INTEREST SAVINGS AND SUBSIDIES GRANTED TO EMPLOYEES
In addition to the interest subsidies and interest rebates granted by the Luxembourg state as part of its housing policy, the Income Tax Act also allows tax deductions for the employer and the employee which can be granted in the form of interest savings and subsidies.
The term "interest saving" is used when the employer itself grants a loan - a mortgage loan in particular - to their employee (usually a financial institution) at a rate which is subsidised in relation to a reference rate fixed by grand-ducal decree. The difference thus recorded constitutes the benefit-in-kind.
The term "interest subsidy" is used when the employer reimburses interest paid by the employee to a financial institution.
Conditions and limits for the tax exemption of the interest subsidy
The principle of tax exemption is provided for in art. 115-22 of the L.I.R. and the conditions laid down by the Grand-Ducal regulation of 11 December 1991.
The mortgage loan thus subsidised must be in economic connection either with the taxpayer's personal dwelling or with the acquisition of a first building plot, or with a building under construction or renovation. In all cases it must be a building that the taxpayer declares that they want to use for their personal housing needs (Art. 2-4 of the Grand-Ducal Regulation). This excludes rental investments and secondary residences (this exclusion is explicitly provided for in Article 2-5 of the same decree).
Personal loans are all other non-mortgage loans.
The tax exemption is capped at €3,000 for a single person for the mortgage part and €500 for other loans. This exemption is doubled in the case of collective taxation or for single-parent salaried taxpayers (Art. 2-1-2-3 and art. 3 of the Grand-Ducal regulation).
The interest subsidy may not exceed the interest paid by the taxpayer.
Responsibility of the Employer
It is up to the employer to check all the conditions which allow this double exemption. They must compile a file containing proof of the mortgage or personal loan.
In the case of a mortgage loan, this means proof of the correlation between the loan and the employee's principal residence, proof of payment of interest, and proof that the employee's spouse did not also benefit from the same exemption.
The tax and social security deductions made from the employee's remuneration are in fact the responsibility of the company and its legal manager.
Example of an interest subsidy for a mortgage loan
To benefit from this advantage, you must own your principal residence and have taken out a loan from a financial institution.
This also means that the passive interest on this mortgage loan is deductible from taxable income (limited deductibility depending on the composition of the household and the date of acquisition).
If the employee receives an interest subsidy from their employer, this subsidy will logically reduce the interest paid and increase taxable income accordingly.
For a taxpayer who is married with 2 children and has recently moved into their main residence, and who has paid €8,000 in interest in 2012 on this property loan and who has a taxable income of €100,000 including the deduction of passive interest on their main residence, the amount is capped in this case at €6,000 - i.e. the ceiling of €1,500 plus this amount for the spouse and the 2 dependent children.
Tax impact of an interest subsidy from one’s employer :
With an interest subsidy of €6,000 from their employer, the taxable income is fixed at €104,000, i.e. €100,000 + €6,000 in interest that is no longer deductible - €2,000 that becomes deductible (the difference between €8,000 and €6,000).
The additional tax to be paid is €1,623 (the tax is set at €21,261 for an income of €100,000 compared to €22,884 for a taxable income of €104,000).
The net gain from this operation is therefore €4,377 for the employee (€6,000 bonus received - €1,623 in taxes).
Tax impact of an exceptional bonus of €6,000 :
In this case, the taxable base is €105,250, i.e. €100,000 of taxable income + €6,000 of bonus - €750 of social security charges deductible at 12.5% on this bonus.
The additional tax to be paid is €2,129 (the tax is set at €21,261 for an income of €100,000 compared to €23,390 for a taxable income of €105,250).
The net gain from this operation is therefore €3,121 for the employee (€6,000 bonus - €750 in social security charges - €2,129 in taxes).