This week Delano will take a look back at the key changes introduced by the law and, with the assistance of Luxembourg tax gurus, ask, “What impact so far and what can we expect next?” To kick-off, Laura Foulds, managing director of Analie Tax & Consulting, reviews the principal changes on personal tax.
Delano: What have been the key changes to personal taxation since the introduction of the new law?
Laura Foulds: The main changes affecting taxpayers in general were adjustments to the tax brackets. Two intermediary rates were introduced as well as the addition of 41% and 42% rates. In general, there was an increase in many of the deductions that can be claimed on the tax return.
Withholding tax on interest doubled, so increased from 10% to 20%, and some environmentally friendly changes were also introduced in relation to bicycles and zero-emission cars, as well as a change in the calculation of company car benefits.
The temporary budget balancing charge, which had been introduced a couple of years previously was abolished and a phase out of the CIS credit (tax credit) was introduced.
However, independent workers faced perhaps the biggest changes in 2017 with the introduction of mandatory VAT registration and increased accounting obligations where turnover exceeds €100,000. In addition, the VAT obligations for directors were detailed with only those receiving less than €30,000 able to opt for a simplified VAT regime.
Have there been further changes or developments in 2018?
The introduction of separate filing for married taxpayers. From 1 January 2018 married taxpayers can elect to file separately as opposed to the mandatory joint filing that was previously in force. There are various options available, so taxpayers have to consider these carefully to determine if there will be any net benefit to change from the joint filing position which remains the default situation. The main advantage of the separate filing is that it should increase the monthly withholding tax via payroll and therefore reduce the large year-end balances and advances payments that many married couples face when they are both working.
For married non-resident taxpayers, there have been changes to bring taxation more closely in line with that of resident taxpayers. This includes changes to the applicable tax class--which will now be tax class 1 as a default position--and for taxpayers seeking to apply tax class 2, there will be a mandatory tax return filing obligation. For those requesting tax class 2, they must meet certain conditions and the basis for the calculation of the tax rate will now include global income so, in many cases, the tax liability for married non-residents will increase.
What advice are you giving clients in light of these changes?
We always recommend a regular “health-check” to ensure that individuals are optimising their taxes based on their individual circumstances and existing legislation.
For directors and independents, we recommend taking professional advice to ensure their bookkeeping and reporting are in line with the new regulations. Even those with turnover below the €100k should plan now for the future when they reach this level and become subject to these reporting obligations.
Non-residents need to do some relatively detailed analysis to determine what their new status will be with the new legislation, and which of the possible choices to make in relation to the withholding tax to be applied via the payroll, in order to optimise their tax position. We also recommend looking at the worst-case position as those electing for tax class 2 via payroll could find that the year-end position is different if their circumstances change during the year such that the conditions to claim tax class 2 are no longer met. Such situations could result in a year-end liability being due if the tax class reverts to tax class 1.
Similarly, resident married couples need to “do the maths” to determine if electing not to file jointly would be beneficial in their specific circumstances.
Whilst the option for separate filing for married couples was eagerly anticipated, it could easily give a worse final tax position than the default joint filing, or increased administration to arrive at the same final tax position. We anticipate limited cases where this would be chosen.
Non-residents need to monitor closely the withholding rate applied via the payroll against their individual circumstances and anticipate the impact that any potential changes may have on their final taxes for the year.
