional income was taxable in Luxembourg.
Julie Ugolini: “Basically, starting from 2018 tax year, only taxpayers classified in tax class 1 and 1a (residents and non-residents) in receipt of a salary or pension of less than €100,000 and subject to withholding tax will be exempt from filing a tax return. As for non-resident taxpayers who fall under tax class 2, they will have to file a tax return in Luxembourg in addition to taking certain preliminary steps to retain their tax class 2 status under penalty of switching back to class 1.
A.R.: Check your tax ID to find out your tax class and/or rate. In addition, although it may seem obvious, I always remind taxpayers that it is important to check their tax ID, to ensure that the information on it is correct.
Why does withholding tax not need to be declared?
A.R.: Withholding tax is calculated and applied “income by income” without taking into account the taxpayer’s overall situation. The monthly deduction made on a salary, for example, does not always take into account all of the tax deductions the household could benefit from.
J.U.: All taxpayers are not subject to withholding tax (which only applies to salaries, wages and pensions, annuities and certain income arising from investment capital). For all other income (earnings from trade, professional services, real-estate, etc), there is no withholding tax so a tax return is necessary. In addition, withholding tax is not necessarily definitive. For example, a taxpayer who has an income made up exclusively of bonuses (remuneration per share) exceeding the legal threshold or a resident married couple who are jointly taxable cannot consider themselves as being “released” from their tax obligations by the mere fact that a withholding tax was applied to their income. A tax return must be filed so that the authorities can verify that this income has been taxed appropriately. Finally, a taxpayer may have negative income to declare (such as a rental loss for which expenditure exceeds earnings) and under certain conditions, this may be deducted from earnings subject to withholding tax consequently relieving their tax burden.
Some taxpayers also make the mistake of believing that the interest on a loan is fully deductible. In fact, there are ceilings that apply depending on the situation.
What are the most frequent mistakes that taxpayers make?
J.U.: It is probably by thinking that the situation of a neighbour/colleague/friend can be applied to their own. More often than not, clients come to us and say “I was told that …” or “so-and-so can deduct such-and-such an item…”. Some sources of information, like social networking sites for example, should be consulted with the utmost caution as comments may have been shared and liked before the laws have even been passed! Each case is different so there is no point applying someone else’s situation (a person who may not be telling the whole truth or who is simply wrong) to one’s own. It is a complex matter so if you have any doubts whatsoever, make sure to consult a professional who can assist you and set you on the right track.
A.R.: Some taxpayers believe that the interest on a loan used to finance the purchase of their main residence is fully deductible. In reality, there are ceilings that apply depending on the situation and composition of the household.
Roughly 194.000 cross-border workers travel to Luxembourg every day for work. Do these non-residents need to file a tax return?
A.R.: From the 2018 tax year on, married cross-border workers with a spouse who does not work in Luxembourg will no longer automatically be classified in tax class 2 but rather as tax class 1. In order to benefit from the tax class 2 regime, all household income (overall income) with supporting documents (pay slips, etc) must be disclosed to the authorities, otherwise tax class 1 will be applicable. Applications to be registered in tax class 2 therefore require a tax return to be filled out so that the authorities can verify that the taxpayer is in fact entitled to benefit from tax class 2.
J.U.: If one half of the couple earns more than 90% (50% for Belgian cross-border workers) of their income in Luxembourg, that person will remain in tax class 2 on a tax rate which takes into account foreign income – such is the case for many cross-border workers. For those who have an additional foreign income (e.g. salary or rental income) that puts them below the 90% limit, a EUR 13,000 tax-free threshold has been put in place on net income (to be determined according to Luxembourg tax rules). As a result, the vast majority of cross-border workers will ultimately remain in tax class 2. We therefore advise cross-border workers to apply to retain their status in tax class 2, even if the tax rate has been slightly revised.
And what about earnings derived from real-estate?
J.U.: From next year, Luxembourg will see tax on the rental value of property rescinded. Any such earnings, which tend to be low anyway, will not need to be disclosed. In the case of a main residence, any interest on the mortgage is tax deductible with a ceiling applied based on the number of years spent in the residence and the number of dwellers (from 2017, the limit will be €2,000 per person for the first five years, instead of €1,500 previously, which will then decrease over time). Rental properties in Luxembourg are subject to tax. Any rental income must be declared on an annexed return, but the interest can be deducted uncapped, which is not the case for main residences. Investing in rental properties is an attractive prospect because the amortization on the property value is 6% (excluding land) over six years. This makes it a great investment for individuals.
A.R.: Let us also point out to our cross-border friends that property taxes (residence tax and property tax) on a residence in their home country are not deductible in Luxembourg. Property of whatever kind, is always subject to tax in the country where it is located! Conversely, a Luxembourg resident who has a residence in France and earns rental income from it will have to file a tax return in France. This income will be included in the Luxembourg tax return as earnings that are exempt, but taken into account when calculating the overall tax rate.
Let us also point out to our cross-border friends that property taxes on a main residence in their home country are not deductible in Luxembourg.
What advice would you give our readers generally?
J.U.: Do not hesitate to contact a professional or engage the services of an accountant in case of any difficulties. Tax experts will be able to help you to file your tax return and can also give you tips on how to maximise your tax refund. They sometimes even offer simulations on how to file a tax return for their clients helping them to plan for the future and make the best possible choices. This is all the more relevant due to the recent tax reform and the changes it entails which have been a cause of concern for some taxpayers.
A.R.: NB: If you want to start a pension plan or home savings plan to benefit from tax deductions, make sure you can cover any expenses that may result. This money is in fact blocked and if it is unblocked before the set deadline, there is a risk of losing the tax benefit. The authorities could review your tax situation and remove the benefits from these investments. Before attempting to mitigate a tax burden, we must ensure that we are in a position to assume the cost and that we are aware of all of the consequences.
What is the official deadline for declaring and paying taxes?
A.R.: For the tax year N, the official deadline for submitting a tax return is 31.03N + 1. In practice, there is no need to panic however, as the tax authorities will accept tax returns up until 31 December. N+1. For example, for the year 2016, tax returns needed to be filed by 31 March 2017, but they can still be submitted up until 31 December 2017.
J.U.: Then, the ACD will inform you of your tax liability by issuing you with a tax form via a postal mail. This is when you will have to pay your taxes or collect your refund (if you are entitled to one). NB: There is no time limit for the tax authorities to levy taxes (except the five-year statutory limitation period). You should immediately start putting money aside so as to avoid any problems paying your taxes later.
If you know that the year after your tax liability will be lower, you may request the cancellation of these instalments.
Tips for paying tax
A.R.: Be aware that, if required, the tax authorities can set up quarterly instalments for future years, based on the most recent amount of tax paid. If you know, however, that the year after your tax liability will be lower (in case of loss of employment for example), you may request the cancellation of these instalments. There is no problem with doing this.
J.U.: In the event of payment difficulties, a request for your income to be averaged is also possible (provided that it is made in time). Be careful however, as if the extension is longer than four months, interest of around 0.6% is applicable. Another piece of advice that I often give my clients: if a tax refund is due to you and you are relying on it, file your tax return before 31 March. You can then restart the process following the timely receipt of the money you are owed.
Many thanks to you both for your clarifications!