Luxembourg tax changes to remember in 2025: five things you need to know

Effective from the tax year 2025, the corporate income tax rate has been reduced by 1%. Consequently, companies with a registered seat in Luxembourg City and a taxable profit exceeding EUR 200,000 are now subject to an aggregate rate of 23.87%, down from the previous rate of 24.94%. While the decrease may appear modest, it reflects a continued and deliberate downward trend—particularly notable given that the same aggregate rate stood at almost 30% not long ago. This latest reduction is a welcome development and aligns with Luxembourg’s broader strategy to enhance its long-term fiscal competitiveness and attractiveness.

As part of ongoing efforts to enhance Luxembourg’s appeal to international talent, the inpatriate tax regime has been modernised through a significant expansion of available tax exemptions. Effective from the 2025 tax year, the existing 50% exemption on the cost-of-living allowance and relocation bonus (prime d'impatriation) is replaced by a 50% exemption on the inpatriate’s annual gross remuneration, capped at EUR 400,000. Additionally, the expansion of the rules for the 50% exemption on profit-sharing bonuses (prime participative) further strengthens Luxembourg’s attractiveness for talent.

The tax treatment applicable to the repurchase and cancellation of shares—commonly referred to as the ‘partial liquidation treatment’—has now been clarified and formally codified in Luxembourg income tax law. When the relevant conditions are met, and the repurchase and cancellation of an entire class of shares qualifies as a partial liquidation, repurchase proceeds may be paid without triggering withholding tax. This legislative update provides welcome legal certainty for transactions involving the cancellation of full share classes.

Taxpayers now have the option to opt out of the participation exemption for dividends and capital gains. This choice is available only for qualifying participations with an acquisition cost of at least EUR 1.2 million in the case of dividends and liquidation proceeds, or EUR 6 million for capital gains. However, the exemption cannot be waived for income derived from a qualifying subsidiary representing a participation of 10% or more. Additionally, taxpayers may opt out of the 50% partial exemption. Each opt-out decision must be made individually for each participation and must be exercised annually for each fiscal year.

In a significant development following a decision by the Court of Justice of the European Union (CJEU), the Luxembourg tax authorities have refined their initial position by confirming that directors' fees may, under certain circumstances, fall outside the scope of Luxembourg VAT. A newly issued circular provides detailed guidance on the VAT treatment of such fees, clarifying that they are not subject to VAT when the director is not considered to be performing an economic activity independently. Whether or not this independence exists is a highly fact-specific determination, to be assessed on a case-by-case basis using the criteria set out by the CJEU. While this clarification is a welcome development, further analysis will be necessary for directors whose duties are carried out in a particular or atypical manner. The circular also sets out the procedures for regularising prior years, subject to specific deadlines.