Luxembourg personal income tax changes and changes to the taxation of stock options, applicable as from 1 January 2013

Besides the new tax measures for Luxembourg corporations, as described in our last Tax Alert, the law of 13 December 2012 (the "Law") also included changes for individuals applicable as from 1 January 2013. Furthermore, as announced, the tax administration amended its Circular LIR 104/02 on stock options to increase the lump-sum valuation basis.

1. Increase in tax rate

A new tax rate of 40% is introduced on the income bracket exceeding EUR 100.000 of taxable income (EUR 200.000 when two tax payers file jointly, i.e. married couples or partners jointly taxable).

Further, a slight increase in the solidarity surcharge (contribution au fonds pour l’emploi) from 4% to 7% and from 6% to 9% for individual taxpayers earning more than EUR 150,000 (EUR 300,000 when two taxpayers file jointly, i.e. married couples or partners jointly taxable) will have as a consequence that the new maximum marginal income tax rate will be 43.60% as from 1 January 2013.

2. Limitation of tax deductions

Travel expenses

The lump-sum tax deduction of EUR 396 per year for commuting expenses (first 4 units of distance) of employees will be abolished.

Deduction of interest expenses

The maximum tax deduction for interest as special expenses will be reduced by half from EUR 672 to EUR 336 per member of the tax payers household.

3. Increase of lump sum value of stock options

The amended Circular LIR 104/2 has been released on 20 December 2012 and will impact the taxation of stock options granted as from 1 January 2013.

Income tax on the options is in principle payable upon exercise of the options, unless tradable options are granted, in which case options are taxable upon grant. In this latter case, the taxable amount of the tradable options is determined either by a financial method (e.g. Black & Scholes method) or by the so-called "lump-sum valuation method". Such "lump-sum" value was equal to 7.5% of the value of the underlying asset as per the old 2002 Circular.

The new Circular increases the lump-sum taxable value of the stock option to 17.5% of the value of the underlying asset.

All other provisions of the 2002 Circular remain unchanged.

For more information please contact Olivier Van Ermengem or your usual Linklaters contact.

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