Tax changes in Luxembourg in 2025: new regulations and laws

Luxembourg tax updates in 2025

On December 11, 2024, the Luxembourg Parliament voted on a series of bills that introduced important tax changes in Luxembourg aimed at supporting businesses and individuals. Below we will look at some of the most important ones:

Income tax

From 2025, personal income tax in Luxembourg will undergo a slight change. The personal income tax brackets will be adjusted to compensate for inflation, resulting in the following:

Modernization of the regime for impatriates

To make Luxembourg more attractive to talent and highly specialized profiles, the government carried out a complete review of the tax regime for impatriates. The various current tax benefits such as removal expenses, housing expenses, and the impatriation bonus were abolished and replaced by a flat-rate exemption of 50% of gross annual remuneration. This excludes partially or fully exempt payments such as participation bonuses or interest subsidies, as well as benefits in kind. This exemption would apply up to a maximum limit of 400,000 euros of gross annual remuneration.

New bonus for young employees

Within the new tax rules in Luxembourg, employers now can grant an annual bonus of between 2,500 and 5,000 euros, depending on the gross remuneration, to young employees with a 75% tax exemption. This is provided that certain conditions are met. The employee must be under 30 years of age on January 1 of the corresponding tax year, be on their first permanent contract (CDI) in Luxembourg and earn less than 100,000 euros gross per year.

Boost to the profit-sharing plan

Another of the tax changes in 2025 in Luxembourg refers to the profit-sharing plan existing in Luxembourg. This plan was introduced in 2021 and allows companies to grant bonuses to their employees with a 50% tax exemption on the amount received for employees with full deductibility for companies. From 2025, the limits of the scheme have been extended to make it more attractive:

• The maximum percentage of annual profits that a company can allocate to these bonuses increases from 5% to 7.5%.\
• The individual limit of the exempt bonus goes from 25% to 30% of the employee's gross annual salary (excluding other benefits).

Introduction of a tax credit for cross-border employees’ overtime

An overtime tax credit has been introduced for cross-border workers. This tax credit has been designed to compensate for the loss of income that these employees may suffer due to double taxation in their country of residence, given that although overtime is tax-exempt in Luxembourg, some countries have started to tax it. The tax credit is applied according to the annual gross income from overtime:

• Overtime income less than 1,200 euros: no credit is granted
• Income between 1,200 and 4,000 euros: the credit is equivalent to 25% of the excess over 1,200 euros.
• Income over 4,000 euros: the maximum credit is 700 euros per year.

This benefit is available to workers residing in countries that have a double taxation treaty with Luxembourg and can be applied for using an annual declaration or tax adjustment.

Reduction in the corporate income tax rate (CIT)

Corporate tax in Luxembourg was also modified. From 2025 the tax rate will be reduced by one percentage point to 14% for companies with a tax base of less than 175,000 euros and 16% for those with a tax base of more than 200,000 euros. Between these two income levels, there is a smoothing mechanism.

A company resident in Luxembourg will be subject to a maximum aggregate tax rate (including corporate tax, municipal business tax and the contribution to the employment fund) of 23.87% (in the city of Luxembourg in 2025) instead of 24.94% (in the city of Luxembourg in 2024).

Simplified Minimum Net Wealth Tax (MNWT)

From the 2025 tax year, the calculation of the MNWT is simplified and now only considers the total value of the balance sheet, eliminating the need to account for the proportion of financial assets. The tax is structured in levels:

• 535 euros for balance sheets ≤ 350,000 euros.
• 1,605 euros for balance sheets between 350,000 euros and 2 million euros.
• 4,815 euros for balance sheets > 2 million euros.

Optional exemption in the participation regime

From 2025, Luxembourg companies will have the option of waiving the benefit of the participation exemption on dividends, liquidation proceeds, and capital gains, as well as the 50% tax exemption on dividend income. This option must be requested for each tax year and each shareholding. 

However, this option is only available when the Luxembourg participation exemption regime would have applied under the acquisition price criterion, that is, 1.2 million euros for dividends and liquidation proceeds and 6 million euros for capital gains. This possibility of exclusion cannot be exercised, then, when the taxpayer would have benefited from the participation exemption regime solely under the application of the 10% participation threshold criterion. In addition, the waiver must be exercised for each tax year and each shareholding.

This change aims to align Luxembourg's participation exemption regimes with those existing in other Member States of the European Union. In addition, the proposed amendment gives companies greater flexibility to use accumulated tax losses.

Tax exemption for actively managed ETFs

From 2025, the subscription tax exemption will be extended to exchange-traded funds (ETFs) that qualify as UCITS (Undertakings for Collective Investment in Transferable Securities) and are actively managed.

Update of the SPF regime

Additional modifications have been introduced for private wealth management companies (SPF). The minimum annual subscription tax has been increased from 100 to 1000 euros and stricter control measures have been introduced. The tax authorities can now impose administrative fines of up to 250,000 euros in case of non-compliance with legal obligations.

Furthermore, the SPF tax regime may be withdrawn in the event of non-compliance with applicable legal, regulatory or statutory provisions that are of a certain severity and persistent non-compliance for a specific period. This follows a compliance request issued by the director of the Registration Duties, Estates, and VAT Authority.

Summary of the main changes

The following table provides a broader overview, summarizing the different changes that will take place this year.

In general, the tax measures implemented in Luxembourg for 2025 have a positive impact on both individuals and companies. For individuals, the adjustments in income tax brackets allow taxation to be aligned with inflation, the new bonus for young employees encourages the hiring and retention of young talent, and the boost to the profit-sharing plan encourages employee motivation through financial incentives directly linked to business success. On the other hand, for companies, the reduction of corporation tax and the simplification of the Minimum Net Worth Tax reduce costs and increase competitiveness, while options such as the optional exemption in the participation regime offer greater fiscal flexibility.