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Luxembourg tax reform for 2017: bill submitted in front of Parliament

Luxembourg tax reform for 2017

Find out some of the most important measures affecting corporate taxpayers following the Luxembourg tax reform for 2017


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Gael Fra

Following the announcement of the tax reform in February and further clarifications presented in April, on 26 July 2016 the Luxembourg government lodged the draft law for the tax reform before the Luxembourg parliament. Once voted in, most of the measures are expected to enter into force from 1 January 2017 onwards (with some exceptions).

The reform is comprehensive and designed to create social fairness, increase competitiveness, and strengthen employment. It entails the introduction of a significant number of new tax measures concerning both corporate and individual taxpayers in the field of direct and indirect taxes. We have highlighted below some of the most important measures affecting corporate taxpayers. Measures concerning individuals are summarised in a separate newsletter.

Main measures affecting corporate taxpayers

  • The corporate income tax rate is to be decreased to 19% in 2017, and to 18% from 2018 onwards. Thus, the aggregate income tax rate for companies with a registered office in Luxembourg-City would be 27.08% in 2017 and 26.01% in 2018. Furthermore, the corporate income tax rate should decrease from 20% to 15% for corporations with a taxable income below €25,000, favouring start-ups and small enterprises (resulting in an aggregate income tax rate of 22.8%). Finally, a third intermediate tax rate of €3,750 plus 33% of the income exceeding €25,000 (except for 2017 where a 39% rate would apply) should be introduced for companies with a taxable income between €25,000 and €30,000.
  • For income tax and municipal business tax purposes, the carrying forward of tax losses incurred as from 1 January 2017 should be limited to 17 years. The older tax losses shall be deducted first. However, tax losses incurred between 1 January 1991 and 31 December 2016 may still be carried forward without any limitation in time. In contrast to the previous announcements made by the government, there is no restriction to the amount of taxable income that can be reduced annually by the tax losses. 
  • The draft law also aims to increase the complementary and global investment tax credits from 12% to 13% and from 7% to 8% respectively (while the current 2% rate for investments exceeding €150,000 remains unchanged). The investment tax credit for assets approved for the special depreciation regime would be increased from 8% to 9% (while the current 4% rate for investments exceeding €150,000 remains unchanged).
  • In reaction to the European Court of Justice’s decision on 22 December 2010 in the case C-287/10 (Tankreederei), the draft law confirms that the investment tax credit should also be applicable to investments made in another Member State of the European Economic Area (EEA), in line with the current wording of the Circular 152bis/3 LIR. 
  • The tax credit for the hiring of unemployed persons should be extended until the end of 2019.
  • The possibility to neutralise exchange gains (currently foreseen by article 54 bis LIR) should be extended to all companies which have their capital in a foreign currency, effective from 1 January 2016. Based on the bill, taxpayers would now have to file a written request in order to benefit from this, no later than three months before the end of the first financial year as from which the benefit is requested. If companies intend to already apply this in 2016, the request would have to be filed before 1 July 2017.
  • Taxpayers would be allowed to defer, upon option, the deduction of the annual amount of depreciation of an asset. The unused depreciation amount could be carried forward (and would have to be used at the latest at the end of the useful lifetime). As a result, the corporate income tax due by these taxpayers would possibly increase, but this increase could be (partly) offset by a reduction of the net wealth tax (NWT) due (under certain conditions).
  • Effective from 1 January 2016, the provisions booked by certain financial institutions to ensure the guarantee of certain bank deposits (i.e., AGDL) shall no longer be tax-deductible. During a transitional period of ten years, the existing provisions shall be released gradually (under certain conditions).
  • The 0.24% registration duty due on notarial deeds documenting the transfer of debt agreements should be abolished.
  • In order to facilitate the transmission of an individual business to the next family generation or to employees, a tax deferral should be introduced for the capital gain realised on real estate assets (land and buildings) held by the enterprise (under certain conditions). 
  • The amount of the minimum NWT for resident companies carrying out holding and/or financing activities would be increased by 50%, from €3,210 to €4,815. The draft law further clarifies that the last balance sheet of the preceding year should be taken into account for the computation of the minimum NWT.
  • Currently, NWT may be reduced by setting up a special five-year NWT reserve. The draft law clarifies that the NWT reserve booked by allocating the results of year N, in order to reduce the NWT due on year N+1, should be booked at the latest on the closing date of the financial year N+1. Further clarifications have also been provided in case of liquidation, merger, and migration.
  • It would be mandatory for capital companies to electronically file corporate income tax, municipal business tax, and net wealth tax returns as from the tax year 2017.
  • The directors, liquidators, and trustees should be regarded as jointly and personally liable for the VAT payment of the taxable persons they administrate or manage. Therefore, the head of the Luxembourg VAT authorities should be entitled to issue a notice of secondary liability (“décision d’appel en garantie”).

Reinforcement of the fight against tax fraud and money laundering

Several measures are expected to be introduced in direct and indirect tax law in order to better fight tax fraud and money laundering. The purpose of the reform is notably to distinguish between three types of tax fraud: “simple” tax fraud, “aggravated” tax fraud, and tax evasion (“escroquerie fiscale”). Thus, the draft law introduces a new concept of “aggravated” tax fraud for direct and indirect tax purposes which would be considered a criminal offence.

Furthermore, the money laundering infraction would be extended to cases of “aggravated” tax fraud and tax evasion.

It is noteworthy that the undue reimbursement of VAT may also be sanctioned by the Luxembourg VAT authorities from 2017 onwards.

Among the various other proposed measures, one should note that the filing of a deliberately incomplete or incorrect direct tax return and the non-filing of direct tax returns should be subject to an administrative fine. The fine depends on the amount of the understated tax (or unduly reimbursed tax) and should range between 5% and 25% of that amount.

The draft law further provides that penalties that can be imposed in case of late filing of direct tax returns would be increased to a maximum amount of €25,000.

To enhance VAT compliance, the amount of certain administrative penalties shall be significantly increased beginning 2017.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor 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 on such information without appropriate professional advice after a thorough examination of the particular situation.

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