Tax-exempt income in Luxembourg: which income must be declared, and which escapes tax?

What income is tax-exempt in Luxembourg?

Certain income is not subject to tax in Luxembourg for social or economic reasons. This is the case, for example, for most social benefits such as family allowances, maternity allowance, certain end-of-contract payments, and also certain housing or study grants. Under the international conventions signed by Luxembourg, other income received abroad may also be exempt.

Please note: it all depends on the precise nature of your income and your personal situation. If in doubt, it is better to check on a case-by-case basis.

What is tax-exempt net income?

Tax-exempt net income is an amount that is not directly taxed in Luxembourg. But be careful: “not taxed” does not mean “invisible” to the tax authorities: in reality, this income is often taken into account to calculate the overall tax rate that will apply to the rest of your income.

In practical terms: if you work partly abroad, this income may be exempt from direct tax in Luxembourg. It will nevertheless be included in the theoretical calculation that determines your tax band, and therefore your overall effective tax rate on your Luxembourg salary.

Is foreign income taxable in Luxembourg?

To avoid you being taxed twice on the same income, Luxembourg has signed numerous international tax treaties. 

In practical terms: if income is already taxed in its country of origin – rent received from a property in France, for example – it is generally exempt from direct tax in Luxembourg.
However, please note: you are still required to declare this income in Luxembourg, even if it is not taxed locally. It is included in the theoretical calculation of your resources and is used to determine the overall tax rate that will ultimately apply to all your Luxembourg-source income.

Must exempt income be declared?

A common mistake is to think that a non-taxable amount has no place in your tax documents. In the vast majority of cases, the opposite is true: exempt income must be declared, in full transparency, in your annual return. This enables the ACD to calculate your household’s overall tax rate correctly, check that tax treaties are being properly applied... and help you avoid a reassessment.