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What global businesses need to know about payroll in Luxembourg
Did you know that by GDP per capita, Luxembourg is the richest country in the world, at more than $140,000 per person per year? And that 70% of its workforce comes from outside of Luxembourg?
This tiny ‘Grand Duchy’ of around 650,000 people is considered a European and global business center, particularly in the world of finance, but by a range of other businesses, too. Bordered by France, Belgium and Germany, and influenced culturally and linguistically by all three, Luxembourg has long attracted major international businesses thanks to a friendly attitude to enterprise, and advantageous tax rates.
Luxembourg is a stable and well-connected place to do business, as a member of the eurozone and the home of the European Investment Bank. However, wages are (understandably) high and some of its payroll and employment requirements are complex. Read on to discover the key facts and basics about running payroll in Luxembourg.
Getting Started
The most common way to set up a business entity in Luxembourg is through a private limited company (the SARL), which comes with a minimum share capital requirement of €12,000 (approx. £10,300; $13,000). The good news is that the vast majority of the startup and registration processes can be completed online.
To set up or expand operations in Luxembourg, companies must first register with either the Minister of Finance, for banking and financial services firms, or the Inspectorat of Labour & Mines (ITM) for other types of businesses. These businesses must receive a business permit from Luxembourg social security authorities to commence operations. You’ll also need to register with the Trades & Companies Register, and complete registration for tax, social security and VAT.
Company executives can set up either resident or non-resident bank accounts in their name, along with social security identification, proof of work status, and payroll forms. These steps should be completed within eight days of arrival in Luxembourg.
Employment Considerations
Workers in Luxembourg are well-protected under current employment laws, with employees receiving extensive protections around job hours, payments, and job stability. These employment protections are explained in detail on the Chamber of Salaries website. Employers in Luxembourg must announce a job vacancy to the National Employment Administration prior to soliciting a candidate or offering a contract.
The standard working week in Luxembourg is 40 hours, over five eight-hour shifts. Overtime work and pay is often defined by collective bargaining, although there are some statutory minimums in place. Employees should not work more than two extra hours per day or eight per week. Overtime should be paid at 150% of salary (unless extra is agreed otherwise), and work on Sunday is not allowed unless permission is given by the authorities.
Notice periods are two months, rising to four months after five years of service and six months after ten years. Probation periods are three months for general workers, six months for certified ‘skilled’ workers, and a year for anyone earning more than €4586.12 per month (approx. £3900; $5000).
Compensation, Bonuses & Severance
As of the start of 2024, Luxembourg’s national minimum wage is €2570.90 per month (approx. £2200; $2800). This rate has risen by approximately 25% in the last five years, so it’s entirely possible that it will go up again in the near future. Lower rates apply to workers under the age of 18. However, employees over 18 who are considered ‘skilled’ have a higher minimum rate of €3085.11 per month (approx. £2650; $3350).
A new regulation introduced at the beginning of 2021 gives a 50% tax exemption to any profit-sharing bonuses employees receive, up to a maximum limit of one-quarter of their annual pre-tax salary.
Severance pay entitlement is one month per five years of service. Long-standing employees can receive six months’ pay for 20 years of service, nine months for 25 years, or 12 months for 30 years. Employers with a headcount of less than 20 can extend notice periods in lieu of severance pay.
Tax and Social Security
Luxembourg has an extremely progressive approach to income tax, in the sense that there are a very large number of different bands. For 2024, the first €12,438 earned per year (approx. £10,600; $13,500) is exempt, after which the first band of 8% kicks in. There are 22 bands in total, and the highest of 42% applies to earnings over and above €220,788 (approx. £189,000; $239,000). Additionally, there is a solidarity tax of 7%, or 9% for those earning more than €150,000 (approx. £128,000; $162,500).
Corporation tax runs at 17.94% for businesses based in Luxembourg City; lower rates apply to businesses turning over less than €200,000 per year (approx. £171,000; $217,000). There is also an additional 7% solidarity tax on top of this. The standard VAT rate is 17%, with a number of reduced rates applicable.
Social security contributions in Luxembourg run as follows:
- Pension: 8% employer, 8% employee
- Health insurance: 2.8-3.05% employer, 2.8-3.05% employee
- Accident insurance: 0.595-1.13% employer
- Mutual health benefit: 0.01-2.98% employer
- Occupational medicine: 0.14% employer
- Dependency insurance: 1.4% employee
Holidays and Leave
Paid leave entitlement in Luxembourg is 26 days per year, although extra entitlements on top of this are given to disabled employees (six days) and those working in mining (three days). Collective bargaining may also deliver extra paid leave entitlement to employees in certain industries. There are 11 days of public holidays in Luxembourg each year; employees should receive days off in lieu when they fall on weekends.
Maternity leave entitlement is 20 weeks, starting eight weeks before the due date. Social security pays this at full salary, although this is capped at five times the current national minimum wage. Paternity leave entitlement is ten days and is also paid for by social security, and while it doesn’t have to be taken in one block, employees should give their employer at least two months’ notice. Paternity leave should all be taken within the first two months after the birth.
Parental leave entitlement is unpaid as such, although parents can receive an allowance through the Children’s Future Fund. Full-time employees can take 4-6 months of full-time leave, or 8-12 months of part-time leave up until the child turns six.
Sick leave entitlement is 26 weeks. Employers cover this at full salary for the first 76 days of sick leave within a 12 month period, although they can claim 80% of this back from the authorities. Social security steps in from day 77 onwards.
In Summary
As a very prosperous nation at the heart of Europe, it isn’t difficult to see why Luxembourg is so popular for foreign businesses. But from a payroll and employment perspective, it comes with its own fair share of complications, especially with the huge array of different bands for income tax, which could well change again in the years to come. Teaming up with a global payroll partner can ensure you have all the up-to-date information you need to stay on the right side of compliance.
This article is for informational purposes only and not intended to convey or constitute legal or any other advice. It is not a substitute for advice from a qualified professional.