Introduction to the Regulatory Framework
The Luxembourg tax system governing benefits in kind represents a complex area of social and tax law that is currently undergoing profound transformation. This regulatory evolution, initiated in 2022 and continuing through 2027, aims to modernize and simplify the tax treatment of non-monetary remuneration while promoting the ecological transition of company vehicle fleets.
Understanding these mechanisms has become essential for company directors, human resources managers, and accounting professionals who must navigate this evolving regulatory landscape. This expertise is particularly crucial when establishing a company in Luxembourg to develop an attractive compensation policy.
Legal Foundations and General Valuation Principle
The cornerstone of the Luxembourg system rests on Article 104, paragraph 2 of the Income Tax Law (L.I.R.), which establishes the fundamental principle that any benefit not consisting of cash must be valued at the average usual price at the place of consumption or use and at the time of provision.
Key principle: This formulation, which may seem abstract, concretely means that the tax administration seeks to determine what the employee would have paid on the open market to obtain the same benefit. It is crucial to understand that this market value constitutes the primary reference, and not the cost borne by the employer, which may be substantially different due to economies of scale or special commercial conditions.
Circular L.I.R. 104/1 of 16/07/2018, issued by the Direct Tax Administration, specifies and operationalizes this general principle. This administrative text, regularly updated to adapt to legislative and economic developments, proposes standardized valuation methods that facilitate the practical application of the real value principle.
The consolidated version of this circular, enriched by circular L.I.R. 104/1bis of 04/02/2020, notably integrates methodological changes linked to the transition from the NEDC test cycle to the WLTP cycle for measuring vehicle emissions and consumption, thus reflecting the evolution of European automotive standards.
Evolution of the Tax Regime for Company Vehicles
The tax treatment of company vehicles in Luxembourg is going through a major transition period that deserves special attention. The Grand-Ducal regulation of 12/05/2022 laid the foundations for a structural reform that spans several years, with progressive implementation designed to allow companies and employees to adapt to the new rules.
This gradual approach demonstrates the Luxembourg legislator’s desire to reconcile environmental objectives with the country’s economic and social realities, a balance particularly important for companies established in Luxembourg.
The Three Transition Periods
To fully understand the current system, it is necessary to distinguish three distinct periods that partially overlap depending on contract signature dates and vehicle registration dates.
First Period: Grandfathering Rights
The first period concerns vehicles under contracts signed by 31/12/2024 at the latest and registered by 31/12/2025, which benefit from grandfathering rights allowing them to retain the old CO₂ scale until the end of the contract. This legal protection mechanism guarantees legal certainty and avoids abrupt disruptions in the financial planning of companies and employees.
Second Period: Transitional Phase 2025-2026
The second period, extending from 01/01/2025 to 31/12/2026, constitutes a transitional phase during which new contracts are subject to a simplified but temporary regime.
During this period, 100% electric vehicles benefit from particularly advantageous rates. The 0.5% rate applies to the most efficient models through two distinct alternative routes:
First route: Vehicles whose consumption does not exceed 18 kWh/100km (i.e., 180 Wh/km), without power condition.
Second route: Introduced by the Grand-Ducal regulation of 08/05/2023, it applies to vehicles meeting two cumulative criteria: maximum consumption of 20 kWh/100km AND net power less than or equal to 150 kW.
This dual approach allows for expanding the field of vehicles eligible for the preferential rate while maintaining strict energy efficiency requirements. Electric vehicles not meeting any of these two alternative routes are subject to the 0.6% rate.
Thermal and hybrid vehicles, meanwhile, are subject to a uniform rate of 2% from 01/01/2025, regardless of their carbon dioxide emissions.
Important extension: If the contract is signed by 31/12/2026 at the latest, vehicle registration can occur until 31/12/2027 while retaining the benefit of the 0.5% or 0.6% rates. This additional flexibility offers companies appreciable room for maneuver to manage the sometimes significant delivery times for electric vehicles, particularly during periods of high demand.
Third Period: Definitive Regime from 2027
The third period will begin on 01/01/2027, when the rates applicable to electric vehicles will be doubled, rising to 1% and 1.2% respectively according to their energy consumption and power.
This programmed increase, announced several years in advance, allows economic actors to anticipate and plan their decisions regarding company vehicle policy. Maintaining the 2% rate for thermal and hybrid vehicles from 2027 confirms the desire to maintain a significant gap in favor of electromobility, even after the increase in rates for electric vehicles.
This progressive tax strategy aims to support the energy transition while preserving the budgetary balance of the Luxembourg State.
Calculation Mechanism and Practical Application for Vehicles
The calculation of the benefit in kind for a company vehicle follows a precise methodology that deserves to be explained in detail to avoid any application error.
Calculation Basis
The calculation basis corresponds to the all-taxes-included acquisition value of the vehicle, including all options and additional equipment, but after deduction of any commercial discounts obtained. This reference value remains fixed throughout the vehicle’s provision period, regardless of its actual depreciation on the used market.
Practical Example
To concretely illustrate this mechanism, let’s take the example of an electric vehicle acquired in January 2025 for a value of €50,000 all taxes included.
If this vehicle shows consumption of 17 kWh/100km, it automatically benefits from the 0.5% rate through the first route, regardless of its power. Another vehicle consuming 19 kWh/100km with a power of 140 kW will also benefit from the 0.5% rate, but through the second alternative route.
In both cases, the monthly benefit in kind will be €250 (€50,000 × 0.5%). This amount is added to the employee’s gross salary to determine the taxable base and social contributions due. It is important to understand that this benefit remains constant each month, regardless of the actual use of the vehicle, unless the employee opts for the alternative logbook method.
Detailed Technical Criteria
The two alternative routes to benefit from the preferential rate of 0.5% deserve special attention as they constitute a determining element in choosing company vehicles.
Consumption is measured according to the WLTP cycle which simulates more realistic driving conditions than the old NEDC cycle and appears on the vehicle’s European certificate of conformity. The first route, with the threshold of 18 kWh/100km without power condition, favors the most energy-efficient electric vehicles.
The second route, with its two cumulative criteria (20 kWh/100km AND 150 kW maximum), allows for including slightly less efficient vehicles but of moderate power. Car manufacturers have progressively optimized their models to comply with one or the other of these routes, thus creating a virtuous incentive to improve the energy efficiency of electric vehicles.
Transitional Regime and Grandfathering Protection
The grandfathering protection mechanism constitutes a fundamental element of the transitional system that deserves in-depth analysis.
Old CO₂ Scale
Vehicles made available under contracts signed before 31/12/2024 and registered before 31/12/2025 retain the benefit of the old scale based on carbon dioxide emissions until the natural expiry of the contract.
This historical scale, more complex but potentially more advantageous for certain types of vehicles, establishes a fine graduation of rates based on emissions, ranging from 0.5% for the most ecologically virtuous vehicles to 1.8% for those exceeding 130 grams of carbon dioxide per kilometer.
Automatic Application
This legal protection applies automatically without any particular action by the employer or employee, but requires rigorous documentation to establish contract signature dates and vehicle registration dates.
Companies must therefore carefully keep these documents to be able to justify the application of the transitional regime in case of tax audit. The coexistence of several tax regimes within the same vehicle fleet can complicate administrative management, but it guarantees fairness and tax predictability for commitments already made.
Summary Table of Applicable Rates for Company Vehicles
| Period | Electric | Thermal / Hybrid | Conditions |
|---|---|---|---|
| Grandfathering | CO₂ scale: 0.5–1.8% | CO₂ scale: 0.5–1.8% | Contract ≤ 31/12/2024 and registration ≤ 31/12/2025 |
| 2025–2026 | 0.5% if: • Route A: ≤ 18 kWh/100 km • Route B: ≤ 20 kWh/100 km and ≤ 150 kW Otherwise 0.6% | 2% | If contract ≤ 31/12/2026, registration possible until 31/12/2027 keeping 0.5/0.6% |
| From 2027 | 1% (Route A or B) Otherwise 1.2% | 2% | — |
Alternative Logbook Method
The possibility of opting for an evaluation based on the actual use of the vehicle offers an interesting alternative to the flat-rate system, particularly for employees who use their company vehicle little for private purposes.
Documentary Requirements
This method, strictly regulated, requires keeping a detailed register documenting each trip with precision. The logbook must mention for each journey:
- Date
- Starting and ending mileage
- Destination
- Professional or private reason for the trip
Benefit Calculation
The taxable benefit is then calculated by applying to the total cost of the vehicle for the company, including depreciation or leasing payments, insurance, maintenance and fuel or electricity, the ratio between private kilometers and the total mileage traveled during the period.
This method can prove particularly advantageous for employees making numerous professional trips, but it requires rigorous administrative discipline and exposes to sanctions in case of insufficient or erroneous documentation.
Controls and Verifications
The tax administration reserves the right to control the consistency and veracity of logbooks, comparing them notably with other evidence such as expense reports, professional diaries or geolocation data when available.
The burden of proof lies with the taxpayer who must be able to justify each declared element. This requirement for detailed documentation explains why many employees prefer the simplicity of the flat-rate system despite its potentially higher cost.
Tax Treatment of Company Housing
The valuation of housing made available by the employer follows specific rules that vary depending on whether the employer is a tenant or owner of the property. This fundamental distinction reflects the difference in economic nature between these two situations and aims to establish a fair evaluation of the benefit provided to the employee.
In both cases, the guiding principle remains the search for real market value, with flat-rate methods only intervening in the absence of reliable comparables.
Housing Rented by the Employer
When the employer rents the housing to make it available to the employee, the benefit corresponds in principle to the rent paid by the company. However, in the absence of comparables allowing a precise market value to be established, a flat-rate method can be applied.
Flat-rate method: 25% of the monthly unit value of the housing, with an important floor that guarantees the evaluated benefit will never be less than 75% of the rent excluding charges actually paid by the employer.
This floor rule protects the tax administration against undervaluations while offering a certain predictability to companies. The unit value, a notion specific to Luxembourg tax law, corresponds to an administrative reference value established by the Direct Tax Administration for each property in the territory.
Housing Owned by the Employer
In the case where the employer owns the housing, and still in the absence of market comparables, the benefit is evaluated at 25% of the unit value, with the application of specific minima to guarantee a realistic evaluation.
Applicable minima:
- Studios and apartments: €8/m²
- Other types of housing: €7/m²
The amount retained will be the higher between the flat-rate calculation based on the unit value and the application of the minimum per square meter. This double protection ensures that the evaluated benefit remains consistent with Luxembourg real estate market realities.
Increases and Charges
The provision of furnished housing systematically entails a 10% increase in the base value, whether the employer is a tenant or owner of the property. This flat-rate increase reflects the additional benefit provided by the furniture and applies uniformly, regardless of the quality or actual value of the furniture provided.
Moreover, when the employer covers rental charges such as electricity, water, heating or other services, these amounts are fully added to the taxable benefit. This additive approach aims to capture the entire economic value transferred to the employee, thus guaranteeing an exhaustive evaluation of the benefit actually received.
Summary Table of Rules for Company Housing
| Situation | Main Rule | Floor / Minima | Increase | Charges |
|---|---|---|---|---|
| Employer tenant | Market value. Failing that: 25% of unit value | Never < 75% of rent excluding charges | +10% if furnished | Charges covered to be added |
| Employer owner | 25% of unit value | Minima: • €8/m² (studio/1 room) • €7/m² (other) | +10% if furnished | Charges covered to be added |
Salary Sacrifice Mechanism and Its Implications
Salary sacrifice, a practice consisting of an employee renouncing part of their cash remuneration in exchange for obtaining a benefit in kind, is subject to special tax treatment that excludes the application of flat-rate methods. This approach requires rigorous payroll management to ensure tax compliance.
Exclusion of Flat-rate Methods
This exclusion, clearly established in section 5 of circular L.I.R. 104/1, aims to avoid artificial tax optimizations that could result from an undervaluation of the benefit compared to the agreed salary reduction.
In the context of a salary sacrifice, the benefit must be evaluated at its actual market value, and this value must correspond exactly to the reduction in gross salary accepted by the employee. If this equivalence is respected, the operation is tax-neutral, with the total taxable amount remaining identical.
On the other hand, if the employer bears a cost higher than the salary reduction, the difference constitutes an additional taxable benefit that must be declared and subject to social and tax charges.
Required Documentation
This strict rule requires precise documentation of the real value of the benefit and the amount of the salary reduction. Companies must establish clearly formulated amendments to employment contracts, specifying the terms of the salary sacrifice and the values retained.
The tax administration pays particular attention to these arrangements, notably to verify that the salary reduction is not artificially inflated to create an undue tax benefit.
Capping and Special Situations
The benefit in kind capping mechanism mainly intervenes in end-of-contract situations, notably when the employee acquires the company vehicle at the end of the leasing period.
Capping Principle
This mechanism, governed by Article 5 of the Grand-Ducal regulation (GDR) of 23/12/2016, aims to avoid double taxation by limiting the total taxable benefit to the economic benefit actually obtained by the employee. The calculation is made by subtracting from the initial acquisition price of the vehicle all the benefits already taxed during the provision period as well as any financial contributions paid by the employee.
For accounting for the benefit already taxed, the regulation provides for the use of the 1.5% rate as a calculation reference, regardless of the rate actually applied during the provision period.
Concrete Example
To illustrate this mechanism, let’s consider a vehicle with an initial value of €40,000 made available for 3 years with a monthly taxable benefit of €800.
If the employee buys the vehicle for €15,000 at the end of the contract, the total benefit cannot exceed €25,000 (initial value minus purchase price). The €28,800 of benefits already taxed (€800 times 36 months) exceeding this ceiling, no additional benefit will be taxed upon purchase, and an adjustment may even be necessary according to the terms provided by Article 5 of the GDR of 23/12/2016.
Impact on Payroll Management and Best Practices
The correct integration of benefits in kind into the payroll process constitutes a crucial issue for the company’s tax and social compliance. Rigorous accounting is essential to track these compensation elements.
Importance of the Employment Contract
The way these benefits are mentioned in the employment contract determines their treatment on the payslip and can have significant consequences on the total cost for the employer and the net received by the employee.
When the employment contract explicitly mentions the benefit in kind in addition to the agreed gross salary, this benefit is effectively added to the remuneration and increases the taxable base without reducing the base net salary. This approach, the most transparent and most favorable to the employee, requires the employer to anticipate the additional cost in employer’s charges from the salary negotiation.
Conversely, if the contract only mentions the overall gross salary and the benefit is granted later, the employer cannot unilaterally reduce the cash salary to compensate for the benefit without obtaining the employee’s written agreement by amendment.
Documentation and Retention
Documentation and traceability constitute essential elements of managing benefits in kind. Companies must keep all supporting documents according to differentiated legal periods.
Retention period of 10 years for accounting and payroll documents (payslips mentioning benefits in kind, vehicle acquisition or rental invoices, all benefit calculation elements, logbooks annexed to salary accounts)
This extended retention period for accounting documents is explained by the in-depth tax audits that can occur several years after the facts. Many companies choose to standardize their practices by keeping all documents for 10 years as a precautionary measure.
Evolution Perspectives and Strategic Recommendations
The evolution of the regulatory framework for benefits in kind in Luxembourg is part of a broader European trend aimed at promoting ecological transition while maintaining tax attractiveness for companies and employees.
Government’s Pragmatic Approach
The postponement to 01/01/2027 of the increase in rates for electric vehicles, decided by the Luxembourg government at the end of 2024, demonstrates a pragmatic approach that takes into account economic realities and the need to maintain sufficient incentives to accelerate the electrification of the vehicle fleet.
Recommendations for Companies
Companies must anticipate these developments by progressively adapting their company vehicle policy. The current transitional period offers an opportunity to renew fleets by favoring efficient electric vehicles, which will benefit from the most advantageous rates until 2026 and will remain fiscally attractive even after 2027. This planning is particularly important for SARLs and SAs seeking to optimize their compensation package.
Training human resources and accounting teams in these new rules also constitutes a necessary investment to ensure compliant and optimized management of benefits in kind. For companies lacking these internal resources, outsourcing payroll management can be a relevant solution.
Conclusion
The Luxembourg system of benefits in kind is going through a period of profound transformation that requires a thorough understanding of tax mechanisms and their practical implications.
The coexistence of several regimes during the transitional period, the complexity of valuation rules and the importance of financial stakes require constant vigilance and regular updating of knowledge.
Professionals who master these subtleties will be best placed to support companies and employees in optimizing their tax situation, while scrupulously respecting the legal framework in force.
The success of this transition will largely depend on the ability of economic actors to anticipate changes, adapt their practices and maintain rigorous documentation of all benefits granted.
