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Luxembourg Pushes Forward Broader Anti-Hybrid Rules

Luxembourg Pushes Forward Broader Anti-Hybrid Rules

Luxembourg publishes anti-tax avoidance legislation to implement EU anti-hybrid rules


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Luxembourg has published legislation to implement an EU Anti-Tax Avoidance Directive (ATAD 2) into its domestic law. These rules were published on August 9, 2019. They will expand Luxembourg's existing anti-hybrid rules to include mismatches with third countries (i.e., non EU countries) as well as a wider array of hybrid mismatches; they apply to Luxembourg taxpayers, including foreign entities with permanent establishments in Luxembourg.

The bill generally confirms the scope of the anti-hybrid mismatches included in ATAD 2; specifically, they would apply to payments made to associated enterprises or related to structured arrangements that trigger either a "deduction without inclusion" or "double deduction" outcome as a result of certain hybrid mismatches between jurisdictions. However, the Luxembourg bill also excludes certain transfer pricing adjustments from the scope of the rules, among other situations.

The bill is subject to the parliamentary process before being enacted. Once enacted, the new rules will generally be effective as of January 1, 2020, subject to certain exceptions.

Transfer pricing adjustments

The new rules do not apply to purely notional "payments" that are deemed to only have been made for tax purposes, such as transfer pricing adjustments on interest-free loans. Mismatches that are solely attributable to those imputed tax adjustments would not generate a targeted deduction without inclusion, under Luxembourg's new rules.

Payments to tax-exempt entities

The Luxembourg bill also clarifies that payments to a tax-exempt entity under either a hybrid instrument or a hybrid entity, do not give rise to a deduction without inclusion outcome.

Non-controlling investors

The bill clarifies that investment funds and certain investment vehicles held by several unrelated investors may be unaffected by the anti-hybrid rules (under the de minimus rule) since individuals or enterprises are not "associated enterprises" if they:

  • Hold (directly or indirectly) less than 10% in the capital of an investment fund, and
  • Are entitled to receive less than 10% of the profit of the investment fund.

In force dates

Once enacted, these rules will generally be effective as of January 1, 2020, with two exceptions:

  • The reverse hybrid provisions (apply as of January 1, 2022).
  • Certain financial instruments issued by banks (apply as of December 31, 2022, under a grandfathering rule).

For more information, contact your KPMG adviser.

Information is current to August 20, 2019. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500

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