The Luxembourg legislator and administration have brought several legislative changes impacting the real estate industry in Luxembourg, and further legal initiatives have been announced in draft bills. The Luxembourg Constitutional Court also issued an important decision.
Recent changes in laws and regulations
1. Tax regime amendments
(i) 20% Real Estate Levy
On 20 January 2022, the Luxembourg tax authorities released a new Circular regarding the “20% Real Estate Levy” introduced by the Luxembourg law of December 19, 2020, effective from 1 January 2021.
The 20% Real Estate Levy must be declared and paid to the Luxembourg tax authorities by the following entities (“Investment Entities”):
- Certain Undertakings for Collective Investment (UCIs);
- Specialized Investment Funds (SIF); and
- Reserved Alternative Investment Funds (RAIF);
except for those that are created in the form of a limited partnership.
Investment Entities must also declare and pay the 20% Real Estate Levy if they hold participation interests in tax transparent entities such as a:
- partnership (société en nom collectif – SENC);
- limited partnership (société en commandite simple);
- special limited partnership (société en commandite spéciale);
- civil company (société civile); or
- mutual investment fund (fonds commun de placement – FCP).
The 20% Real Estate Levy applies to the following:
- income from the rental of a real estate asset located in Luxembourg;
- capital gains from the disposal of a real estate asset located in Luxembourg; and
- income from the disposal of participation in the aforementioned tax transparent entities or in an FCP.
The reporting duties must be fulfilled no later than the 31st of May following the year of the realization of the above income.
The Investment Entities must be able to provide all the supporting documents on the amounts of the declared income and gains including an auditor’s report certifying such income and gains.
(ii) The limitation on the application of the 4% accelerated tax depreciation regime
On 23 December 2022, the Luxembourg Parliament passed the budget law for the year 2023 (“Budget Law“).
Among other things, the Budget Law limits the 4 percent accelerated depreciation rate for buildings or parts of buildings used for rental housing to two properties or parts of properties used for rental housing acquired or constituted after 31 December 2022.
BILLS CURRENTLY IN PROCESS
1. The Reform of the Property Tax (Impôt foncier) – “Bill 8082” or the “Bill”
The Property Tax was first introduced in Luxembourg under the First French Republic in the form of the “contribution foncière” (land tax) by the law of 3 frimaire de l’an VII (23 November 1798).
The current property tax dates from the 1930s German tax regime.
The taxation procedure takes place in two stages. First, the Tax Authorities (Administration des Contributions Directes or “ACD”) must determine the property values at regular intervals in time by sending a “Unitary Value” assessment to the taxpayer.
Second, each municipality adopts its municipal rate annually.
The tax amount due is obtained by multiplying the Unitary Value by the municipal rate and sent to the taxpayers via a Property Tax assessment.
In fact, the periodic updating of these valuations, as provided by law, were so cumbersome that the values currently used in Luxembourg have not been updated since 1941!
The Property Tax reform has been part of political discussions for years. To mitigate the housing shortage, on October 10, 2022, the Luxembourg government adopted Bill 8082 on the property tax, the land mobilization tax and the tax on the non-occupation of housing (Projet de Loi sur l’impôt foncier, l’impôt à la mobilisation de terrains et l’impôt sur la non-occupation de logements).
Bill 8082 amends several laws; its objectives are summarized as follows “the reform of the property tax, which should counteract land speculation, will be linked to the redesign of the ‘new generation’ general development plans (PAG). An exempt bracket on the property tax on owner-occupied properties will be introduced. The reform of property tax will provide an opportunity to replace and simplify the system of the specific municipal tax for vacancy or non-use of certain buildings.”
The Bill not only aims at modernizing the property tax but also proposes to introduce two new taxes to encourage landowners to mobilize building land and unoccupied dwellings, and entails a fundamental reform of the Luxembourg property tax regime.
Thus, the Bill deals with three different types of taxation:
(i) The Property Tax
The Bill proposes to revalue all land, based on an introduction of a regime that is supposed to ensure that such valuation is fair, equitable, objective and transparent. The proposed formula for valuing land uses a number of factors to determine the value of a property, namely:
- the building potential;
- land use patterns;
- geographical location;
- phasing of development (immediate availability or not for construction);
- available surface area;
- number of facilities and services available nearby; and
- general level of property prices.
The amount of Property Tax to be paid depends on the value of the property (see above), if necessary broken down between several owners, the municipal rate and tax rebates applied.
Note that the municipal rate varies between 9% and 11% and the government has established a tax rebate for owners who have their usual residence on the land.
(ii) Land Mobilization Tax
The purpose of this tax is to “encourage the realization of the building potential conferred on the land by municipal regulations”. This tax therefore only becomes payable in the event the land remains in a state of wasteland and thus does not materialize the design reserved for it by the regulations.
For example, a plot of land the size or configuration of which does not allow for the construction of dwellings would not be taxed.
On the other hand, a plot of land having sufficient residual surface area to build a new construction, even if there is an existing construction, would be taxed if the available space is not used.
The amount of the tax is modulated according to the years during which the land is considered unbuilt. The longer a land remains unbuilt, the higher the tax rate will rise.
(iii) Tax on non-occupation of dwellings
The “tax on non-occupation of dwellings” is intended to tax real estate the building potential of which has been realized in the form of a construction, but where this realization of potential does not result in the actual occupation of the building by human beings, such as housing.
In the past, municipalities had the option of introducing such a tax on the local level, but only a few municipalities have made us of this opportunity. The Bill proposes that from now on it shall be a compulsory tax levied by the State.
Under the main rule, a dwelling is considered unoccupied if no natural person is registered in the national register of natural persons for a period of 6 consecutive months. Other cases of non-occupation are also provided under the law.
It is up to a municipality to establish the non-occupancy of dwellings in its territory and provide the necessary information to the ACD, which will set and collect the tax.
The property tax reform, which is a complex endeavor, is not expected to come into force before 2026.
2. Creation of the National and Municipal Registers of Buildings and Dwellings – Bill 8086
On 1 June 2022, the government in council confirmed the principle that the reform of the property tax and the introduction of a tax on the non-occupation of dwellings are intrinsically linked and must be developed in parallel. The collection of the tax on non-occupation of dwellings requires the creation of a National Register of Buildings and Dwellings (Registre National des Bâtiments et des Logements and a Municipal Register of Buildings and Dwellings in each municipality (Registre Communal des Bâtiments et des Logements), as well as the creation of a register of taxation on non-occupancy of dwellings. The latter register is provided under the bill introducing the tax on non-occupation of dwellings.
Two levels of registers will thus be created.
The following data shall be entered in the municipal register:
1° existing buildings and dwellings; and
2° buildings and dwellings whose projects are subject to planning permission within the meaning of Article 37 of the amended Act of 19 July 2004 on municipal planning and urban development.
The entry must be made within eight days of the granting of a building permit.
The data in the municipal register thus shall be the identifier of the buildings and dwellings, and the “reference information”.
The reference information of buildings and dwellings includes data concerning the:
1° geolocation or cadastral reference;
2° address reference;
3° type and allocation;
4° status; and
5° technical characteristics.
A grand-ducal regulation shall specify the details on the reference information, as well as the methods of entry.
For the maintenance of the municipal registers, the following sources may be used to gather reference information:
1° Land Registry and Surveying Administration geolocation data;
2° municipality building permit files; and
3° on-site inspection findings.
For the initialization of the municipal registers, the following sources may be used by the communes to provide the reference information:
1° Administration of Cadastre and Topography geolocation and dimension data, if available;
2° building permit files from municipalities or any other useful source of information available from the communes;
3° on-site inspection findings;
4° data to be provided by the owners at the municipalities’ request.
A national register of buildings and dwellings shall be established with the following data:
1° the unique alphanumeric identification of buildings and dwellings, as well as the registration and maintenance of data relating to them;
2° the provision of data on buildings and dwellings;
3° the preservation of the history of such data; and
4° the centralization of municipal registers of buildings and dwellings at the national level.
The national register data will be derived from the reference information, including the data of the municipal registers of buildings and dwelling.
The municipalities are responsible for any data entered or modified and for any information communicated to the national register, as well as for the conformity of the supporting documents. The municipalities shall also be responsible for any missing data that may be included in the national register.
3. Amendment of the “Baulandvertrag” (building land contract) bill
On October 27, 2022, the Committee on Internal Affairs and Gender Equality tabled new amendments to the Baulandvertrag.
Bill 7139, introduced in 2017, aims to improve the effectiveness of measures for the implementation of urban development plans (“PAG”) to cope with the chronic lack of housing in Luxembourg.
The bill has once again been restated by the amendments, and now revolves around three measures:
(i) Introduction of new easements
The bill as amended introduces new easements, the purpose of which is to limit the mode and degree of land use over time in accordance with the PAG implementation concept.
More specifically, the new easements are divided in 2 categories: those determining a limited servicing period (“CTV”) and those determining a limited construction period (“CTL”).
The implementation of CTV is mandatory each time a municipality is willing to reclassify a plot of land that was not primarily intended for housing into a housing zone or into a mixed zone subject to the elaboration of a specific development plan “new development” (“PAP NQ”).
As from the municipal council’s vote, the owners of the lands subject to the CTV have a maximum of 6 years to significantly begin the servicing works, failing which the land will be automatically reclassified in its prior classification.
The implementation of CTL is mandatory each time a municipality is willing to reclassify into a housing zone or into a mixed zone a plot of land that was not primarily intended for housing.
The owners of the land have a maximum of 4 years as from the municipal council’s vote, or as from the expiry of the servicing delay (PAP NQ) to significantly begin the construction works, failing which, a deferred development zone will automatically be superimposed on the land.
(ii) Introduction of a simplified modification procedure for the PAG
The bill as amended allows the municipalities to use a simplified procedure to amend their PAG, which is supposed to shorten the timeframe from 12 to 7 months.
However, this simplified procedure will only be available for minor adjustments of the PAG which do not affect its comprehensive structure and orientation.
(iii) Amendment of the urban reparcelling procedure
Finally, the bill as amended introduces a new procedure for urban reparcelling which should allow the lands owned by recalcitrant landlords who refuse to cooperate in the servicing of the PAP NQ, but are vital for its development, to be exchanged with plots within the PAP NQ that can be developed at a later stage.
4. Amendment of the Law of 21 September 2006 on residential leases
Bill 7642, tabled on 31 July 2020 by the Luxembourg Ministry of Housing plans to reform the Law of 21 September 2006 on residential leases.
The explanatory memorandum of the bill points out that the continuous rise of residential rents in Luxembourg makes it increasingly necessary to establish new protective measures for tenants and find new mechanisms to combat the housing shortage in Luxembourg.
The initial bill was amended on 10 November 2022 following the filing of government amendments.
In broad terms, the bill now provides for the following changes to the existing legal framework:
(i) Exclusion of verbal leases and compulsory statements
The bill provides that a lease must systematically be documented in writing and must specify the following minimum information:
- amount of capital invested;
- amount of rent (excluding charges) and the statement that the rent asked by the landlord complies with the legal rent ceiling, as well as a statement on the option for the parties to refer to the rental commission in case of a dispute over the rent;
- down payments or lump sums on charges that are to be indicated separately from the rent;
- any potential addition to the rent for furniture to be indicated separately from the rent; and
- the amount of any potential additional service fees.
(ii) Establishment of a mandatory legal regime specific to co-tenancy
The bill aims at establishing a mandatory co-tenancy regime, defined as the rental by several tenants of the same dwelling through a single lease in the context of which the tenants are all held jointly and severally liable to the landlord.
The regime will not apply to couples who are married or in civil law unions but could apply to common-law couples.
The government deems that the adoption of an autonomous mandatory legal regime, characterized by the obligation for the co-tenants to sign a co-tenancy agreement governing their respective obligations, has become necessary given the increase in the number of co-tenancies in Luxembourg, an increase which is promoted by the current shortage of housing available on the Luxembourg market.
(iii) Redesign of the mechanisms for the legal rent ceiling the rent adjustment
The bill introduces new rules regarding the reassessment of the maximum annual rent that an owner of a leased property can receive (from 5% to 3.5% or even 3% of the capital invested, depending on the energy class of the property) and overhaul of the rules on the valuation and discounting of the capital invested, which shall be reassessed more regularly than is done currently.
As indicated above, a lease must contain a statement on the capital invested. The latter shall be determined based on supporting documentation, failing which an expert assessment may be used.
The rent may only be adjusted every 2 years.
(iv) Agency fees
In case of use of a real estate agent in the tenant’s search, the bill introduces a mandatory sharing of the agency fees equally between the owner and the tenant.
Currently, landlords frequently require tenants to support those fees.
(v) Rental guarantee
The maximum rental guarantee that the landlord could ask for would be capped at 2 and no longer 3 months’ rent.
The restitution of the rental guarantee will also have a specific procedure.
With some exceptions (in particular in case of payment arrears), the landlord will be held, on pain of financial penalties, to restitute half of the rental guarantee within 1 month of the end of the lease, and the balance within the month following receipt of the final accounting of the charges.
(vi) Repeal of the concept of “luxury housing“
The bill abolishes the concept of “luxury housing”, defined by the current Article 5 of the Law of 21 September 2006, as all “housing with modern, non-standard comforts”.
The characterisation of “luxury housing” currently allows the parties to contractually exclude a certain number of mandatory provisions which protect a tenant (legal rent and rental guarantee ceilings, in particular).
Recent case law
1.Ruling of the Constitutional Court of 23 December 2022 on commercial leases
By judgment no. 176 of 23 December 2022, the Constitutional Court declared unconstitutional Article 1762-6, paragraph 4 of the Civil Code, which provides that “except in the case of a sublease where investments specific to the sublessee’s activity have been made by the lessee, the rents paid to the lessee by the sublessee may not be higher than the rents paid by the lessee to the lessor”.
The Constitutional Court noted that the restriction imposed by the aforementioned article does not allow an economic operator who has leased commercial premises to sublet them at a price that covers even its operating costs relating to the sublease, nor a fortiori to receive a reasonable profit from the sublease. According to the court, the ceiling on the rent of the sublease imposed by Article 1762-6(4) therefore constitutes a disproportionate restriction on the freedom of trade and industry guaranteed by the Constitution.
However, it is important to note that the ruling does not automatically mean that the unconstitutional norm disappears. Legislators will have to intervene to re-establish conformity of the law with the Constitution.
- Mario DI STEFANO, Managing Partner, Head of Real Estate and Head of Tax
- Alex PHAM, Partner Tax
- Quentin MARTIN, Senior Associate
- Cathy NELSON, Jurist