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Taxation: why is Luxembourg attractive?

Luxembourg is the most attractive country in Europe for international job seekers. In fact, three out of four employees in the country are foreign nationals and 47% of workers are cross-border workers. What role does taxation play in the country’s appeal? Is it really lower than in neighbouring countries? Also, is it more advantageous to be a worker living in Luxembourg or a cross-border worker? Here are a few answers.

Taxation of employment in Luxembourg

The average gross annual salary in Luxembourg is the highest in the European Union. That said, the income gap is much wider in some sectors than in others. Do you work in the public sector, for example? You will earn far more than your counterparts in neighbouring countries. But above all, the difference in income is due to the over-representation in Luxembourg of sectors with well-paid jobs, such as finance, insurance, and science and technology.

However, are these higher incomes taxed more or less? Workers in Luxembourg are not too badly off compared to their neighbours. France and Belgium, for example, are consistently among the top three European countries where workers are taxed the most.

As in these countries, taxation in Luxembourg is based on a scale system. The more you earn, the more taxes you pay, but there are some major differences:

• Taxation is much more progressive in Luxembourg: While Belgium and France apply four and five tax brackets respectively, Luxembourg has 19.
• Once you exceed a certain annual income threshold (€50,751), the progression virtually stops for higher income.

In short, Luxembourg’s tax system is the most attractive for very low and high incomes. It should also be noted that a bill to adapt tax rates to the cost of living is expected to help further lower taxes in 2024.

The combined advantage of (much) higher incomes and more advantageous taxation for higher incomes makes Luxembourg a doubly attractive country for workers. In addition, social security contributions are lower in Luxembourg.

In which country do foreign workers pay their taxes?

As a foreign worker living in Luxembourg, you will pay your taxes in Luxembourg. The same goes for cross-border workers who work in Luxembourg for a Luxembourg employer:

• They only have to file an annual tax return in Luxembourg under certain conditions.
• They still have to file a return with the French or Belgian tax authorities.
• However, income earned in Luxembourg is exempt from tax in France and Belgium.

Cross-border worker or resident in Luxembourg?

What is the most advantageous tax situation: that of the cross-border worker or that of the foreign worker living in Luxembourg? In both cases, you pay your taxes in Luxembourg, according to Luxembourg tax rates. So the difference lies not so much in taxation, but in the cost of living, and  this is higher in Luxembourg, despite a lower VAT rate than elsewhere (17% maximum).

one important indicator is the cost of housing:

• In 2023, average rents were €1,500/month and up to €2,039/month in the centre of the country (Luxembourg-city region). By way of comparison, average rents in Brussels were €1,188 in 2023.
• Average purchase prices at the beginning of 2024 were between €6,960/m² and €10,975/m² (depending on the region). In Brussels in the same period, the average price of an apartment was €3,364/m² and that of a house was €3,166/m².

Here we have compared Luxembourg prices with Brussels prices, but of course the contrast is even greater with the prices of the border regions in Belgium, France and Germany. It is therefore logical that a large proportion of workers in Luxembourg choose to live on one side of the border and work on the other. Even if in practice, Luxembourg income offsets the higher cost of living.

Is Luxembourg really a tax haven?

Luxembourg’s reputation as a tax haven didn’t just fall from the sky. As explained above, high-income workers are taxed less in Luxembourg, but what about individuals’ wealth? Good news on the tax front here too: there is no wealth or real estate tax in Luxembourg. In addition, taxation on income from assets (interest, dividends and capital gains) is also very low.

As far as companies are concerned, it is mainly foreign entities established in Luxembourg that benefit from advantageous conditions. The country has banking secrecy and its corporate tax rates are among the most favourable in Europe. In addition, companies based in Luxembourg benefit from numerous support measures and programmes, such as investment loans, export credits, interest rate subsidies, etc. So it’s hardly surprising that the country attracts many start-ups and multinationals.

Conclusion

Is it really worthwhile for tax purposes to work or settle in Luxembourg? Yes, both for companies and for workers.

Workers have understood this and the number of foreign workers in Luxembourg continues to rise: today, around 75% of the country’s workforce is made up of immigrant or cross-border workers. As well as the attractive tax system, foreign workers are attracted by high wages, the resilient and dynamic labour market (unemployment rate of 5.6% at the beginning of 2024) and finally, by the multicultural working environment.

As for choosing to live there rather than just working there, this is often a question of quality of life: although teleworking has revolutionised the world of work, mobility remains very complicated for cross-border workers. It is not uncommon to see people walking out on their Luxembourg employer simply because of unbearable traffic jams…

How to further reduce your taxes 

Did you know that insurance is tax deductible, as are pension savings plans and life insurance plans?

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