On 19 December 2025, Luxembourg enacted the law amending (i) the law of 4 December 1967 concerning income tax (the “LITL”) and (ii) the law of 23 December 2005 introducing a final withholding tax on certain interest income earned on savings (the “Relibi Law”). The law was published in the Journal officiel du Grand-Duché de Luxembourg on 22 December 2025 and applies as from the 2026 tax year.
The legislation originates from Draft Law No. 8633, which had been submitted to the Luxembourg Parliament (Chambre des Députés) earlier in 2025. Please also refer to our previous newsletter.
The new legislation introduces a full tax exemption for interest income derived by Luxembourg tax resident individuals from certain qualifying sovereign bond issuances. The measure forms part of the Government’s broader strategy to finance increased defence-related expenditure, including through dedicated sovereign bond issuances aimed at private investors.
From an income tax perspective, the exemption is implemented through the insertion of a new article 115, number 15b, into the LITL. This provision exempts from income tax, when taxed by assessment, interest income falling within Article 97 LITL and arising from sovereign bonds that meet a set of cumulative statutory conditions. In parallel, a new article 5bis introduced into the Relibi Law provides for a corresponding exemption from the 20% final withholding tax on interest derived from savings.
The exemption applies exclusively to sovereign bonds that (i) are issued by a State, (ii) are denominated in euros, (iii) have a maturity of three years, (iv) are subscribed and issued during the period from 15 January 2026 to 15 February 2026 (inclusive), and (v) are issued by a State benefiting, at the time of issuance, from the highest credit rating according to the rating scale used by at least two internationally recognised credit rating agencies.
The personal scope of the measure is limited to Luxembourg tax resident individuals acting in the context of the private management of their assets. Interest income earned in the course of a professional activity, as well as income derived by corporate taxpayers, does not fall within the scope of the exemption. Non-resident investors are likewise excluded, as the relevant interest income does not constitute taxable Luxembourg-sourced income in their hands.
Unlike certain existing exemptions under Luxembourg tax law, the new exemption is not subject to any monetary cap, thereby enhancing its simplicity and attractiveness. Where the interest is paid through a Luxembourg paying agent, the withholding tax exemption applies automatically. In cases where the paying agent is established in another EU or EEA Member State, the exemption under the Relibi Law generally requires an election by the investor; failing such election, the income tax exemption under the LITL remains applicable.
A first practical application of this framework is the inaugural Luxembourg defence bond, which was opened for subscription, to retail investors only, on 15 January 2026 with a maximum issuance amount of EUR 150,000,000. On 16 January 2026, the full amount had already been allocated, with subscriptions closing in less than twenty-four hours, reflecting strong demand. This rapid uptake illustrates the attractiveness of the tax-exempt regime and confirms the effectiveness of the legislative incentive.
Importantly, the exemption is not limited to bonds issued by Luxembourg itself and may apply equally to qualifying sovereign bonds issued by other States, in compliance with EU and EEA rules on the free movement of capital. At the same time, the legislator has confined the measure to low-risk investments by imposing strict eligibility criteria, in particular the requirement of the highest sovereign credit rating.
Share on
