The Luxembourg government had introduced a housing allowance that can be granted by the employer and that is aimed at easing the burden on young employee tenants, taking into account the rise in property prices and the cost of living.
Clarifications have been provided regarding this scheme through the circular of the Administration of Direct Contributions L.I.R. No. 115/14, published on September 27, 2024.
This article provides an overview of this allowance, as well as the latest clarifications regarding its application.
- 1. Principles of the Housing Allowance
The housing allowance is financial assistance for employees under 30 years old who are tenants of their primary residence in Luxembourg or abroad.
This allowance is also accessible in the case of shared housing, with the amount prorated according to the portion of rent borne by each employee. It is worth noting that Luxembourg has recently established a legal framework regulating shared housing, which we have discussed in another article that you can findhere.
Partial Tax Exemption of 25% on the Housing Allowance
25% of the housing allowance is exempt from tax, up to a limit of €1,000. In other words, 25% of the amount received by an employee will not be subject to tax. If the allowance exceeds €1,000, the exemption applies only to the first €1,000.
Eligibility Conditions
To benefit from this exemption, employees must meet several criteria, including:
- • Age: The employee must be under 30 years old at the beginning of the tax year.
- • Mount of the Allowance: It must not exceed the amount of rent excluding charges.
- • Annual Income: The annual salary must not exceed 30 times the qualified minimum social wage.
Proration in Specific Situations
In cases of part-time work or an incomplete tax year (for example, in the case of a change in employee status during the year), the amount of the allowance is prorated to fit the beneficiary's situation.
- 2. Clarifications Provided by the ACD Circular
The ACD circular clarifies various aspects of the application of the housing allowance, thereby facilitating understanding of the eligibility criteria and calculation methods, with key points summarized below:
Eligibility Conditions
Only employees bound by an employment contract can benefit from the exemption on the housing allowance.
The exemption applies only if the employee is under 30 years old on January 1 of the payment year. After turning 30, the allowance is no longer eligible for the exemption. Changing employers does not affect the exemption of the allowance.
The housing allowance must relate to the employee's primary residence, whether in Luxembourg or abroad. The accommodation must also be rented and occupied for a fee. Free accommodations or secondary residences are not eligible.
To verify the salary limit, all emoluments and benefits of the employee are considered, excluding the housing allowance, regardless of whether they are taxable in Luxembourg or not.
Limits and Caps on the Exemption
Only 25% of the housing allowance can be exempted from tax, with a maximum of €1,000 per month.
The employer is free to grant their employee a housing allowance exceeding the aforementioned limits, but the amount exceeding the applicable cap will not qualify for the exemption.
Particular Situations
For employees whose incomes are partially exempt (for example, through an international tax treaty), the portion of the housing allowance eligible for exemption must be adjusted based on the distribution of these incomes.
Housing allowances paid to an associate or shareholder of a capital company who receives a salary from that company are considered salary income. The exemption applies, even if this associate or shareholder is the only employee receiving the allowance.
The circular presents several practical cases to illustrate the calculation of the exempt allowance, for example, in cases of exceeding the salary cap or part-time work.
Employer Obligations
The employer must verify that the employee meets the age and salary conditions and that the amount of the allowance does not exceed the rent.
If the employee's salary exceeds the cap of 30 times the minimum social wage during the year, the employer must adjust the amount of the exempt allowance.
The employer should retain supporting documents (rental contract, proof of rent payments, etc.) to justify the exemption in case of an audit.
