Expat Tax In Luxembourg – Ultimate Info You Need To Know

Expat Tax In Luxembourg – Expat Living In Luxembourg

Luxembourg was the second richest country in the world in 2011 according to IMF. It is a landlocked country located in Western Europe and one of the smallest sovereign states in Europe.  The country has been a popular destination in recent years and immigrant population increased in the 20th century.

There are 10,000 new immigrants arriving in Luxembourg every year mostly from EU states and Eastern Europe. Read on to discover important tips on US Expat Tax in Luxembourg.

Below is our top 10 list of areas to live in Luxembourg for expats (in no particular order):

• Luxembourg City
• Mamer
• Larochette
• Esch-sur-Sûre
• Vianden
• Remich
• Echternach
• Clervaux
• Ettelbruck
• Niederanven

About Luxembourg

Luxembourg formally known as the Grand Duchy of Luxembourg is bordered by Belgium to the west and north, Germany to the east, and France to the south. Its official languages are French, German, and Luxembourgish, and the currency was the Luxembourg franc before being replaced by the euro.

The citizens of Luxembourg are called Luxembourgers. The majority of immigrants move from Portugal, Belgium, France, Italy, and Germany. Luxembourg’s cuisine is heavily influenced by neighboring countries France and Germany. While Luxembourg is largely multilingual, a large portion of the population predominantly speaks French.

Luxembourg is 2^nd ranked safest tax haven in the world behind Switzerland according to Financial Secrecy index in 2013.

Luxembourg’s geography varies from hills and low mountains in the north to large plateaus in the south where the capital is located. The country is a democracy with a parliamentary form headed by a constitutional monarch.

According to Environmental Performance Index, Luxembourg ranked 4^th of 132 countries becoming one of the best in environmental protection!

Guide To US Expat Tax In Luxembourg

The Tax Samaritan country guide to US expat tax in Luxembourg provides a general review of the tax environment of Luxembourg and how that will impact your U.S. expatriate tax return as a U.S. Expat In Luxembourg.

As a U.S. taxpayer, all worldwide income is subject to taxation and reporting. For most expatriates you have a requirement to file a U.S. tax return on an annual basis due on April 15 each year (June 15 if you are residing overseas on the April 15 deadline). The tax treatment for different classes of income can vary greatly from Luxembourg and the U.S.

For example, certain benefits are tax free in Luxembourg. However, for U.S. tax purposes, these benefits likely must be included as gross income. As such, there are a number of considerations related to US expat tax in Luxembourg. This brief article will address a few of those considerations.

Luxembourg Expat Income Taxes

Who Is Liable For Income Taxes In Luxembourg

Residents of Luxembourg are subject to tax on their worldwide income. Non-residents are subject to tax only from their Luxembourg sourced-income. Residents are determined if they have intended to live in Luxembourg permanently or lived in the country for more than six months. Resident and nonresident employees are subject to income tax on renumeration received from employment.

Tax Year In Luxembourg And Tax Filing And Payment Rules

Tax rates in Luxembourg is progressive with a maximum rate of 45.78%. The tax year corresponds to the calendar year. The deadline for filing the annual income tax returns is on March 31 for income earned in the immediately preceding year. The filing deadline however can be extended upon request of the taxpayer.

Nonresident taxpayers can elect to be treated as Luxembourg residents to qualify for the same deductions and allowances. Self-employed individuals must make quarterly payments of tax in amounts that are determined by tax authorities based on the individual’s recent final assessment.

The tax year in Luxembourg is the assessment year, and tax is levied on a preceding-year basis. For example, in the 2021 assessment year, tax is levied on income from the 2020 calendar year.

Luxembourg Tax Relief

Business losses can be carried forward without limit if financial statements are kept according to generally accepted accounting principles. Losses from investments in securities may only offset other investment income.

A beneficial tax regime can be availed of by expatriate highly skilled employees. It provides tax relief for certain costs linked to expatriation and is subject to several conditions. The tax regime applies for a maximum of five years.

Non-reimbursed expenses incurred by an employee are generally deductible. In addition, interest on loans contracted to purchase owner occupied housing is deductible up to a ceiling that decreases with the length of time the housing is occupied. A 50% exemption from tax may also be granted for dividends mostly for residents.

Expat Tax Withholding

A final withholding tax of 20% is imposed on interest income paid by a paying agent established in Luxembourg to beneficial owners resident in the country. Nonresidents are subject to the 15% withholding tax on dividends received from Luxembourg companies. Nonresidents are not subject to withholding tax on royalties.

Most of Luxembourg’s tax treaties provide double tax relief through the exemption-with-progression method. Luxembourg has entered into double tax treaties with the United States.

These treaties (commonly known as Avoidance of Double Taxation Agreements or DTAs) have been written to protect expats from taxation of the same income by both Luxembourg and the expat’s home country. Even though Luxembourg has a tax treaty with the United States that pertains, most expat should have their US and Luxembourg-source income carefully reviewed by an international tax specialist like Tax Samaritan.

What You Need To Know About US Income Taxes

When dealing with US expat tax in Luxembourg, there are a number of preferential expat tax treatments that may benefit your U.S. expatriate tax return. In fact, for many U.S. expats, the Foreign Earned Income Exclusion (IRS Form 2555) and other deductions may reduce your U.S. tax liability to zero.

Some of these preferential tax treatments or benefits for US expat tax in Luxembourg include:

• If you are a U.S. citizen or a resident alien of the United States and you live in Luxembourg, your US expat tax in Luxembourg is based on your worldwide income. As such you must file a U.S. return for all the years that you are residing in Luxembourg. However, as a U.S. expat you may qualify to reduce your U.S. taxable income up to an amount of your foreign earnings that has an annual adjustment for inflation ($107,600 for 2020). In addition, you can exclude or deduct certain foreign housing amounts. This is known as the Foreign Earned Income Exclusion and foreign housing exclusion.
• When it comes to your US expat tax in Luxembourg, most US expatriates worry about “double taxation”. Paying taxes to two different countries – the U.S. and Luxembourg. A U.S. taxpayer working overseas in Luxembourg may be able to reduce U.S. taxable income and “double taxation” by claiming the Foreign Tax Credit on Form 1116. Should any foreign income not be fully offset by the foreign earned income exclusion, housing exclusion or housing deduction, the foreign tax credit paid or accrued may be used as a deduction or credit on the U.S. tax return. Taxpayers can elect to either deduct the taxes as an itemized deduction or claim as a credit. In most cases, it is to your advantage to take foreign income taxes as a tax credit.

Don’t Make This Mistake

A common but dangerous mistake is the assumption that if there are zero taxes when claiming these tax benefits that there is not US expat tax filing requirement.

That is not true.

If you are working overseas, it is likely that you meet the filing requirements to file a tax return and must do so. It is important to note that the preferential tax treatments, such as the foreign earned income exclusion and foreign tax credit are not automatically granted until an accurate return is properly filed.

When faced with US expat tax in Luxembourg there are many tax items to consider.

But the above are by far the most common preferential tax benefits.

With top-notch experience and knowledgeable expat tax preparation from Tax Samaritan, you can be assured that you are paying the minimal amount of U.S. taxes that you are legally obligated for.

Luxembourg Foreign Bank Account Reporting – The FBAR (FinCen Form 114)

Another important tax deadline that frequently applies to US expat tax in Luxembourg is in regards to the disclosure of foreign assets on the <a aria-label=”undefined (opens in a new tab)” rel=”noreferrer noopener” href=”https://taxsamaritan.com/tax-preparation-services/expatriate-tax-services/fbar/” target=”_blank”>FBAR</a>  (Foreign Bank Account Report – Form 114).

The FBAR filing deadline is April 15th (or the preceding business day if April 15th falls on a weekend). Unfortunately, requesting an extension on your individual return does not extend the FBAR due date. There is no extension available for the FBAR deadline. Any reports filed after this date are considered a delinquent FBAR. However, in recent years, an automatic extension till October 15th is applicable.

The FBAR must be filed with the Treasury Department (it is not filed with your federal income tax return) whenever you meet the FBAR filing requirements, which in a nutshell is whenever a U.S. person has a financial interest in, or signature authority over a foreign financial account, including a bank account, brokerage account, mutual fund, trust or other type of foreign financial account (including an insurance policy with a cash value such as a whole life insurance policy) maintained with a financial institution, with an aggregate value of over $10,000 at any time during the calendar year based on the highest value of each foreign account during the tax year.

If you have bank accounts at Deutsche Bank Luxembourg S.A., CACEIS Bank Luxembourg, Banque et Caisse d’Epargne de l’Etat, Société Générale Bank & Trust, UniCredit Luxembourg S.A. or at another bank in Luxembourg or any other foreign country, you may meet the filing requirement to disclosure your foreign accounts on the FBAR.

Please don’t hesitate to contact Tax Samaritan to learn more about your filing requirements.

U.S. – Luxembourg Social Security Totalization Agreement

The United States has entered into agreements, called Totalization Agreements, with several nations for the purpose of avoiding double taxation of income with respect to social security taxes.

As of this time, Luxembourg <b>has</b> a Totalization Agreement with the United States. This agreement helps people who would otherwise have to pay Social Security taxes to both countries on the same earnings. The agreement covers Social Security taxes (including the U.S. Medicare portion) and Social Security retirement, disability and survivors insurance benefits.

Under the agreement, if you work as an employee in the United States, you normally will be covered by the United States, and you and your employer will pay Social Security taxes only to the United States. If you work as an employee in Luxembourg, you normally will be covered by Luxembourg, and you and your employer pay Social Security taxes only to Luxembourg.

Self-employed individuals living and working in Luxembourg are covered by the Luxembourg system and should obtain a certificate of coverage to claim the benefits of the totalization agreement. A photocopy of this certificate must be attached to your U.S. individual tax return to properly exempt yourself from U.S. self-employment tax. Tax Samaritan can help guide you through this process if unsure of how to proceed.

U.S.- Luxembourg Tax Treaty And Tax Relief For US Expat Tax In Luxembourg

The United States have a separate, comprehensive tax treaty with the Luxembourg. Many of the articles apply to non-resident aliens for U.S. tax purposes but can also extend certain benefits to U.S. citizens, residents, and green card holders (limited by the ‘Savings Clause’) so it is important to understand if you qualify for these benefits. We recommend discussing with a tax professional to determine if you qualify for benefits in the treaty.

Tax Samaritan Takeaways For US Expats In Luxembourg

Please click on the hyperlinks below for additional takeaways and resources for expats residing in Luxembourg:

Tax Samaritan Expat Tax Services

IRS Publication 54, Tax Guide for US Citizens and Resident Aliens Abroad

Luxembourg Inland Revenue (ACD) (for tax schedules and other resources)

Major Banks in Luxembourg, (for important contact numbers)

US Embassy in Luxembourg

Luxembourg Ministry of Foreign and Euroean Affairs (for important contact numbers)