On 4 June 2021, the Director of the Luxembourg tax authorities issued circular LIR No.105/2 regarding the tax treatment of certain expenses incurred by individuals (the “Circular”).
GENERAL TAX TREATMENT OF EXPENSES BORNE BY INDIVIDUALS
Before entering into more details as described below, the Circular recalls the general principle applicable to expenses borne by individuals under Luxembourg tax law. Indeed, expenses incurred by individuals may be deducted from their net income (such as net employment income) only when such costs are borne exclusively or quasi-exclusively to directly acquire, secure and retain the income. Such would typically be the case for specific professional clothing, contributions paid to professional chambers, etc. The term “quasi-exclusively” means the expenditure’s use is at least 90% dedicated for professional purposes.
In addition, where expenses are borne partially for professional and partially for private purposes, a breakdown between the private and professional purposes of the expenditure is required to allow for the tax deductibility of said part. In cases where no breakdown is possible or where the expense is solely attributable to private purposes, the expense is considered as an expense of the taxpayer’s lifestyle, and thus not deductible, even if it is made with a view to benefiting or is likely to benefit his profession or activity.
THE CONTEXT OF THE CIRCULAR
In the context of the COVID-19 pandemic, a number of employees had to incur expenses in order to work remotely as they were constrained in traveling to their professional office. Although it seems at a first glance that said expenses have been incurred for professional purposes, it does not necessarily mean that those expenses can be deemed to be exclusively or quasi-exclusively incurred for professional purposes. The Circular’s main aim is to provide guidance on the tax deductibility (or not) of certain typical expenses made by taxpayers, notably with respect to computers and home office cabinets.
Besides the above, the Circular also confirms (i) the positions previously taken in a repealed circular dated 1998, according to which the procurement costs in relation to income from movable property benefiting from the tax-free tranche are deductible and (ii) the distinction between deductible professional development trainings (Fortbildungskosten) and the non-deductible education expenditure (Ausbildungskosten).
THE MAIN TAKEAWAYS OF THE CIRCULAR
- With respect to working tools :
The working tools specifically targeted by the Circular are computers, software and internet subscriptions, where the distinction between private and professional use is not straightforward.
With respect to personal computers, and for simplification purposes, the Luxembourg tax authorities took the position that the acquisition of a computer is always made for private use absent pertinent justification/proof of the exclusive use for professional purposes. Indeed, the Luxembourg tax authorities consider that using the computer in order to exchange private emails is by itself sufficient to bring the private use of the computer above the 10% threshold, thus denying the “quasi-exclusively” professional purposes of the computer.
In this context, the LTA also clarifies that they are not controlling the appropriateness of the expense as long as the latter was made exclusively or quasi-exclusively for professional purposes.
- With respect to home office cabinet :
The principle of an exclusive or quasi-exclusive use for professional purposes applies equally to maintaining a home office and thus request deductibility for e.g. procurement costs. The Luxembourg tax authorities confirmed that they will base their judgement on whether the home office is used exclusively for professional purposes on a bundle of indicators, such as the size of the home office, the separation of the home office from the rest of the taxpayers home, etc.
According to the Circular, not only the expenditure exclusively incurred for the furnishing of the home office, but also the portion of the general expenses of the taxpayers home in relation to the home office may be deducted as procurement costs (e.g. rent, utilities, maintenance costs, etc.). Please however note that taxpayers with an office at the place of work are considered as unable to deduct expenses for a home office given the availability of a work place.