LUXEMBOURG GUIDE

Luxembourg – The Economy

Luxembourg’s economy is characterized by its fiscal system and a high degree of international openness. The financial sector is the main driving force behind the Grand Duchy’s economy, representing about one-third of the country’s GDP, making the country vulnerable to external shocks.

Luxembourg is the second-wealthiest country in the world in terms of GDP per capita (the first in the EU – PPP) and has one of the highest current account surpluses as a share of GDP in the eurozone. It generally maintains a healthy budgetary position, nevertheless, the measures taken to address the pandemic, partially offset by an increase in revenues, caused the general government balance to slip into a deficit of -1% of GDP in 2021.

Although Luxembourg in tourist literature is aptly called the “Green Heart of Europe”, its pastoral land coexists with a highly industrialized and export-intensive area. Luxembourg’s economy is quite similar to Germany’s. Luxembourg enjoys a degree of economic prosperity very rare among industrialized democracies.

The economy of Luxembourg is largely dependent on the banking, steel, and industrial sectors. Luxembourgers enjoy the highest per capita gross domestic product in the world (CIA 2018 est.).

The government has been aiming at economic diversification for a few years and has been encouraging the development of sectors such as communication and information technologies, logistics, e-commerce, and biotechnologies. The number of foreign citizens in the labor market outweighs the number of Luxembourgish nationals.

Luxembourg is a founding member of the European Union, OECD, United Nations, NATO, and Benelux. The city of Luxembourg, which is the country’s capital and largest city, is the seat of several institutions and agencies of the EU.

Luxembourg served on the United Nations Security Council for the years 2013 and 2014, which was a first in the country’s history. As of 2020, Luxembourg citizens had visa-free or visa-on-arrival access to 187 countries and territories, ranking the Luxembourgish passport fifth in the world, tied with Denmark and Spain.

Small and Medium-Sized Companies

SMEs in Luxembourg play an important role in the non-financial business economy, especially in terms of their contribution to total value added, which at 67.7% is substantially higher than the EU average of 56.4%.

The SME contribution of 67.0% to employment is exactly in line with the EU average, however, indicating that SME productivity, measured as value added per person employed, is substantially higher in Luxembourg than in the EU as a whole.

SMEs in Luxembourg also employ more people, an average of 5.5 compared with the EU average of 3.9. SMEs in Luxembourg’s non-financial business economy have generated solid growth in recent years, with SME value added rising by 14.4% and employment by 11.8% in 2014-2018. In 2017-2018, overall SME growth has been strong, with growth in value added of 8.7% and in employment of 3.3%.

Compliance Highlights

• The Luxembourg Inland Revenue (Administration des contributions directes – ACD) – one of 3 tax authorities in the Grand Duchy of Luxembourg, alongside the Registration Duties, Estates and VAT Authority (Administration de l’enregistrement, des domaines et de la TVA – AED) and the Customs and Excise Agency (Administration des douanes et accises).
  
  The main objective of the Luxembourg Inland Revenue is to implement the legislation related to direct taxation, such as:
  • deciding and collecting direct taxes (personal income tax, corporate income tax, business tax, withholding tax on wages, salaries, and pensions, etc.)
  • deciding the basis of collection for property tax (tax valuation on all real estate properties in the country)
  • deciding and collecting various taxes and duties.
    
    
• The Ministry of Labor, Employment and the Social and Solidarity Economy – The Ministry manages three distinct fields of policy: employment policies, labor law and industrial relations, and social and solidarity economy. The Ministry defines the strategic goals within these fields and coordinates their implementation.
  
  The following three administrations also fall under the remit of the Ministry: The National Employment Agency, the Inspectorate of Labour and Mines, and the Labour College.

Labor Contracts Law

Most aspects of employment contract compliance in Luxembourg are covered by the Labor Code (Code du Travail, Arbeitsgesetzbuch). Additionally, Collective Bargaining Agreements (CBAs) also affect the contractual relationship between employer and employees. CBAs or trade union agreements can enhance statutory minimums covered by the Labor Code, but they cannot undercut them.

General requirements apply to all contracts. These include:

1. Each employee must be given a written contract no later than the first day of employment
2. Contracts must be in a language understood by all parties, although there are no specific regulations. English is commonly used and generally accepted in courts
3. Mandatory information required for all contracts includes identities and addresses of all parties, employment start date, place, and type of work, working hours, annual leave, notice periods, any trial period
4. There must be two copies, each signed by both parties
5. Oral agreements are considered to be permanent contracts
6. The standard contract is open-ended, indefinite. The Labor Code allows fixed-term contracts only in certain cases and they cannot exceed a total of 24 months, including a maximum two renewals. A trial period can be written into a contract before employment starts.

The main types of contracts and significant factors are also seen below:

• Open-ended, Permanent, Indefinite Employment Contracts (CDIs):  The typical and preferred contract type in Luxembourg. Regulations for terminating a permanent contract are laid down by the Labor Code.
  
  
• Fixed-term Employment Contracts (CDDs):  These are permitted only for specific tasks or timescale, as strictly defined by the Labor Code, such as seasonal work or temporary replacement of staff. They cannot exceed 24 months, including the possibility of two renewals. If employers enter into a fixed-term contract outside the regulations, the agreement automatically becomes open-ended and permanent.
  
  
• Part-time Employment Contracts:  Can be either permanent or fixed term, following the required regulations.
  
  
• Seasonal Employment Contracts:  Permitted where a company’s operations (harvests or tourism for example), require employees on a repeated annual basis. They cannot exceed 10 months within any 12-month period.
  
  
• Apprenticeship Employment Contracts:  Drawn up between employer and apprentice, or the apprentice’s legal representative if they are a minor, and must be registered with the Ministry of Education, Children and Youth.  Can be either an initial apprenticeship contract in the case of a minor, or adult apprenticeship contract.
  
  
• Probation or Trial Period Employment Contracts:  Trial periods can be written into the employment contract and are generally for between two weeks and six months. The probation period can be up to 12 months if the contract stipulates a monthly salary exceeding €4,474.31 (US$5,280).
  
  
• Collective Bargaining Agreements (CBAs):  Collective bargaining and trade union agreements cover a significant proportion of workers in Luxembourg, in such areas as wages, working hours, notice periods, overtime, general working conditions and vacations. Such agreements overwrite other statutory minimums where they provide a higher level of benefits. Employers are required to enter into negotiations with representative trade unions if requested.
  
  CBAs operate at industry or company level in Luxembourg. Industry-level agreements apply to companies that belong to employers’ associations who have signed CBAs, although the government can expand these agreements for an entire sector. In practice, more agreements are signed at company level, and it is estimated that over 60% of workers are covered by industry or company CBAs.

Payroll – Tax Contributions and Benefits

Income Tax:

Tax liability is based on residency and with three different classes depending on status. Residents are taxed on their worldwide income in a tax year running from January 1 until December 31, while non-residents are taxed on certain categories of their Luxembourg-sourced income, or income that is paid into Luxembourg.

Tax rates are progressive from 0% to 45.78%, with identical rates applying to Classes 1 and 1a, but with different bands for Class 2 payers. By the end of February following the tax year, employers must provide the tax authorities with information on salaries paid to their employees. Under European Union directives this information is shared with EU member states in June of that year.

Health and Social Insurance: Luxembourg’s highly developed health and social care programs provide for all residents. The system is supervised by the Ministry of Social Security and the Inspector General of Social Security. All residents must be members of one of the social security funds according to their occupations and register through the Joint Social Security Center (Centre commun de la sécurité social, CCSS).

The employer is responsible for declaring the employee to the CCSS and obtaining their national insurance card with their 13-digit social security number.