We have here briefly detailed the main aspects of the different amendments included in the Draft Law. For more details, we invite you to contact your usual adviser with Tiberghien.
The main topics included in the Draft Law are:
- Limitation on interest deduction;
- General Anti-Abuse Rule (“GAAR”);
- Controlled Foreign Companies (“CFCs”);
- Hybrid mismatches;
- Transfer of assets, activities or residence.
Limitation on interest deduction
Articles: art. 168bis and 172bis of the Luxembourg income tax law (“LIR”)
Entry into force: 01.01.2019
The Draft Law intends to limit the deduction of excess borrowing costs. These are defined, for a given year, as the positive difference between potentially deductible interest expenses (and economically equivalent expenses) incurred by the taxpayer less taxable interest income (and economically equivalent income).
If, for a given year, this difference is negative (i.e. the company has realized a profit on interest income and expenses), all interest expenses incurred by the taxpayer are fully deductible and the difference constitutes an unused interest capacity that could be carried forward by the taxpayer for five years.
If the difference is positive (i.e. the company is in a loss position on interest income and expenses), non-excess borrowing costs are fully deductible. Excess borrowing costs are deductible on the higher between EUR 3 million and 30% of the EBITDA of the taxpayer for the year, each being increased by the unused interest capacity of the five preceding years. The remaining part of the interest expenses is not deductible for the year in question but may be reported as excess borrowing costs for the subsequent years without time limitation.
The limitation on interest deduction applies to Luxembourg corporate taxpayers and permanent establishment of non-Luxembourg resident corporations with the exception of financial entities (including securitization vehicles, SICAR, etc.) and so-called stand-alone entities, as defined in the Draft Law which corresponds to the definition hereof as included in the Directive. The Draft Law also provides that the limitation would not apply to a taxpayer which is a member of a financial consolidation, as long as its ratio between equity and total of assets is in line (no lower than 2%) with the same ratio at consolidated group level.
According to the parliamentary work, in presence of a tax unity in the meaning of article 164bis, the limitation on interest deduction should be computed – and the 30% EBITDA rule with Euro 3 million safe-harbor should be applied – individually at the level of each member of the tax group rather than at the level of the unity itself.
Finally, the Draft Law provides for some specific rules linked to the type of loans received by the taxpayer. There would be no interest deduction limitation for exceeding interest payments in relation to loans granted before June 17th, 2016 (if not amended since) and those related to loans concluded in the framework of qualifying public infrastructure projects. The main question in practice remains when an existing loan would be considered to have been amended and hence would no longer be grandfathered.
General anti-abuse rule
Articles: §6 StAnpG
Entry into force: 01.01.2019
The Luxembourg general abuse rule applicable to all taxes in general and contained in §6 SteuerAnpassingsGesetz (“StAnpG”) is intended to be updated and completed in order to bring it in line with the GAAR inserted in the Directive. Under the new version, abuse of law consists in three different elements:
- Use of form and institution of law; this corresponds to the concept of arrangement or a series of arrangements used in the Directive;
- Purpose of the arrangement is to obtain a by-pass or a reduction of its tax charge against the purpose of the tax law;
- The arrangement is defined as “non-genuine” when, having regard to all the relevant facts and circumstances, it was not chosen for sound commercial reasons that reflect the economic reality.
In case of abuse of law, Luxembourg taxes would be levied as if the arrangement would not have been put in place. The Draft Law also provides for the credit of the taxes suffered under the disregarded arrangement.
As general anti-abuse rule, §6 StAnpG covers all Luxembourg tax laws, including tax laws and grand-ducal decrees. It is however overridden by specific anti-abuse provision such as those contained in article 147, draft article 164ter and 166 LIR. The general anti-abuse rule remains applicable even if an arrangement is not considered abusive under a particular anti-abuse provision.
New CFC rules
Articles: art. 164ter LIR
Entry into force: 01.01.2019
The purpose of new article 164ter LIR is to allow Luxembourg to tax, under certain circumstances, a Luxembourg corporate taxpayer on undistributed income from certain non-resident companies. The Draft Law provides for the Luxembourg taxation of the undistributed income of derived by a foreign subsidiary provided the following conditions are cumulatively met:
- First, the foreign company should be a subsidiary of the taxpayer; i.e. the Luxembourg taxpayer holds directly or indirectly 50% of the share capital or voting rights of the foreign company or is entitled to receive more than 50% of the profit of the foreign company;
- Second, the foreign company should be subject to a low level of taxation; i.e. income tax effectively paid by the foreign company should be lower than 50% of the Luxembourg corporate income tax (currently set at 18%) that the foreign company would have paid in Luxembourg had it been a Luxembourg taxpayer;
- Third, the income is derived from non-genuine arrangement implemented with the main purpose to obtain a tax advantage; the definition of non-genuine arrangement under draft article 164ter is different from those of §6 StAnpG.
If the three conditions are all fulfilled, only the income of the foreign company as derived from such non-genuine arrangement should be included in the taxable income of its Luxembourg parent entity according to modalities provided for in the Draft Law. No inclusion is required if the accounting profit of the foreign company is lower than EUR 750.000 or 10% of its operating costs for the tax period.
The Draft Law also provides some mechanism to eliminate certain cases of double taxation that could result from the application of the CFC rule, i.e. a capital gain would not be taxable up to the amount of the income already taxed under the CFC legislation, and the undistributed income that has already being taxed under the CFC rules would not be taxable when actually distributed.
Articles: art. 168ter LIR
Entry into force: 01.01.2019
The Draft Law aims at limiting the deduction of expenses borne by a Luxembourg company, when, by virtue of a hybrid mismatch, the same expense or loss (i) is also deductible in another Member State or (ii) the income corresponding to this expense is not included in the tax base of its recipient in another Member State.
The Draft Law targets situations where a Luxembourg company enters into an arrangement with another party from another Member State and, as consequence of differences in the legal qualification of an instrument or entity, expenses borne by the Luxembourg company are either also deductible in the EU country of residence of the other party or give rise to an exempt income.
In such cases, the expenses borne by the Luxembourg company are not deductible up to the extent of their deduction or non-inclusion in the other Member State.
In order to ensure the deduction of those expenses, the Luxembourg corporate taxpayer may be requested by tax authorities to evidence that the expenses have been treated as non-deductible or as a taxable income in the other Member State.
It is worth mentioning that this article is currently limited to the hybrid mismatches between Luxembourg and EU Member States. However, the scope of this article is expected to broaden in the near future when Luxembourg will be required – like all other EU member states – to implement ATAD 2.
Transfer of assets, activities or residence
Articles: art. 35, 38 and 43 LIR; §127 AO
Entry into force: 01.01.2020
The Draft Law aims transfer of assets, activities and residence in Luxembourg and out of Luxembourg.
For transfer towards Luxembourg, new draft articles 35 and 43 LIR provide that the assets transferred to the Luxembourg company are valuated at the value retained in the jurisdiction of origin unless this value does not correspond to the operating value. In addition, the acquisition date of these assets is the date of their effective acquisition (instead of the date of their transfer to Luxembourg).
For transfer outside of Luxembourg, new article 38 LIR provides that the transfer of certain assets or activities outside of Luxembourg are to be considered as disposal and will then entail the taxation of latent capital gains in the following situations:
- Transfer of assets (i) from a Luxembourg permanent establishment to foreign head office or another foreign permanent establishment or (ii) from Luxembourg head-office to foreign permanent establishment;
- Transfer of residence or legal seat outside of Luxembourg, without leaving a permanent establishment in Luxembourg;
- Transfer of Luxembourg permanent establishment outside of Luxembourg.
At present, following the ECJ decision in the National Grid Indus case of 29 November 2011 (C-371/10), the Luxembourg tax law allows for a broad tax deferral in case of transfer of the seat of a company or a permanent establishment outside of Luxembourg, allowing taxpayers, upon request and under certain conditions, an (in time) unlimited deferral of the Luxembourg tax on any unrealized profits included in the assets subject to the aforementioned transfers, where the transfer takes place to an EU/EEA country or any other country with which Luxembourg has concluded a tax treaty containing an OECD (article 26) compliance exchange of information clause. In line with the Directive, the Draft Law / Bill of Law now amends this tax deferral as provided for in §127 of the Luxembourg General Tax Law (Abgabenordnung) relating to the payment deferral upon exit. The scope of application has been restricted in time (five years in the current Draft Law) and as regards to the countries of exit (EU Members and EEA jurisdictions under certain conditions).
Articles: art. 22bis LIR; §16 StAnpG
Entry into force: 01.01.2019
Under the Draft Law, the conversion of a loan into shares of the debtor will be deprived from the tax neutrality provided for by article 22bis LIR. As a result, the conversion will no longer be considered as a tax neutral exchange of the loan against shares issued by the debtor.
The definition of permanent establishment under Luxembourg law has been completed. The new definition now includes that, in presence of a double tax treaty, the existence of a permanent establishment should be determined in accordance with the double tax treaty. The purpose of the amendment is to prevent any difference of interpretation between Luxembourg and the other State on the subject.
Tiberghien Luxembourg remains committed to monitoring the progress of the implementation of ATAD 1 within Luxembourg. If you would like more information, then please contact Michiel Boeren, Gauthier Mary, Inès Losciale or Marie Fraycinet, or your trusted adviser at Tiberghien Luxembourg.
Michiel Boeren - Counsel (firstname.lastname@example.org)
Gauthier Mary - Senior Associate (email@example.com)
Marie Fraycinet - Associate (firstname.lastname@example.org)