Introduction

The Luxembourg legislator and administration have brought several legislative changes impacting the real estate industry in Luxembourg, and further legal initiatives have been announced in draft bills. The Luxembourg Constitutional Court also issued an important decision.

Recent changes in laws and regulations

1. Tax regime amendments

(i) 20% Real Estate Levy

On 20 January 2022, the Luxembourg tax authorities released a new Circular regarding the “20% Real Estate Levy” introduced by the Luxembourg law of December 19, 2020, effective from 1 January 2021.

The 20% Real Estate Levy must be declared and paid to the Luxembourg tax authorities by the following entities (“Investment Entities”):

  • Certain Undertakings for Collective Investment (UCIs);
  • Specialized Investment Funds (SIF); and
  • Reserved Alternative Investment Funds (RAIF);
  • except for those that are created in the form of a limited partnership.

Investment Entities must also declare and pay the 20% Real Estate Levy if they hold participation interests in tax transparent entities such as a:

  • partnership (société en nom collectif – SENC);
  • limited partnership (société en commandite simple);
  • special limited partnership (société en commandite spéciale);
  • civil company (société civile); or
  • mutual investment fund (fonds commun de placement – FCP).

The 20% Real Estate Levy applies to the following:

  • income from the rental of a real estate asset located in Luxembourg;
  • capital gains from the disposal of a real estate asset located in Luxembourg; and
  • income from the disposal of participation in the aforementioned tax transparent entities or in an FCP.

The reporting duties must be fulfilled no later than the 31st of May following the year of the realization of the above income.

The Investment Entities must be able to provide all the supporting documents on the amounts of the declared income and gains including an auditor’s report certifying such income and gains.

(ii) The limitation on the application of the 4% accelerated tax depreciation regime

On 23 December 2022, the Luxembourg Parliament passed the budget law for the year 2023 (“Budget Law“).

Among other things, the Budget Law limits the 4 percent accelerated depreciation rate for buildings or parts of buildings used for rental housing to two properties or parts of properties used for rental housing acquired or constituted after 31 December 2022.

BILLS CURRENTLY IN PROCESS

1. The Reform of the Property Tax (Impôt foncier) – “Bill 8082” or the “Bill”

The Property Tax was first introduced in Luxembourg under the First French Republic in the form of the “contribution foncière” (land tax) by the law of 3 frimaire de l’an VII (23 November 1798).

The current property tax dates from the 1930s German tax regime.

The taxation procedure takes place in two stages. First, the Tax Authorities (Administration des Contributions Directes or “ACD”) must determine the property values at regular intervals in time by sending a “Unitary Value” assessment to the taxpayer.

Second, each municipality adopts its municipal rate annually.

The tax amount due is obtained by multiplying the Unitary Value by the municipal rate and sent to the taxpayers via a Property Tax assessment.

In fact, the periodic updating of these valuations, as provided by law, were so cumbersome that the values currently used in Luxembourg have not been updated since 1941!

The Property Tax reform has been part of political discussions for years. To mitigate the housing shortage, on October 10, 2022, the Luxembourg government adopted Bill 8082 on the property tax, the land mobilization tax and the tax on the non-occupation of housing (Projet de Loi sur l’impôt foncier, l’impôt à la mobilisation de terrains et l’impôt sur la non-occupation de logements).

Bill 8082 amends several laws; its objectives are summarized as follows “the reform of the property tax, which should counteract land speculation, will be linked to the redesign of the ‘new generation’ general development plans (PAG). An exempt bracket on the property tax on owner-occupied properties will be introduced. The reform of property tax will provide an opportunity to replace and simplify the system of the specific municipal tax for vacancy or non-use of certain buildings.”

The Bill not only aims at modernizing the property tax but also proposes to introduce two new taxes to encourage landowners to mobilize building land and unoccupied dwellings, and entails a fundamental reform of the Luxembourg property tax regime.

Thus, the Bill deals with three different types of taxation:

(i) The Property Tax

The Bill proposes to revalue all land, based on an introduction of a regime that is supposed to ensure that such valuation is fair, equitable, objective and transparent. The proposed formula for valuing land uses a number of factors to determine the value of a property, namely:

  • the building potential;
  • land use patterns;
  • geographical location;
  • phasing of development (immediate availability or not for construction);
  • available surface area;
  • number of facilities and services available nearby; and
  • general level of property prices.

The amount of Property Tax to be paid depends on the value of the property (see above), if necessary broken down between several owners, the municipal rate and tax rebates applied.

Note that the municipal rate varies between 9% and 11% and the government has established a tax rebate for owners who have their usual residence on the land.

(ii) Land Mobilization Tax

The purpose of this tax is to “encourage the realization of the building potential conferred on the land by municipal regulations”. This tax therefore only becomes payable in the event the land remains in a state of wasteland and thus does not materialize the design reserved for it by the regulations.

For example, a plot of land the size or configuration of which does not allow for the construction of dwellings would not be taxed.

On the other hand, a plot of land having sufficient residual surface area to build a new construction, even if there is an existing construction, would be taxed if the available space is not used.

The amount of the tax is modulated according to the years during which the land is considered unbuilt. The longer a land remains unbuilt, the higher the tax rate will rise.

(iii) Tax on non-occupation of dwellings

The “tax on non-occupation of dwellings” is intended to tax real estate the building potential of which has been realized in the form of a construction, but where this realization of potential does not result in the actual occupation of the building by human beings, such as housing.

In the past, municipalities had the option of introducing such a tax on the local level, but only a few municipalities have made us of this opportunity. The Bill proposes that from now on it shall be a compulsory tax levied by the State.

Under the main rule, a dwelling is considered unoccupied if no natural person is registered in the national register of natural persons for a period of 6 consecutive months. Other cases of non-occupation are also provided under the law.

It is up to a municipality to establish the non-occupancy of dwellings in its territory and provide the necessary information to the ACD, which will set and collect the tax.

The property tax reform, which is a complex endeavor, is not expected to come into force before 2026.

Read full article here


Mario DI STEFANO, Managing Partner, Head of Real Estate and Head of Tax
Alex PHAM, Partner Tax
Quentin MARTIN, Senior Associate
Cathy NELSON, Jurist