21-12-05
Taxation of individuals: Introduction of a final withholding tax on savings income & abolition of the Net Wealth Tax for individuals – Law adopted
by: ATOZ
Today, the Luxembourg Parliament adopted a new tax law introducing a final withholding tax on interest income for individuals. This law also provides that the Net Wealth Tax is abolished for individuals as of the year 2006.
Final withholding Tax
In accordance to the law, any Luxembourg paying agent that pays interest to a Luxembourg resident beneficial owner, must apply a final withholding tax of 10%. The withholding is final in the sense that:
- no further tax is payable on the income;
- the income is not required to be reported in the tax payers tax return;
- the income is not taken into account when calculating the average rates of tax on the income.
In the following, we will explore what is meant exactly by an interest payment, a beneficial owner and a paying agent.
Interest payment
The 10% withholding tax will apply to income as defined in article 6 of the Law of June 21 2005 (the “Law of 2005”) incorporating the Savings’ Directive, to the extent the income is paid or allocated by a Luxembourg paying agent to an individual Luxembourg resident. Certain items are out of the scope of the law, among others:
- income distributed by UCITS (including entities which opted to be treated as a UCITS) as defined in article 6, §1, c of the Law of 2005;
- income arising from the sale/repurchase/reimbursement of shares/units in such UCITS or entities which opted to be treated as a UCITS. The tax treatment of investment funds remains therefore unchanged and a capital gain realized on the sale of shares in a capitalizing SICAV held for more than 6 months will still be tax exempt in the hands of a private individual and the latter does not hold more than 10 % of the shares in the SICAV.
- interest in connection with negotiable debts within the meaning of article 10 of the Law of 2005 (so-called “grandfathered Bonds”);
- interest, bonus, premiums as well as any other payments on short term current accounts or deposits where the interest rate is less than 0,75% pa;
- all type of income paid by non-resident paying agents (in particular non resident banks).
This income must be declared as in the past and remains subject to normal income tax at the level of the individual. The marginal tax rate of 38,95% may thus be applied.
The withholding tax also applies where the interest income is considered, in the hands of the individual recipient, as income of an other type (business income, income from farming and of forest and income from independent personal services). However, in these cases, the taxation will not be definitive and will be included in the calculation of for example business income, with a credit for the withholding tax.
Beneficial owner
The law defines a beneficial owner as any individual resident in Luxembourg except if he/she can provide the paying agent with a tax residence certificate issued by another country.
In order to qualify for the 10% final withholding tax, the interest needs to be paid by a Luxembourg paying agent to a Luxembourg resident beneficial owner.
Paying Agent
The law defines the paying agent as any economic operator established in Luxembourg which pays interest or attributes the payment of such interest to the beneficial owner, whether the economic operator is the debtor himself or in charge of performing the interest payment.
The paying agent has to levy the tax each time the income is attributed to the beneficial owner and the paying agent is personally responsible for withholding the appropriate amount. He has to declare the withholding tax within one month to the tax office in charge and at the latest the 10th of the following month without mentioning the beneficial owner of the income. At the same date at the latest, the tax has to be paid to the tax office in Ettelbruck.
Exemption
No withholding tax will apply up to an amount of EUR 250 of interest on savings accounts (including certain term deposits), to the extent the interest is paid once a year. The EUR 250 exemption applies per year, per person and per paying agent.
Entry into force
The withholding tax will apply to interest accrued as from July 1st, 2005 but paid after January 1st 2006.
Net Wealth Tax
Regarding Net Wealth Tax, some of the provisions of the law of October 16, 1934 regarding individuals have been abolished so that the Luxembourg Net Wealth Tax do no longer apply to individuals as from the tax year 2006, but will remain applicable to companies.
Implications
A number of practical implications arise:
- Luxembourg will become a very attractive jurisdiction, in which for High Net Worth Individuals to establish residence in Luxembourg;
- Banks and other paying agents will have to modify their systems in order to handle these withholding obligations and communicate this to their clients, since the law will enter into force as of January 1st 2006;
- Luxembourg residents should review the structure of their savings to ensure that they gain maximum benefit from the provisions;
- Certain provisions of the law in respect of the final withholding tax could be considered as contrary to the principle of free movement of capital. For example, a Luxembourg resident who has bank accounts in several countries will be taxed much more heavily than if he had only bank accounts in Luxembourg (Luxembourg source income being taxed at 10% while other source income may be taxed at a maximum rate of 38,95%).
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