Areas of Strength

• Luxembourg reports annually on tax expenditures (TEs) and prepares multi-annual financial programmes. This provides greater transparency and predictability on public finances and their evolution. Luxembourg also reports an annual list of TEs and their estimated nominal values. In 2025, TEs in Luxembourg amount to 2% of GDP (EUR 1 714 million). Moreover, based on simulations, Luxembourg’s tax expenditures raise disposable income for households and, to an extent, reduce inequality.
• Luxembourg undertakes several activities aimed at effective VAT collection and tax recovery. Luxembourg has a relatively low level of tax arrears (13 percentage points below EU average). This is influenced by the provision of online information on VAT registration and online registration options, verification of applicant’s identities, and preliminary checks. Furthermore, different IT subsystems of the tax administration are linked, allowing for better oversight. Luxembourg also has sound mechanisms for VAT dispute resolution in place.

Areas for Improvement

• Luxembourg’s progress with digitalising its tax administration has been slow. E-filing rates for corporate income (CIT) and personal income tax (PIT) returns are low compared to EU averages, for CIT e-filing rates have even slightly decreased in recent years. Pre-filled personal income tax (PIT) returns are not available for all households and not available for VAT or CIT. The Luxembourgish Court of Auditors has also raised concerns in this domain, pointing to the fact that the tax administration relies heavily on paper-based processes, also handled by fax.
• Luxembourg has limited activity in the field of tax gap estimation. For the VAT compliance gap, estimates in the 2025 edition of the VAT gap in Europe study fall outside plausible ranges. Moreover, to the knowledge of the Commission, the country is not active in the estimations of tax gaps in the field of direct taxation. Proxy indicators for tax gaps (e.g. difference between Effective Tax Rates (ETR) and Statutory Tax Rates (STR)) for corporations, or reports from the Court of Auditors for personal income taxation, indicate that there is scope for Luxembourg to engage in tax gaps estimations in the future.
• Certain TEs in Luxembourg contribute to economic inefficiencies. These TEs include the deductibility of interest charges on bank loans for personal real estate, cross-border tax credits, and housing tax credits for registration and transcription fees. Such subsidies for home ownership can contribute to inflating pre-tax housing prices, which benefits wealthy owners and investors at the expense of less well off. Furthermore, the absence of effective recurrent taxation on buildable land and property also provides incentives for land and property hoarding, given the lengthy period of sustained strong price growth until the recent downturn, deepening the imbalance between supply and demand on the housing market, and amplifying upward price pressure.

Tax Complexity

Luxembourg ranks 4^th out of the 27 Member States in the Tax Complexity Index (‘TCI’), where a higher rank corresponds to lower tax complexity. The TCI is based on the Global MNC Tax Complexity Project, a joint research project of Deborah Schanz (LMU Munich) and Caren Sureth-Sloane (Paderborn University). The TCI 2024 places Luxembourg 3^rd among the Member States with regards to Tax Framework Complexity, and 5^th with regards to Tax Code Complexity. This suggests that overall, both tax processes carried out by the tax authorities and the structure of the tax regulations are rather efficient. According to the authors, Luxembourg scores particularly high in areas such as the regulation of transfer pricing or enactment processes.

The full Commission Staff Working Document of the Mind the Gap Report - Challenges and opportunities for tax compliance and tax expenditure in the EU regarding Luxembourg can be found here.

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