Tax and social security for the self-employed
It can be hard to navigate the system of social security and tax contributions if you set up as an independent, sole proprietor or in partnership to run a small business. We guide you through the steps below.
If you are an independent, freelancer or self-employed in Luxembourg, you must fill out a tax declaration for the year 2021 by 31 March 2022. If you work for yourself, but own a limited company, you may need to pay corporation tax.
For more information on tax returns, including income bands and tax cards and allowances, read our article Understanding Tax.
Types of self-employment
Freelancers, independents and sole proprietors don’t pay corporation tax because the money they make is regarded as personal income. If you are married or in a registered civil partnership, you will need to combine your tax return with the income of your spouse or partner and fill out a personal tax return jointly. You can now fill out your tax returns online on MyGuichet.
If you have set up a limited company, SARL or a partnership, you may be asked to pay corporation tax. There’s more on this later in the article.
Social security for the self-employed
You must pay social security contributions if you are self-employed as a craftsperson or trader, in a liberal profession (such as an architect, accountant or doctor), or in a profession which does not require a permit such as a freelance writer or tutor.
As with those working for companies, your social security contributions cover sickness, maternity, disability, death, old age, and occupational accidents, plus family allowances and unemployment benefit. If you are self-employed and paying social security contributions, your family is also eligible for health insurance cover.
Independents can opt to pay towards their pension in a percentage that reflects their income – so if the income is low, the pension contribution can be low.
They can also voluntarily register with the Employers Mutual Insurance Scheme (Mutualité des employeurs or MDE) to cover for financial cost due to loss of income due to sickness. This must take place before 1 January in any given year and you will be covered from that date. New registrations for this cover can only take place after a period of at least 12 months of social security contributions. You can end these contributions at any time by writing to the CCSS to request this.
You can find out if you need a business permit to set up as self-employed here. Note, third country nationals (non-EU, including UK nationals not living in Luxembourg before 31 December 2020), who wish to work as self-employed and reside in Luxembourg, must first apply for a residence permit for a self-employed person. You can find out more here.
At what income do CCSS contributions kick in?
If you are self-employed and earn less than 1/3 of the social minimum wage (€2,256 per month if 18 years or more and unskilled, so €752 per month or approximately €9,000 per year) then you don’t need to pay contributions and you don’t need to fill in a tax return, unless you are married or in a civil partnership with someone who is earning and paying social security and tax in Luxembourg. Then you add your income to your partner's or spouse's income on the tax return.
In some EU countries, self-employed people pay the same flat rate of social security as those employed, depending on their income. This is not the case in Luxembourg. In general self-employed people must contribute both elements (as the worker and the employer), meaning that your CCSS contributions will be between 24-28% depending on your income, which is a substantially higher CCSS contribution than that of an employee working for a company.
This might explain why there are not many independents in Luxembourg (less than 9%), and it is particularly hard for those earning below the social minimum wage but above a third of that (when no CCSS contributions are required). You can read a personal take from a self-employed person with an income of half the minimum wage here.
Self employed people who work for companies in more than one EEA country must be registered to pay social security in one country. Usually this is paid in the country you reside, so long as you conduct at least 25% of business in that country or your business is located in your country of residence.
To register for social security, you must submit a “Declaration of the start of employment for self-employed persons” form to the CCSS. If you already filled out a business permit on MyGuichet, you can use a pre-completed form which will be automatically generated. If you’re a partner in a business with more than a 25% share, you must complete a different form, entitled “Declaration of start of employment for salaried workers”.
If you run a business and your spouse or civil partner helps, they must be registered as such, or as an employee. You can find more information here.
Growing your business and CCSS contributions
Social security contributions are usually calculated on the basis of the last known net taxable income, so your last tax return, or for a newly insured person, it may be based on the social minimum wage for an unskilled worker (as provided above).
If you are growing your income, this means that unless you re-adjust your contributions as your gross income grows, you will be asked to pay an additional amount in CCSS contributions based on a new tax return filed with a higher gross income. The CCSS usually gives you some time to pay this or you can pay it in instalments.
You can adjust your expected income at any time with the CCSS, which will send out an annual letter specifying the income that will be used to calculate your contributions. You can also adjust downwards depending on your predicted income, or should you know already that you will make less than in previous years. You will need to provide proof that your income is different.
If you work for a non-profit association in the cultural or sports sector, you can be exempted from health and pension contributions, if you receive an income of less than two thirds the social minimum wage.
Income tax for the self-employed
Freelance income tax rates are split into 23 rates in exactly the same way they are for those employed with a permanent or fixed contract, working for a company or employer. You can find the rates here, but most importantly you start paying tax when you earn €11,266 (at the lowest rate of 8.56%) and it scales upward in income brackets to a top rate for earnings of €200,005 and more (at a tax rate of 45.78%).
Tax for partnerships
As with sole proprietors, partners usually do not need to pay corporate tax, and profits are taxed as personal income. However, if the partnership is limited by shares, then corporate tax will apply to any shareholder profits.
Tax on limited companies
If your company is registered in Luxembourg and exists as a legal entity you will need to pay corporation tax, although you may pay personal income tax on your salary. This applies to limited liability companies.
You may be liable for communal tax, which is paid by commercial businesses and partnerships on their operating profit. However this tax does not apply to freelancers or sole proprietors in agriculture or liberal professions. You can find out more about communal tax here.
When you register as a freelancer or a proprietor or partner you will be asked to categorise your work or business into commercial, skilled craft and trade or specific professions.
If you are self-employed, you can also claim or offset additional expenses on your tax return. The obvious is office supplies, stationery, ink, paper, and IT equipment such as laptops or printers (which can be claimed for up to €870 in one year or a larger amount on a sliding scale per year) and a proportion of your telephone and mobile phone bills.
However, if you work from home, you can also claim a proportion of your energy bills and rubbish collection, plus car tax, car servicing, tyre changes and the cost of travel. You can also deduct membership fees to trade associations.
Like employed people, you can also include life insurance premiums, debt loans, rents or mortgage interest (up to €2,000 per year in the first six years, then €1,500 for next five years and €1,000 for the remaining years). You can also deduct for private pensions, charitable contributions, and alimony payment (up to €24,000). You can find a full list of these deductions in our article Understanding Tax.
Self-employed people and freelancers are also entitled to a credit of €300 on income tax.
If your company has an annual income of less than €175,000 you will pay a corporate tax of 15%. You will also pay a solidarity tax of 7%, and if you operate or reside in the Luxembourg City area you pay an additional tax of 6.75%.
If your business makes more than €200,000 gross income per year you must pay corporate tax at a rate of 17%. The rate for a sum in between these two figures is based on a percentage of profit on the amount between the two.
Unlike freelancers and sole practitioners, you will pay corporate tax in advance every quarter on the 10th of the month in March, June, September, and December. If you overpay (i.e you earn less than in the previous year) you can claim the money back or have it deducted from future tax payments.
Value Added Tax registration is compulsory for all businesses in Luxembourg with an annual turnover of more than €35,000. The normal rate of VAT (usually passed on directly to customers) is 17%, although it is 8% for heating, clothes, hairdressing and cleaning. A rate of 3% is charged for food, non-alcoholic beverages, children’s clothes and books.
You should pay your tax bill within a month of receiving it, or pay a penalty of 0.6% each month after that date. The same applies to late payment of advance corporate tax quarterly payments. You can contact your local tax office to ask for an extension to file your tax returns.
More information on tax and social security
For more information on where to fill out tax returns online or on paper, allowances, tax brackets, tax categories and online tax services, read our article Understanding Tax.
You’ll find forms to declare you are self-employed and more information on social security contributions here.