On 8 October 2025, Draft Law No. 8633 was submitted to the Luxembourg Parliament (Chambre des Députés) (the “Draft Law”) to introduce a new tax exemption on interest earned by Luxembourg resident individuals on certain specific bonds issued by a State.
To meet its NATO defence spending commitments, the Luxembourg government plans to raise funding through the issuance of a new “defence bond”.
Under the proposed legislation, interest earned by Luxembourg-resident individuals on qualifying government bonds would be fully exempt from personal income tax, whether through assessment or via the 20% final withholding tax regime established under the Luxembourg law of 23 December 2005 (Loi Relibi). The exemption will take effect for the 2026 tax year.
It should be noted that, with a view to ensuring compliance with European law, all bonds that satisfy the various stipulated conditions may benefit from the interest exemption provided by the Draft Law, and not solely those issued by Luxembourg.
A targeted, full and temporary tax exemption
The Draft Law introduces a temporary and targeted tax measure by amending two key pieces of Luxembourg tax legislation:
- The amended Luxembourg law of 4 December 1967 on income tax (LIR), through the insertion of a new Article 115, point 15b;
- The amended Luxembourg law of 23 December 2005 introducing a final withholding tax on certain interest income from savings, by adding a new Article 5bis.
To benefit from the full exemption, two sets of conditions must be met:
- those relating to the nature of the bond, and
- those relating to the status of the bondholder.
Material scope of the exemption: conditions relating to the nature of the bond
The exemption applies only to bonds that meet the following cumulative conditions:
- the income-generating claim must be in the form of a bond issue;
- the issuer must be a sovereign State which, at the time of issuance, holds the highest credit rating according to the scale used by at least two internationally recognised credit rating agencies (Moody’s, S&P Global Ratings, Fitch Ratings, DBRS Morningstar, Scope Ratings or Credit Reform Rating);
- the bond must be denominated in euro;
- both the issuance and subscription of the bond must occur between 15 January and 15 February 2026 (inclusive); and
- the bond must have a maturity of three years.
Personal scope of the exemption: conditions relating to the bondholder
The exemption is limited to bondholders who are Luxembourg tax resident individuals acting within the management of their private wealth.
In other words, the following are expressly excluded from the benefit of the exemption:
- Legal entities;
- Non-resident individuals (the latter would, in any case, generally not be taxed on interest income derived from said bonds, even if issued by the Luxembourg government, as Luxembourg does not apply withholding tax on interest);
- Resident individuals acting in the context of a professional activity (commercial, agricultural, forestry or liberal professions).
Estimated fiscal impact
According to the financial note attached to the Draft Law, the government estimates that a bond issuance of EUR 150,000,000 at an annual interest rate of 2% over three years, assuming all exemption criteria are met, would result in a revenue shortfall of approximately EUR 1,800,000 for the State Treasury (Trésorerie de l’Etat).
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