Introduction
On 31 May 2024, a law introducing various measures to revive the construction sector was published (the “Law”). According to the government’s communication, these measures are designed to boost the construction sector and facilitate access to housing, by tackling both economic and structural housing problems. The Luxembourg property market is indeed currently at a virtual standstill. These measures concern individuals and the construction industry, as well as investors.
The aim of the first package of measures is threefold: to strengthen the construction industry and craftmanship in order to maintain jobs in the sector; to increase the supply of housing; and to support people in acquiring or renting accommodation. All but one of the measures were announced in the coalition programme of the newly elected government published on 20 November 2023.
The package includes tax and non-tax measures with short, medium, and long-term effects. Hereafter, we detail the tax measures to be introduced. Some are limited to 2024, while others are structural.
The draft law has been rather favourably received, especially
by the various Chambers, given the scale of the crisis and the need to take swift action to remedy it.
This article provides a commentary of the tax measures introduced by the government, including the various Grand- Ducal Regulations and the amendments proposed during the legislative process.
Measures applying in 2024
Effective retroactively from 1 January 2024, the following measures will apply for 2024 only:
Temporary increase of the “Bëllegen Akt” tax credit for individuals
The Law provides that the “Bëllegen Akt” tax credit for the purchase of real estate intended for residential use is increased from 30,000 to 40,000 euros per individual for property acquisitions documented by notarial deeds between 1 January 2024 and 31 December 2024.
The Council of State recalled in its opinion that, since the increase of the “Bëllegen Akt” is only temporary, it will decrease again to 30,000 euros in 2025. As a consequence, if a purchaser does not use all their 40,000 euros tax credit in 2024, the balance available cannot be used for a subsequent acquisition. During the discussion with the deputies, Finance Minister Gilles Roth confirmed the analysis made by the Council of State and therefore confirmed that any surplus tax credit could not be carried over from 2024 to 2025.
Introduction of a new “Bëllegen Akt” tax credit for investment in rental housing
According to the Law, a new “Bëllegen Akt” tax credit for investment in rental housing is also introduced. The amount of this tax credit is set at 20,000 euros per individual acquirer and applies only to individuals. It is intended solely for sales in future state of completion (Ventes en état future d’achèvement - VEFA) documented by notarial deeds executed between 1 January 2024 and 31 December 2024. This tax credit can be used for several acquisitions during 2024 but the cumulative amount cannot exceed 20,000 euros. As underlined by the Council of State, the scope of this measure is not limited to Luxembourg residents.
The Law sets that to qualify for this new tax credit, the purchaser must undertake to rent out the property for a minimum period of two years1, except in cases of force majeure, and the property must be effectively occupied within four years following the date of the notarised deed of acquisition. In addition, the purchaser will be required to register the rental agreement with the tax authorities (Administration de l’enregistrement, des domaines et de la TVA - AED). If these conditions are not met, the purchaser will, in principle, be required to reimburse the entire amount of credit granted for the acquisition concerned, increased by legal interests.
Since the new tax credit is introduced in the course of the year, purchasers are allowed to request retroactive application if they go to the relevant tax office to sign a declaration of acceptance setting out the legal conditions.
Temporary decrease of the tax rate for capital gains
Under Luxembourg tax law, individual taxpayers are taxed on speculative profits on real estate assets (i.e. when the assets are sold within a two-year period following their acquisition) at the marginal rate and, if the real estate assets are sold more than two years after their acquisition, at a rate corresponding to half of the global rate (i.e. average rate resulting from taxation of all the taxpayer's income). These provisions do not apply to the extent that a property sold constitutes the taxpayer's principal residence.
In order to mobilise properties, the Law provides that the tax rate for non-speculative capital gains realised on the sale of built and unbuilt real estate property forming part of the private assets of individuals in 2024 are temporarily reduced to a quarter of the global rate.
For the purpose of determining the temporal applicability of this measure, net income is taxable in the year of disposal of the real estate property, regardless of the date of payment of the sale price. The date the property is realised is the date of the notarial deed, the date of the judicial ruling in lieu thereof or the date of the administrative deed in lieu thereof.
This measure was already applied between 2016 and 2018. At the time, this measure stimulated the supply of building land and housing, and also contributed to an increase in real estate property sales.
As from tax year 2025
To accelerate the incentive effects of the planned quarter- rate measure and to curb speculation, the Law also amends the deadline within which a real estate alienation is considered as speculative and extends it to five years, instead of two currently, as from tax year 2025.
Fiscal neutralisation of non-speculative capital gains transferred to accommodation used for social rental management or belonging to energy performance class A+
The Law sets up the conditions in respect of a new tax- neutral regime for non-speculative capital gains transferred to specific replacement assets. This measure is an addition to the measures announced in the coalition programme of the government.
Real estate non-speculative capital gains realised during tax year 2024 and reinvested in one or more accommodation used for social rental management purposes (Gestion locative sociale) or in accommodation belonging to energy performance class A+ are eligible for the tax neutral regime under the following main conditions:
- Capital gains are to be transferred either to buildings acquired or constituted used for the purposes of social rental management as provided for in article 49 of the law of 7 August 2023 on affordable housing, or to residential buildings achieving level A+ in the classes of energy performance, thermal insulation and environmental performance, as defined in application of the amended law of 5 August 1993 on the rational use of energy.
- The replacement assets must be newly constructed. The commentary to the articles of the draft Grand-Ducal Regulation defines it as buildings with a completion date no earlier than during the tax year in which the transferable capital gain is realised (i.e. tax year 2024).
- The taxpayer must be the owner or bare-owner of both the building and the land which it is built on. Transfer to a building in undivided co-ownership is possible if the taxpayer’s shares in the land and in the building are of the same percentage.
- The replacement asset must be located in the Grand- Duchy of Luxembourg. As underlined by the Council of State in its opinion on the draft Grand-Ducal Regulation, this condition of territoriality could potentially constitute an unjustified restriction on the free movement of capital under article 63 of the Treaty on the Functioning of the European Union and thus be incompatible with European law if the national legislation does not comply with the requirements of necessity and proportionality fixed by the European Court of Justice.
- The proportion of capital gain transferred to the land may not exceed 50 percent of the total amount of capital gain for which the transfer is requested.
- The transfer of capital gain must be requested when submitting the tax return for tax year 2024. Only the person who realised the capital gain may transfer it to a replacement asset. However, in the event of the taxpayer's death before the transfer, the successor(s) may request the transfer.
- The application must state the amount of capital gain for which the transfer is requested. If the sale price is only partially reinvested, the portion of capital gain for which the transfer is not requested is taxable in the tax year in which it was realised (i.e. 2024).
- The transfer of the capital gain must take place before the end of the tax year following the year of disposal of the real estate (i.e. tax year 2025). The transfer of the sale price on a replacement asset must take place at the latest before tax year 2026, unless the replacement asset is still under construction. In that case, the tax administration may extend the deadline by two years based on the introduction of a reasoned request and supporting documentation by the taxpayer.
The capital gain transferred becomes taxable in the tax year in which the building or part of the building acquired in replacement 1) ceases or fails to meet one of the conditions set out above, 2) becomes the taxpayer's principal residence or 3) is contributed to a commercial, industrial, mining or craft business.
Increase of the rate and the duration of accelerated depreciation for real estate investments allocated to rental housing
With the same aim of revitalising demand for real estate investments allocated to rental housing, the Law, completed by a Grand-Ducal Regulation, aims to re-introduce2, in terms of the amount and duration of application, a deduction - subject to a ceiling - for depreciation of 6% for a period of six years and for eligible buildings or parts of buildings. The properties in scope are those which are built for rental purposes and for which the taxpayer has signed a deed of sale in future state of completion (VEFA) between 1 January 2024 and 31 December 2024. The maximum annual amount that can be deducted in this respect is capped at 250,000 euros. This amount is reached when the allowance is calculated on depreciable values of 6,250,000 euros.
The measure is granted for maximum seven tax years, i.e. for the tax year during which the properties or parts of properties are completed (in proportion to the number of full months during which they are considered to have been completed) and for the following six years.
This new special deduction for construction (l’abattement construction spécial) cannot be cumulated with the existing special deduction for investments in real estate not older than five years and allocated to rental housing (abattement immobilier special) to the extent it concerns the same building or part of building.
Measures applying for an unlimited period
The following measures, applicable as from tax year 2024, will apply for an unlimited period:
Increase of the exemption for net income from social rental management
According to the Law, the exemption for net income earned from the rental of accommodation through organisations involved in social rental management will be increased from 75% to 90%.
Extension of capital gains tax exemption to the Housing Fund
Currently, the law dated 22 October 2008 exempts capital gains (speculative or not) realised by individuals upon the sale of real estate properties sold to the State, municipalities, and local authority associations. This exemption is maintained and introduced by the Law in a specific provision of the LITL and its scope is extended for capital gains (speculative or not) realised by individuals upon the sale of real estate properties sold to the Housing Fund (Fonds du Logement). This exemption is, however, not available for real estate properties sold via the exercise of a legal right of pre-emption3.
In its opinion, the Council of State wondered why the legislator wishes to limit the extension in question to the Housing Fund when there are other public establishments with the same activity or missions as them.
Introduction of a partial exemption for premiums paid by employers for renting accommodation
The Law provides for a partial exemption for premiums paid by employers to young employees for the purpose of renting accommodation. This measure is available for young employees (i) who are under 30 years of age at the beginning of the tax year during which they obtain the payment of a premium for which the exemption of 25% is requested and (ii) whose annual income does not exceed 30 timesthemonthlyqualifiedsocialminimumwage4 (salaire social mensuel minimum qualifié). In addition, the amount of the premium qualifying for the exemption is capped at the amount of rent paid by the employee and at a maximum of 1,000 euros per month, of which 25% is exempted.
Therefore, if the rent paid by the employee is 750 euros, for example, the maximum amount of rental premium benefiting from the exemption that the employer can pay to the employee is also the amount of 750 euros. The exemption for such rental premium is then limited to 25% of the amount of 750 euros (i.e. 187.50 euros/month). The maximum amount paid by the employer is then limited by a second threshold of 1,000 euros per month. As a result, the 25% exemption no longer applies to the portions of a premium that exceed a monthly amount of 1,000 euros. For example, if an employer pays a rent allowance of 2,000 euros to an employee, the above-mentioned 25%exemption only applies up to the maximum monthly amount of 1,000 euros of the rental premium (i.e. 250 euros/month).
A draft Grand-Ducal Regulation specifies that the maximum amount of rental premium qualifying for the exemption (i.e. rent paid by the employee, capped at 1,000 euros per month) refers to a full month and full-time employment. In the event of a period of incomplete remuneration, or part-time work, the maximum amount of rental premium is reduced proportionally by reference to full-time employment.
It is up to the employer to check that the conditions are met and to regularise the exemption in the event that at the end of the year the employee exceeds the annual remuneration limit making him eligible for the exemption. It should be noted that, if the employee has not worked for the employer awarding the premium for the whole year, the employer must extrapolate the remuneration received during the period the employee worked for the employer over a full, full-time year, in order to verify that the annual remuneration limit has not been exceeded.
If the lease agreement provided by the employee is a shared lease agreement, the amount borne by the employee in respect of rent is the total amount of rent, excluding charges, to be divided by the number of lessees, unless the lease contract specifies the amount of rent, excluding charges, borne by each lessee individually.
As underlined by the Council of State, the scope of this measure is not limited to Luxembourg residents.
This exemption is justified by the difficulty that some employers may encounter in practice in attracting suitable candidates, given the cost of rental accommodation, which is often considered a decisive factor in the decision of whether or not to accept a job in Luxembourg. This measure is positive for young talent attraction in Luxembourg. However, it would have been interesting to let the employee decide what to do with the premium, allowing them to rent accommodation or to buy accommodation. This would probably help to attract talent but also to retain it. It would also help young workers finance their mortgage, which is also one of the aims of the Law as described further.
Increase of the amount of mortgage interest deductible
Finally, the Law aims to introduce structural measures to help individuals finance their mortgage. For this purpose, a draft Grand-Ducal Regulation provides that the amount of deduction of mortgage interest for houses occupied by the owner (or to be occupied by the owner) will be increased by one third.
The relevant amounts, to be multiplied by the number of persons in the taxpayer's household, will thus rise from:
- 3,000 to 4,000 euros for the first five years of occupancy,
- 2,250 to 3,000 euros for the subsequent five years (six-ten years),
- 1,500 to 2,000 euros thereafter.
Conclusion
The new measures proposed by the Luxembourg government in order to address the current Luxembourg building construction sector issues are positive and welcome. However, most of them are temporary and only address the urgency of the current crisis. This overall situation outlines the need for a global reform of the real estate tax system in Luxembourg, as we have already stressed in one of our previous articles according to which the ongoing Luxembourg property tax reform was too slow to efficiently address the housing challenges.
1 The purchaser must also undertake to make a written declaration to the tax authorities (AED) in the event of sale or change in use of the property concerned during the two-year period. It must be declared within a three-month period starting on the day of the sale or change in use of the property.
2 The accelerated amortisation rules applicable to rental housing investments was reduced from 6% to 4% as from tax year 2021.
3 Note that, under the law dated 22 October 2008, this exception is limited to non-built real estate properties sold by exercising a legal right of pre-emption. 4 Which amounted to 92,553.30 euros on 1 September 2023 (30 x 3,085.11 euros), corresponding to 2.5 times the annual qualified social minimum wage.
