6. Marriage and PACS

Marriage in Luxembourg

Monthly taxation

• First spouse: Taxed according to tax class 2.
• Second spouse: Subject to a flat rate of 15%, regardless of income.

In Luxembourg, the spouse with the higher income is generally assigned to tax class 2, meaning their salary is taxed according to the progressive scale. The other spouse is taxed at a fixed rate of 15%, no matter how much they earn.

The difficulty is that this 15% flat rate is often too low compared to what the couple will actually owe once both incomes are combined. As a result, the monthly withholding on the second salary may not cover the real tax burden.

It is important to note that the monthly withholding after marriage is only a prepayment mechanism. It does not reflect the final tax due. The annual tax return will establish the couple’s actual liability, taking into account both spouses’ incomes, deductions, and eligible tax benefits.

Tax declaration for married couples

Married couples can choose from several taxation options depending on their situation:

• Joint taxation (class 2): The incomes of both spouses are added together and then divided by two (splitting), which can reduce the total tax amount when incomes are unequal.

• Individual taxation (class 1): Each spouse is taxed separately on their own income.

• Individual taxation with reallocation: Allows certain tax benefits or deductions to be redistributed between spouses to optimize overall tax burden.

The choice between joint or individual taxation must be indicated in the annual tax return and can be changed each year depending on financial and family circumstances.

Tax benefits related to marriage

By opting for joint taxation, married couples may benefit from:

• Doubled tax deductions: Certain deduction ceilings apply to the couple, not to each individual.

• Additional allowances: Possibility to benefit from the extra-professional allowance of 4.500€ on the total taxable income.

• Optimization of tax burden: The splitting system can reduce the overall tax rate.

Civil Partnership (PACS)

The PACS (Registered partnership) is a legal union between two people who live together and wish to officialize their partnership without marrying. PACS provides legal rights and obligations similar to those of married couples while having certain specific fiscal and administrative features.

Monthly taxation

When entering into a PACS, partners retain their individual tax status. This means that each is initially classified in tax class 1 (or 1a if one partner has a dependent child), which may result in higher withholding from their monthly salaries.

Tax declaration for PACS partners in Luxembourg

Although monthly taxation does not immediately reflect PACS status, partners can benefit from joint taxation (class 2) by submitting a joint tax return to the tax authority. This option allows the incomes of both partners to be combined and to benefit from a more favorable overall tax rate.

Tax declaration for PACS partners abroad

Couples PACS abroad do not need to have their PACS recognized in Luxembourg to benefit from Luxembourg tax advantages. They can submit a joint tax return and opt for joint taxation as long as they meet the eligibility criteria.

Conditions for joint taxation (class 2)

• Be PACSed from January 1 to December 31 of the relevant tax year.
• Share a common residence throughout the tax year.
• Tick the required box in the tax return.

Tax benefits

By opting for joint taxation, PACS partners may benefit from:

• Doubled tax deductions: Certain deduction ceilings are doubled, reducing the household’s total taxable income.
• Additional allowances: Possibility to benefit from the extra-professional allowance of 4.500€.
• Optimization of tax burden: The splitting system allows household income to be distributed, which can reduce the overall tax rate, especially when partners’ incomes are unequal.

End of PACS and tax impact

In case of PACS dissolution, partners can no longer benefit from joint taxation (class 2) for the year of dissolution. They are then taxed individually, usually in class 1 or 1a, depending on their situation.

Differences between marriage and PACS

It is important to note that, with equivalent income, the final amount of tax due is the same whether a couple is married or PACSed, as soon as they opt for joint taxation in class 2. In other words, whether married or PACSed, the final calculation applied by the tax authority is based on the same splitting rules and results in the same outcome.

The differences mainly lie in how this taxation is applied during the year and in the administrative steps required to benefit from it.

Key distinctions

• Married couples are automatically considered jointly taxable in class 2 unless they explicitly request separate taxation.

• PACS couples, by default, are taxed separately in class 1 and must make an explicit annual request to benefit from class 2. This request must be submitted within the tax return.

• To be eligible for class 2, partners must have entered into their PACS by December 31 of the previous year and share a common address during the year for which they are doing a tax return.

• Marriage is recognized retroactively for the entire calendar year, whereas PACS is not automatically recognized. This can influence the period during which the couple can claim joint taxation.