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A guide to preparing tax form in Luxembourg

It is this time of the year where I cannot delay any longer doing tax for the previous year. This post is for my futre self, but it might be helpful to others similar to our situation. Let me know if there are inaccuracies.

A simplified mental model

The taxable income is the outcome of substracting some spending from most earning. The nuances lie in "some" and "most" of this sentence. Doing tax optimally is the process of identifying all earnings that can be exempted and all spendings that can be deducted in the equation.

This simplied view relates taxable income to cashflows in and out of the household. It is not perfect because there are deductables not related to spending e.g. abattement conjoint (if both tax payers work), the 540 euro floor for frais d'obtention (even if you don't spend any). The case of AC is particularly annoying because it's really not about spending. But luckily it claims to be automaticaly handled in the online tax form so tax payer can forget about it in their calculation.

Once the taxable income is calculated, one applies the marginal tax rate for that amount, then removes the tax credits to obtain the final owed tax.

Benefit of class 2

Although a single tax class R is about to be legislated, the old class 2 will continue to exist for 20 years. Let's briefly discuss what makes Luxembourg a family friendly place in relation to class 2.

Let \(R\) denote the marginal tax rate function for an invidiual (class 1). This is a piecewise constant and non-deceasing function. Let \(T\) denote the tax function excluding credits i.e. \(T(x) = \int_0^x R(s) ds\). It's a convex function because its derivative is non-decreasing.

class 2's tax function excluding credits is given by

\[ T_2(x) = 2 T(\frac{x}{2}) \]

where \(x\) is the taxable income of the household. By convexity, we have

\[T_2(x+y) \le T(x)+T(y)\]

therefore, there is 0 benefits for a couple to pay tax separately.

Earning

The starting point is the gross income aggregated across multiple categories. Then removing all that can be exempted, such as

  • overtime pay
  • night sunday holiday preminums.
  • bonus (part)
  • meal voucher (part)
  • relocation allowance (part)
  • settlement after losing a job (cap)
  • capital gain after holding more than 6 month

Article 115 of LIR is all about exemptions.

Spending

Deductables are documented in multiple articles in LIR. Social security in article 110. Special expenses in article 111, 111bis. Extraordinary expenses in article 127, 127 bis. Professional expenses in article 107, 105.

  • social security
  • commuting (cap)
  • frais d'obtention (floor)
  • second pillar pension (cap)
  • donation (?)

  • special expenses

    • insurance premiums (cap)
    • debit interests of loans (cap)
    • third pillar pension plan (cap)
    • home savings plan (cap)
    • annuity payment (?)
    • personal contribution (?)

  • extraordinary expenses: unavoidable and reduces ability to pay tax

    • medical care not covered by CNS (condition)
    • dependency (cap)
    • disability (?)
    • case by case (?)

Financial investment

In the case of financial investment the situation is a bit nuanced. If the funds pays officially a divident, then it cannot be exempted even if the funds offer the option of reinvesting dividend into the funds.

At the time of selling a financial investment, capital gain must not be exempted if the tax payer holds the funds for less than 6 months.

Memo — where to look in the LIR

Courtesy chatGPT and Gemini for this section.

Purpose: a one-page map so you can jump to the right article when you need to check whether an item is deductible, exempt, subject to withholding, eligible for credit, etc.

  • TITRE I — Impôt sur le revenu des personnes physiques — Art. 1 → Art. 157 (approx.). All rules for individuals: definition of taxable income, categories (salaires, pensions, revenus mobiliers, loyers, bénéfices commerciaux/agricoles/libérales), deductions, exemptions, credits, withholding, rules for non-résidents. ([Impots Directs][1])
  • TITRE II — Impôt sur le revenu des collectivités (sociétés, etc.) — Art. 158 → Art. 174 (rules that apply to corporate entities and the overlap with Title I where indicated). ([Impots Directs][1])
  • TITRE III — Dispositions additionnelles et transitoires — Art. 175 → Art. 188 (misc transitional/technical provisions). ([Impots Directs][1])

Chapter-level pointers inside Title I (the most relevant for personal deductions/exemptions)

  • Chapitre I — Disposition générale — Art. 1 (formal definitions / scope).

  • Chapitre II — Personnes soumises à l’impôt — Art. 2 (resident / non-resident definitions).

  • Chapitre III — Imposition collective — Art. 3 → 5 (married couples, joint assessment).

  • Chapitre IV — Revenu imposable — Art. 6 → 114 (sections & subsections). This is the central chapter: it defines income categories (commercial, agricole, libérale, salaires, pensions, revenus mobiliers, loyers, revenus divers) and contains the rules about how to compute taxable income (principles, valuation, amortissement, déduction des dépenses d’obtention, etc.). If you’re asking “is X deductible?” start here.

  • Section I — Généralités — Art. 6 → 13.

  • 1ᵉʳ sous-section — Bénéfice commercial — Art. 14 → 55 (mode de détermination, amortissements, etc.).
  • 2ᵉ sous-section — Bénéfice agricole / forestier — Art. 61 → 90 (≈).
  • 3ᵉ sous-section — Professions libérales — Art. 91 → 94.
  • 4ᵉ — Salaires — Art. 95 → 95a.
  • 5ᵉ — Pensions / rentes — Art. 96 → 96a.
  • 6ᵉ — Revenus mobiliers — Art. 97 → ...
  • 7ᵉ — Location (revenus fonciers) — Art. 98 → ...
  • Section III — Dispositions communes sur frais d’obtention, recettes, dépenses — Art. 103 → 108 (frais d’obtention, recettes et dépenses liées aux catégories 4→8 de l’art.10).

  • Section IV — Dépenses spéciales — Art. 109 → 114 (list of special deductible expenses, plafonds, conditions). Check here for personal deductible items (assurances, intérêts, frais de garde, etc.).

  • Chapitre V — Exemptions — Art. 115 (main general exemptions; then details elsewhere). If you suspect an amount is tax-exempt (insurance payouts, certain capital receipts, etc.), check Art.115 and the following enumerated items.

  • Chapitre VI — Déclaration / établissement de l’impôt — Art. 116 → 117 (procedural: filing, forms).

  • Chapitre VII — Calcul de l’impôt & modérations pour enfants — Art. 118 → ~123bis (allowances, child reductions). Use this for family/child tax moderation.

  • Chapitre VIII — Recouvrement de l’impôt — Art. 135 → 155 (advances, retenue à la source on salaries and capital, payment procedures, tax credits like CIS, CI-CO2, etc.). Withholding / tax credits live here (e.g. retenue d’impôt salaries Art.136→145; retenue sur revenus de capitaux Art.146→151; crédits d’impôt Art.152→154ter etc.).

  • Chapitre IX — Dispositions particulières non-résidents — Art. 156 → 157ter (non-resident taxation rules).

Cheat-sheet: topic → where to look first

  • “Is this type of receipt a taxable income category?” → Chap. IV (Revenu imposable), start at the subsection for that category (salaires Art.95; pensions Art.96; revenus mobiliers Art.97; loyers Art.98; bénéfices commerciaux Art.14+).
  • “Is it deductible as a business expense / amortissement?” → Chap. IV, subsections for the relevant business type and Art.22–34 for valuation / amortissements; Section III (Art.103–108) for frais d’obtention.
  • “Personal deductible expenses (insurance, alimony, childcare, interest on loans, pension contributions)?” → Section IV — Dépenses spéciales (Art.109–114), then cross-check with relevant specific articles.
  • “Exemptions (what is explicitly tax-exempt)?” → Chap. V — Art.115 (and linked enumerations later in the text).
  • “Tax credits (child credit, minimum salary credit, CO₂, parental, etc.)?” → Chap. VIII / Art.152 → Art.154ter (and nearby articles for variants). ([Impots Directs][1])
  • “Withholding at source on salary?” → Chap. VIII, Section II — Art.136 → 145.
  • “Withholding on capital income (dividends, interest)?” → Chap. VIII, Section III — Art.146 → 151.
  • “How do I file / deadlines / assessment?” → Chap. VI — Art.116–117 (declaration rules).
  • “Non-resident special rules (partnerships, source taxation)?” → Chap. IX — Art.156→157ter.

Quick tip for speed

  1. If it’s about whether something is taxable (category) → open Chap. IV and go to the subsection for that category.
  2. If it’s about whether it’s deductible → check Art.103–108 (frais d’obtention) and Art.109–114 (dépenses spéciales), and the amortissement rules (Art.29→34).
  3. If it’s about exemption → jump to Art.115 first, then follow the cross-references.
  4. If it’s about withholding or credits → use Chap. VIII (Art.136→155; credits around Art.152–154).