Under normal circumstances tax-related issues can make our head spin. COVID-19 brings a whole new level of confusion.

Worry not! We had a nice talk with Séverine Moca, Managing Director in Tax, expert in Personal Tax, who answers all the questions related to the 2020/2021 Tax Return and all the changes coming our way.

1. We’re all struggling to understand the tax return, particularly since the deadline of 2020 tax returns was extended until 30 June 2021. Can you explain the whys and the hows?

The reason for this change of deadline is one we’re all familiar with: COVID-19. The deadline for filing tax returns for 2019 was already extended several times due to COVID-19 and is now until 31 March 2021 (so don’t miss it!), and the deadline for filing tax returns for 2020 is now 30 June 2021 (and potentially until 31 December 2021). This extension will apply as well for married couples taxed jointly who intend to ask for an individual taxation instead.

It is also important to mention that specific tax returns dedicated to the option to claim 20% of withholding tax on interest payments from foreign institutions (mainly EU) should also be extended until 30 June 2021 (form 931).

2. What are the main changes to the 2020 tax forms?

There are not so many changes on the 2020 tax forms except on the extraordinary charges section (page 17). There has been an increase of the ceiling for deductible charges related to the employment of a housekeeper, due to the COVID-19. Indeed, the annual standard deduction is exceptionally increased to a maximum of EUR 6,750 for taxpayers who employed a household helper in their private home during the period from 1 April, 2020 until 31 December 2020.

- It cannot exceed neither the costs incurred, nor EUR 450 per month from January 2020 until March 2020, and EUR 600 per month from April 2020 until December 2020.

- It is also allowed to use workers of a company or association for the accomplishment of domestic work inside a home.

Another hot topic is related to DAC6 reporting (page 18). The Luxembourg Law of 25 March 2020 transferred EU Directive DAC6 into national law and provides for an exchange of information between tax authorities in the event of cross-border tax planning.

The Law refers to the Directive’s indications, called “hallmarks”, which define the scope of those cross-border arrangements which must be reported under DAC6. If a cross-border arrangement is identified according to one of the Law’s hallmarks, it must then be reported to the Luxembourg tax authority. Luxembourg then exchanges this information with the authority of the other country concerned by the arrangement.

Therefore, if you are benefiting from such an arrangement as a non-resident, you will have to report the references you have received from the banking institution.

Last but not least, it is important to mention a change in the 2021 tax cards that were recently received by non resident taxpayers applying for a joint taxation (and therefore having an average tax rate applicable on their tax card). The tax authorities added some allowances (FFO, FDS) on those tax cards only. They will be taken into account at payroll level.

However, this will not be an additional deduction in comparison to the past. It will only be a cash flow adjustment between the salary received during the year and the related income tax returns (tax returns as from 2021 prepared in the course of 2022).

One last point for non-resident married couples applying for joint taxation. It is key to check if the tax rate proposed by the tax authorities is still in line with your own situation. If not, you can still ask for a review of it to be close to your real situation at payroll level.

3. What are the main things people should be aware of?

When talking with individuals, I noticed that some of them moved back to their country of origin during the COVID-19 period to stay closed to their family. Their employer agreed to let them work remotely. However, it was not anticipated that the crisis would take so long and that borders will remain closed. This specific population needs to pay attention since their residency status may have changed (i.e. if they stayed more than 183 days in another country during the whole year 2020, depending on the other countries’ specific residency rules).

Indeed, this may trigger tax liability in the other country and an adjustment of their tax situation in the 2020 Luxembourg tax file (if not done on time through the payroll). If not correctly anticipated, this could trigger some important cash flow issues for the individual.

Another hot topic is to ensure that individuals residing in Luxembourg are declaring their worldwide income. This is clearly not new! However with the automatic exchange of information, the Luxembourg tax authorities are receiving such information directly from the foreign countries.

The main oversight is regarding rental properties abroad. Individuals think that because it is declared in the country where the property is located then they do not need to declare it anymore. Which is not correct, because of the principle of worldwide taxation! As an example, you own a small apartment in Portugal or in the south of France which is rented out during the year: as a resident of Luxembourg (or a non-resident opting for joint taxation or specific articles allowing you to be considered as resident of Luxembourg), you will have to declare the rents received minus all related expenses in the rental income section (page 10, ligne 1003/1004) and complete form 190. This income will not be taxable in Luxembourg but has to be reported as a foreign income taken into account to determine your global tax rate.

As a reminder, interest / dividends and capital gains on movable property earned abroad are also to be declared in Luxembourg. These are taxable in Luxembourg but you can claim foreign tax credit in certain circumstances on withholding taxes paid abroad (page 19, lignes 1029 to 1032)

4. In simple terms, and step by step, what do people have to do?

The first thing to do is to collect all documents to enable the individuals to start preparing their tax returns (certificate of remuneration/pension, interests on loans, certificates from insurances, childcare, and any other document related to an income or an expense). This first step is the most time consuming for taxpayers. Another advice would be to check the previous tax assessment to see whether or not it was in line with the tax return. It allows the individual to check the correctness of the document and / or adjust his new tax return based on the feedback from the tax office.

If a mistake was made by the tax office on the tax assessment, be careful. Either you need to check with the tax office for the amendment of your tax assessment or you will have to submit a claim to the direction (three months delay!).

5. What are pros and cons of such changes in the tax obligations?

As mentioned above, changes remain marginal. The good point is the additional deduction on extraordinary charges which will slightly reduce the tax liability of individuals or increase potential refunds.