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Luxembourg: Proposed profit-sharing scheme and revisions to expat tax regime

Total Rewards|Executive Compensation|Talent

By Mary Cloosterman | November 30, 2020

The 2021 Budget Bill includes several provisions affecting employee remuneration and abolishes certain requirements of the expatriate tax regime.

Employer Action Code: Monitor

The 2021 Budget Bill includes several provisions affecting employee remuneration, the most substantial of which is the introduction of a voluntary tax-favored Profit-Sharing Scheme (PSS), also referred to as a prime participative. If implemented, the PSS would replace the current tax-effective framework relating to employer-granted stock option plans and warrants. The intention is to establish a more equitable and transparent framework for employee incentives.

In addition, the bill proposes several amendments to Luxembourg’s expatriate tax regime for highly paid foreign workers to help companies attract highly skilled workers from a wider pool of talent by expanding the regime’s scope and tax advantages. Foreign workers make up roughly half of Luxembourg’s labor force, most of whom are cross-border workers from neighboring Belgium, France and Germany; the percentage of resident foreign workers is much smaller (about 6%).

If approved, the proposed changes would be effective January 1, 2021.

Key details

The main characteristics of the proposed PSS include:

  • All employees (or only those selected at the employer’s discretion) would be eligible to participate, provided they are taxpayers in Luxembourg, are covered by the social security system or a foreign system under a bilateral or multilateral social security treaty with Luxembourg, and are employees of the Luxembourg entity offering the PSS.
  • Annual profit-sharing bonus amounts would be based on the entity’s financial results in the prior financial year, subject to an aggregate cap of 5% of profits (in Luxembourg) on the total value of all payments and an individual cap of 25% of an employee’s annual base salary.
  • PSS bonuses could be provided in cash or shares. Payments would be fully deductible for the employer. For employees, half of the PSS bonus would be exempt from personal income tax.

The principal proposed changes to the expatriate tax regime include:

  • The minimum head count requirement (20 full-time employees) for employers to sponsor expatriate employees would be abolished.
  • The level of annual remuneration required for candidates to qualify for expatriate status would be reduced from 100,000 euros to 50,000 euros, and occupational requirements (related to hard-to-find skill sets) would be abolished. The maximum duration of expatriate status would be increased from six to nine years.
  • The primary tax benefit would be a tax exemption of 50% on lump sum cost-of-living allowances, the value of which would be capped at 30% of the employee’s annual base salary, replacing the current cost-of-living allowance of up to 8% of base pay (capped at 1,500 euros and 3,000 euros for single and married employees with a nonworking partner/spouse, respectively).

Employer implications

While the proposed changes are still subject to approval and certain details have not yet been released, employers should review the proposed changes to understand how their current programs and practices may be affected. Almost one-third of companies surveyed by Willis Towers Watson reported having equity-based long-term incentive plans in place. The PSS could be a possible replacement if the favorable tax regime for employee stock options and warrant plans is abolished as part of the establishment of PPS plans as proposed.


Mary Cloosterman

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