Luxembourg is to reduce corporate income tax and make changes to income tax for expatriates in a bid to boost the country’s financial services sector.
The changes, expected to reduce government income by €500m from 2025, are likely to make moving financial services staff from London to the Grand Duchy – a process that has been steadily underway since Brexit – more attractive for firms and employees.
The changes will also make the country more competitive with Ireland which has attracted international financial firms by offering low taxes.
A Luxembourg government statement said that the targeted tax reforms would help “to attract top talent, boost business and strengthen financial services”.
“As the largest fund centre outside the US, a recognised EU hub for international banks and insurers, and one of Europe’s core capital market infrastructures, Luxembourg will use these measures to reinforce its position as a leading financial centre, ensuring continued growth and appeal to global investors and financial firms.”
The package of measures include reductions in income tax for expats, a one percentage point reduction in corporate income tax to 16% and an exemption from subscription tax for actively-managed ETFs.
Luxembourg’s current expat fiscal regime, which allows a partial tax exemption in relation to gross annual remuneration and certain relocation costs, will be replaced and simplified.
The new regime will provide for a 50% exemption on gross annual remuneration, capped at €400,000 of gross annual remuneration, and is aimed at attracting highly-skilled experts.
In a move designed to foster employee retention, a profit-sharing bonus will be increased to 30% of an employee’s gross annual remuneration, and the total amount available for allocation to employees is increased to 7.5% of the company’s profits of the year prior to the allocation. 75% of bonuses for those under the age of 30 will be tax exempt.
Mike Delano, asset & wealth management leader at PwC Luxembourg, said: “While passive ETFs have benefited from a tax exemption for some time now, extending it to actively-managed ETFs removes a substantial cost, creating a favourable environment where portfolio managers can thrive and potentially outperform benchmarks.
“These tax reforms could significantly boost Luxembourg’s ETF AuM in the coming years, making it a more compelling alternative to Ireland and helping narrow the ETF gap between the two leading European financial centres.”
As of Q2 2024, Ireland’s ETF assets under management (AuM) stood at €1,343.1bn euros, compared to Luxembourg’s €283.3bn euros.
