Luxembourg continues its transition towards a tax system aligned with its climate objectives, in particular by revising the rules governing the benefit in kind (BIK) for company cars.

This reform is intended to encourage the adoption of low-emission vehicles while progressively penalising internal combustion engine vehicles.

It is bound to have a direct impact on businesses and their human resources managers, who must reassess the structure of remuneration packages, where the company is often a key element.

Here is an overview of the main changes.

In 2022, new rules for calculating the benefit in kind were introduced in Luxembourg to boost electric and hybrid vehicles

In 2022, a grand-ducal regulation of 12 May 2022 introduced new rules for determining the value of the benefit resulting from the provision of a company car.

The objective was clear:  provide fiscal incentives for electric and hybrid vehicles while making conventional models less advantageous. Implemented progressively as of 2023, these measures adjust the BIK according to CO₂ emissions and the type of engine. By way of reminder, the amount of the BIK is calculated based on the value of the new car (including options and VAT, minus discounts) multiplied by a percentage determined by the CO₂ emission rate and engine type (see tables below).

The reform was scheduled in two stages: an initial transitional phase starting in 2023 and a second phase as of 2025.

Before 2022: Old regime

This regime applies to cars registered before 2022 and to those registered in 2022, for which  a contract was signed before 31 December 2021.

Please note: For cars registered in 2022 with a contract signed after 31 December 2021, the old regime applies only until the end of 2022. The transitional regime applies to these vehicles as of 1 January 2023.

Since 2023: Transitional regime

Under this regime, the BIK rate increases by 0.2% for most categories of cars with CO₂ emissions exceeding 80 g/km. Furthermore, the maximum rate of 1.8% now applies to company cars with CO₂ emissions exceeding 130 g/km, reduced from the previous threshold of 150 g/km. This maximum rate of 1.8% represents the average limit beyond which a company car becomes less financially advantageous for an employee compared with purchasing the car privately or through private leasing.

A minimum rate of 0.5% is maintained for zero-emission vehicles, such as purely electric and hydrogen fuel cell cars. This 0.5% rate however applies only to cars with low electricity consumption. For vehicles with an electric energy consumption exceeding certain criteria, a rate of 0.6% is applied.

The transitional regime applies:

• As of 1 January 2023, to cars registered in 2022 where a contract was signed after 31 December 2021;
• To all company cars registered in 2023 and 2024.

Please note: This regime continues to apply to leasing contracts signed until the end of 2024, provided the car is registered before the end of 2025.

Projections as of 2025 or 2027: New regime

Initiated in 2023, the final phase of the reform will enter into force in 2025 for combustion vehicles and in 2027 for zero-emission vehicles.

Combustion and hybrid vehicles

Combustion vehicles will be subject to a flat BIK rate of 2% as of 2025, irrespective of their environmental efficiency. Employees using such vehicles will experience a significant increase in their  benefit in kind.

This new regime applies to:

• Company cars newly registered as of 1 January 2025, for which no contract was signed before 31 December 2024;
• Vehicles under leasing contracts that naturally expire after 31 December 2024 and are extended as of 1 January 2025.

100% electric or hydrogen fuel cell vehicles

On 29 November 2024, the Luxembourgish government announced an extension of the transitional regime for zero-emission vehicles. Originally planned for 2025, the increase in BIK rates to 1% or 1.2% has been deferred by two years. This decision reflects a strategy to support the decarbonisation of vehicle fleets while maintaining attractive incentives for companies and employees.

The current rates of 0.5% or 0.6% will consequently remain applicable to electric vehicles registered up to 31 December 2026 (or 31 December 2027 if a contract was signed before 31 December 2026).

These rates will double to 1% or 1.2% for electric vehicles newly registered as of 1 January 2027, for which no contract was signed before 31 December 2026.

The same measures apply to hydrogen fuel cell vehicles.

*Subject to the publication in the Official Gazette of the Grand-Ducal Regulation announced by the Government on November 29, 2024

Conclusion

Luxembourg has shown a clear commitment to realign its fiscal system to  environmental goals. The country is actively promoting the energy transition by maintaining favourable tax conditions for electric vehicles and increasing fiscal pressure on combustion vehicles.

HR professionals play a crucial role in supporting this shift by adapting internal policies or by raising employee awareness. It is essential to reassess company car policies so as to incorporate more electric vehicles and address the expectations of employees for sustainable mobility. By aligning their fleets with environmental standards, businesses can demonstrate their ecological commitment and enhance their corporate social responsibility positioning.

In summary, find below two tables summarizing the application over time of the different regimes based on the vehicle’s type of motorization.

100% electric and hydrogen fuel cell vehicles*

*Subject to the publication in the Official Gazette of the Grand-Ducal Regulation announced by the Government on November 29, 2024

Combustion and hybrid vehicles