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Wednesday, 13 March 2019

Welcoming changes to interest limitation rules for Luxembourg tax unities

On 4 March 2019, the Luxembourg government presented its draft 2019 budget law to its parliament.

This draft budget law includes some measures which the government had already announced when it presented its coalition agreement on 3 December 2018.

The measures included an amendment to the interest limitation rules (as applicable per 1 January 2019 as a result of the transposition of article 4 of the European Union Anti-Tax Avoidance Directive dated 12 July 2016 (“ATAD”) by means of the introduction of an option (not an obligation) to apply article 4 of ATAD at the level of the tax unity rather than at the level of each member of the tax unity. The draft law also intends to clarify some aspects of the regime that were not previously covered by the tax law itself.

In addition, the draft 2019 budget law decreases the nominal corporate income tax rate by 1% (from 18% to 17%) bring the overall statutory income tax rate for companies established in Luxembourg city to 24.94% (including municipal business tax and contributions to the Luxembourg unemployment fund).

Corporate income tax rate decrease

The draft budget law foresees (i) a 15% corporate income tax rate applicable to taxable profits not exceeding Euro 175,000 (presently Euro 25,000), (ii) an rate of Euro 26,250 plus 31% of the taxable profits that exceed Euro 175,000 in the event that the total taxable amount ranges between between Euro 175,000 and Euro 200,000 (so as to arrive at an effective rate of max 17%) and (iii) lowering the headline corporate income tax rate from currently 18% to 17%. The latter results – for companies having a taxable profit in excess of Euro 200,000 in an overall tax rate of 24.94% (for the municipality of Luxembourg). These new rates apply from tax year 2019.

Revised interest limitation rules

By transposition of the ATAD into Luxembourg domestic tax law effective 1 January 2019 (for a more broad coverage of the introduction of ATAD into Luxembourg domestic tax legislation, please click here), an interest limitation rule has been introduced that limits the deduction of net borrowing costs to 30% of the taxpayer’s taxable EBITA (taxable Earnings before Interest, Depreciation and Amortization), with a safe harbor of Euro 3 million. The initial law implementing ATAD into Luxembourg did not foresee in the option laid down in article 4(1)(b) ATAD, i.e. that tax unities may be allowed to determine exceeding borrowing costs and EBITDA at the level of the tax unity itself.

The draft 2019 budget law now introduces the option for tax unities to deduct the exceeding borrowing costs up to the higher amount of 30% of (tax unity) EBITDA or Euro 3 million. This option is subject to the tax unity members jointly “opting in” at the time they request for the formation of the tax unity itself. It is important to note that the tax unity approach applies to all tax unity members and not just to some of them, hence, an all or nothing principle. It is equally important to note that the choice that has been made continues to apply throughout the entire period during which an entity / entities belong to the fiscal unity.

The introduction of a transitory measure for existing tax unities ensure that these can still benefit from this measure by opting in via the submission of a common written request prior to the end of their first financial year to which the interest limitation rules apply for the first time.

The proposed revised tax unity rules contain detailed provisions on how exceeding borrowing costs, taxable EBITDA as well as other notions relevant in the context of determining the impact of the interest limitation rules.

In essence, tax unity members will (continue to) be required to prepare and submit individual / stand-alone tax returns in which they declare their individual amount of borrowing costs and interest income (and other economically equivalent taxable revenues). Subsequently, at tax unity level, these individual amounts will be aggregated. Exceeding borrowing costs of the parent company of the tax unity will then be equal to the excess of borrowing costs over interest income (and other economically equivalent taxable revenues) of all tax unity members, whereby taxable EBITDA of the fiscal unity will equal the aggregate amount of taxable EBITDA of all tax unity members.

The Luxembourg rules on the carry forward of exceeding borrowings costs and unused interest capacity will – for tax unities having opted in – only apply at the level of the parent company.

Finally, the rules dictated that the head of the parent company will have to submit – as part of the fiscal unity tax return – detailed calculations supporting the aggregated outcomes. These calculations will have to be certified by an independent auditor.

Update of other existing tax unity related rules

The newly proposed article 164bis intends to contain all substantial elements of the application of the tax unity regime. For this reason, the draft law does not include any legal basis for a grand-ducal decree. It now includes some elements previously covered in the grand ducal-decree dated 18 December 2015, such as the treatment of carry forward of tax losses by members of the tax unity.

The draft law also clarifies the tax treatment of gifts and investment tax credits at the level of the tax unity, as neither the current tax law provisions nor the grand-ducal decree addresses these aspects.

Contact

For any particular questions, please reach out to your adviser at Tiberghien or any of the authors of this publication.

Michiel Boeren - Counsel (michiel.boeren@tiberghien.com)

Gauthier Mary - Senior Associate (gauthier.mary@tiberghien.com)

Tiberghien Brussels

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