Luxembourg payroll and tax overview.

Luxembourg lies at the heart of Western Europe, sharing land borders with Germany, France and Belgium. Although one of the smallest countries in Europe by population and size, Luxembourg is nonetheless one of the world’s most advanced economies and offers high standards of living, healthcare, and education. Natural iron-ore deposits fuelled Luxembourg’s industrialisation throughout the 20th century but more recently the country has become a global financial centre boasting one of the world’s highest GDPs per capita. The country’s growth has been supported by a stable and consistent democratic political system that emphasises free-trade and a low regulation business environment for foreign investment interests. With high industrial output and a strong services sector, Luxembourg’s economy is diverse and important contributors in the 21st century include the finance, technology, communications, and international banking industries. In 2019, Luxembourg’s nominal GDP reached an estimated $69.45 billion, with a growth rate of 2.3%. Luxembourg is a member of the EU, the OECD, the United Nations, and Benelux: in 2019, the World Bank ranked Luxembourg 72 on its Ease of Doing Business Survey.

Why Invest in Luxembourg?

Investors targeting Luxembourg will find a variety of reasons to do business in the country:

• Economic options: Luxembourg’s iron and steel industries remain important to the economy but there are a range of thriving developing sectors to explore, including communications, biotechnology, energy, shipping, and logistics. The financial services sector is a particularly exciting investment area, with Luxembourg developing a reputation as a global hub for banking.
• Government support: Luxembourg’s government promotes a low-regulation, free trade environment for businesses. The government also provides long and medium-term loans to businesses in Luxembourg, along with a range of financial support schemes for investment in research and innovation, which focuses on new products, services or processes.
• European gateway: With Germany to the east, and Belgium and France to the north and west, Luxembourg enjoys a highly advantageous geographic location. Transport infrastructure is also an advantage to businesses in Luxembourg: a network of roads and railways connects to the rest of the continent, while an international airport links to global destinations.
• Favourable tax: With a corporate rate of 29.22% various tax incentives are available for businesses in Luxembourg including a 12% tax credit, and double taxation agreements with a range of countries. The government has announced on-going plans to reduce corporate tax to 18% by 2018.
• Skilled workforce: Luxembourg’s labour force is one of the most well educated and skilled in Europe, and offers businesses a range of skillsets to draw from. The majority of Luxembourg’s citizens speak three languages, representing useful versatility for exploiting European markets.

Foreign Direct Investment in Luxembourg

The Government welcomes foreign investors in Luxembourg. The Government can provide capital grants for the funding of specific projects in order to complement Government policy, including small and medium-sized companies; companies located in development areas and research and development for new products, services or processes. Furthermore, medium and long-term loans are available from the National Credit and Investment Corporation (SNCI).

Registering a Company and Establishing an Entity in Luxembourg

The employer may be a legal entity or a private person, established in Luxembourg or abroad, and must register for social security. It is worth noting that there may be a requirement to obtain a business license. If a business license is required and all substantiating documents are available, it can take less than two weeks to get all registrations in place.

Business Banking in Luxembourg

It is not mandatory in Luxembourg to make payments to either employees or authorities from an in-country bank account, however it is mandatory if you wish to proceed with automatic payment. Both salary and third-party payments can be made on behalf of a client. Only bank transfers are used for making payments to both employees and local authorities. Usually, bank transfers can be made within 72 hours.

A Guide to Doing Business in Germany

Germany is a central European country and the continent’s largest economy. Bordered to the west by Switzerland, France, Luxembourg, Belgium, and the Netherlands, to the north by Denmark, and to the east by Poland, the Czech Republic, and Austria, Germany has become a significant global economic power and a popular location for foreign investment. Rich in natural resources, Germany experienced a period of significant economic growth in the latter half of the 20th century: in 2019, Germany’s GDP reached an estimated $3.9 trillion with a growth rate of 0.6%. Modern Germany offers a highly developed and diverse business landscape: significant industries include healthcare, IT, electrical equipment manufacturing, aerospace, and automotive engineering, with the service sector contributing around 70% of GDP. With a large, well-educated population, high living standards, low unemployment, and a geographic location at the heart of Europe, Germany is an attractive place to set-up a business, offering organisations from around the world the resources, skills and innovation to succeed and grow. In 2019, over 22,000 enterprise organisations maintained a presence in Germany, taking advantage of road, rail, and air links to the rest of Europe and the world. Germany is a member of the UN, NATO, the G7, and the OECD, and was ranked 22 on the World Bank’s Ease of Doing Business Survey 2019.

Why Invest in Germany?

Germany is ranked 17 on the World Bank’s ‘Ease of Doing Business’ survey, and its growing economy offers plenty of opportunities for investment:

• With a 2019 GDP of €3.861 trillion, Germany’s economic strength is an encouraging factor for foreign investors. Germany’s economy is the fourth largest in the world (the largest in the EU), and the second-largest in terms of exports.
• EU Status: As a leading member of the European Union, and with the largest population, Germany is an influential financial force, with access to a vast regional marketplace. It also benefits from trade agreements with the rest of the world.
• Germany’s geographic location at the heart of Europe makes it one of the continent’s busiest trade hubs. With excellent energy, communication and transport infrastructure, Germany represents a gateway to the world for many investors.
• Germany’s workforce is amongst the most skilled and innovative in the world, with over 81% of the population holding a university or vocational qualification. Research and development in Germany receives billions of euros in federal funding every year.
• As the largest population in Europe, Germany is a huge market for consumer goods, including high-technology products and machine tools. Renewable energy is also a popular foreign investment target.

Foreign Direct Investment in Germany

The German government has been a driver, innovator, and beneficiary of an ever more globalised economy. Germany is amongst the three largest exporters in the world, with exports accounting for over one third of GDP. Foreign and local investors are treated equally and are both eligible for investment incentives. Any entrepreneur who wishes to start a business in Germany may do so, there are generally no restrictions limiting the establishment of new companies.

Registrations and Establishing an Entity in Germany

In the establishment phase of a company and prior to assumption of commercial activities, a company only has to be registered in the public commercial register (Handelsregister) and the local trade office (Gewerbe-/Ordnungsamt).

For companies that are looking to process payroll in Germany, the company registrations to the tax and social security authorities include:

• Employer Company Number with Employment Agency (Betriebsnummernstelle)
• If no German company exists, a copy of the Foreign Company Registration is necessary
• Applying for Statutory Accident Insurance (Berufsgenossenschaft)
• Employer Tax Number for withholding tax purposes

The timeline for processing depends on the registering authority. According to experience, this can take up to six weeks.

The key legislative authority in Germany varies depending on where the employer is located and the purpose of the business:

• Tax authorities
• Health insurance company
• Statutory accident insurance

Business Banking in Germany

It is not mandatory to pay employees from an in-country bank account. Salary and third-party payments can be made on behalf of the client. Bank transfers are used to pay both employees and the local authorities in Germany. Any transfers that are made between banks in Germany are usually complete within a day. International bank transfers can take at least three working days.

What Are the Working Days and Working Hours in Luxembourg?

The working week in Luxembourg is Monday to Friday. There are no specific rules concerning the daily hours in Luxembourg. Office hours are typically 0800 – 1700 (one-hour lunchtime included) or 0900 – 1800 (one-hour lunchtime included).

Basic Facts about Luxembourg

General Information

Luxembourg is officially known as The Grand Duchy of Luxembourg, and was historically a Roman settlement, which consolidated in 963 AD. By the Middle Ages, the Counts of Luxembourg had expanded their territory considerably and, in the mid-14th century, established the Duchy of Luxembourg, ruling from the city-fortress of Luxembourg itself. The Grand Duchy of Luxembourg was formalised in the early 19th century as the country began to integrate with its continental neighbours. Modern Luxembourg is a prominent presence on the European political landscape: a parliamentary democracy, it is also a founding member of NATO, the European Union and the United Nations. At the heart of Europe, Luxembourg is landlocked and dominated by hills, mountains and forests, with a temperate, oceanic climate of warm summers and cool winters. A range of historic attractions and landmarks, and centuries of fascinating heritage attract millions of tourists to Luxembourg each year.

General Population: 613,894 (Eurostat, 2019)

Capital: Luxembourg

Major Languages: French, German and Luxembourgish

Major Religion: Christianity

Monetary unit: 1 Euro = 100 cents

Main Exports: Steel products, chemicals, rubber products

Internet Domain: .lu

International Dialling Code: +352

The tax year runs from 1 January to 31 December.

Requirements of the employer:

• To proceed with the affiliation of the company to the Luxembourg social security authorities
• To proceed with the affiliation (or disaffiliation) of each employee to the Luxembourg social security authorities
• To declare and to pay the Luxembourg social security contributions
• To proceed to the calculation of the withholding tax based on the information mentioned on the employee tax card
• To proceed to the declaration and the payment of the withholding tax to the Luxembourg tax authorities
• To prepare an employment contract

Requirements of the employee:

• To make the necessary formalities in order to obtain a Luxembourg tax card
• To deposit his/her Luxembourg tax return at the end of the year (if mandatory)

Key legislative authorities in Luxembourg include:

• Centre Commun de la la Sécurité Sociale 125, route d’Esch L-2975 Luxembourg
• Caisse Nationale de Santé 125, route d’Esch L-1471 Luxembourg
• Administration des Contributions 18, rue du Fort Wedell L-2982 Luxembourg
• Caisse Nationale d’Assurance Pension 1A, Boulevard Prince Henri L-2096 Luxembourg

Income Tax in Luxembourg

Monthly income tax contributions are paid on the 10th of the following month. Late-payment interests related to Luxembourg tax invoices are 0.6 %.

In order to proceed with the registration of a company, a document called “Déclaration d’exploitation” must be forwarded to the Luxembourg social security authorities within 24 hours.

In order to make any tax filing on behalf of a client, the service provider must detail a “business license” delivered by the Ministry of Middle Classes on the basis of professional qualifications.

As of 1 August 2018, there was a statutory indexation per employee in Luxembourg, the increase is fixed at 2.5%. Indexation is a mechanism for keeping earnings in Luxembourg in line with inflation. Each time it occurs, wages and pensions increase by 2.5%.

Social Security in Luxembourg

In order to make any social security filing on behalf of the client, the service provider must detail a “business license” delivered by the Ministry of Middle Classes on the basis of professional qualifications.

In order to be eligible for a pension from the Luxembourg Pension Insurance scheme, you need to have contributed to the Pension Insurance for a period of at least one year in Luxembourg.

Furthermore, you need to have contributed to a pension scheme in Luxembourg and/or another Member State of the EU (including Switzerland) for at least 120 months (or 10 years).

If the retirement age is reached, and the minimum contribution period of 10 years is not met, entitlement to a pension from Luxembourg is refused. Contributions made are reimbursed after adaptation to the Luxembourg cost of living index.

Normal retirement age in Luxembourg is 65. Early retirement is permitted at the age of 60 (57 if contributions were made for at least 480 months (in or out of Luxembourg). From the age of 60 onwards, the years of university studies and military service are also included for the computation of the 40 years period.

For pension contributions paid during 40 years, monthly minimum pension is approx. €1.842 and the maximum pension €8.526.

Reporting Tax in Luxembourg

Monthly

• Luxembourg pay-slip
• Monthly tax declaration
• Monthly social security declaration (online formalities)

Payslip: Name of the employee, social security number of employee, name of employer, social security number of employer, tax card information (tax class and deductions), monthly gross salary, social security contributions (employee part), withholding tax.

Monthly Tax Declaration: Tax amount to be declared to the Luxembourg tax authorities.

Monthly Social Security Declaration: Contribution to be declared to the Luxembourg social security authorities.

The payroll provider submits all of the documents mentioned above. The employer does not need to sign the forms.

New Employees in Luxembourg

New starts need to be registered to the Luxembourg social security authorities (CCSS) and need to ask for a Luxembourg tax card (Luxembourg tax card authorities or Municipality). This is to be done within eight days of starting work.

The procedure for expats is the same as for other Luxembourg employees if they are subjected to the Luxembourg social security regime within eight days of starting work.

Leavers in Luxembourg

Payment for leavers must be closed before the end of employment.

Notification of a leaver must be made to Luxembourg social security authorities (“Déclaration de sortie”).

Payroll in Luxembourg

Luxembourg’s payroll system involves withholding obligations on the part of employers - towards their employees’ salaries. In more detail, those obligations require mandatory income tax and social security contributions:

• Income tax: Tax brackets in Luxembourg range from 0% to 40% and are based on three classes - each of which reflect the taxpayer’s personal status as single, married, or supporting children.
• Social security: employee contributions to social security vary from 12.72% to 14.89% depending on salary. Employer contributions are set a 11.05%

Employers in Luxembourg may choose to provide their employees with online payslips for each pay cycle, and must keep payroll reports for a minimum of 10 years. Given the complexity of Luxembourg’s tax system and its associated payroll regulations, international businesses setting up in the country often engage a global payroll provider to help them deliver compliance quickly and efficiently, and pay their employees accurately.