Common Questions About The Impatriate Tax Regime, Answered

In 2014, a tax circular1 became effective in Luxembourg, aiming to attract skilled employees to the country. It did so by stating that certain expatriation costs usually borne by the hiring company are no longer considered taxable income for the impatriate (if certain conditions relating to the impatriate, the Luxembourg employer, and the position are met). Among other advantages, the circular also attracts groups looking to relocate part or all of their headquarters.

With several years having elapsed since this regime went into effect, we have had some experience with it and would like to answer the following commonly asked questions.

1. Must the impatriate worker exercise his/her employment as a main activity in Luxembourg?

   In principle, the employee should perform 100% of his/her professional activity in Luxembourg.

   However, the Luxembourg tax authorities have shown some flexibility in this respect, being aware that highly qualified employees are obliged to travel abroad in the framework of their professional activity in Luxembourg. In practice, the Luxembourg tax authorities tend to analyse each case individually.

   Our experience shows that the Luxembourg tax authorities usually take no issue with employees performing 80% (or more, of course) of their professional activity in Luxembourg (i.e. 4 workdays a week).

2. What does it mean employ or commit to employ in the medium term at least 20 full-time employees in Luxembourg?

   The tax circular does not provide any further indication of what should be understood by "medium term". It does state that if, based on its business plan, a company can commit to employing 20 full-time employees (or 40 part-time employees) within 3 to 5 years, then the condition should be considered fulfilled.

   In reality, the acceptable timeframe would probably vary from case to case based on the actual business plan of the company.

   Additionally, following our correspondences with the Luxembourg tax authorities, we see that the authorities no longer accept the application of the impatriate tax regime if the minimum number of 20 employees is reached using the consolidated basis of the company (i.e. the company group level).

3. If the impatriate maintains his/her home-country residence (i.e. in terms of qualifying expenses), does that affect anything?

   Yes: the difference would be in the deductible expenses available, which would depend on the impatriate's maintaining this residence.

   To be able to deduct the following...