This week, the new Luxembourg government issued amendments to the transposition bill of the Anti-Tax Avoidance Directive (ATAD 1), released the bill of ratification of the new double tax treaty with France, and announced its vision of the future tax landscape in Luxembourg (in its political coalition agreement).
This alert provides you with the key aspects of these important tax news for Luxembourg taxpayers.
Amendments to the transposition bill of ATAD 1
On 4 December 2018, the Luxembourg government issued amendments to bill 7318, which is aimed at transposing the EU Anti-Tax Avoidance Directive (‘ATAD 1’) in domestic tax law (‘the bill’).
As a reminder, the bill includes provisions related to five main topics: interest limitation, exit taxation, a general anti-abuse rule (GAAR), controlled foreign companies (CFC) and intra-EU hybrid mismatches. For more details on the provisions of the bill, please refer to our Luxembourg tax alert
The amendments to the bill mainly incorporate some of the recommendations issued by the State Council on 13 December 2018. Most of these amendments consist of minor technical changes which are not substantial. We have therefore only highlighted below the main changes that represent relevant clarifications for corporate taxpayers. One can however regret that the amendments made to the bill do not address several points for which further clarifications or modifications would have been welcome.
Interest limitation rule
The rule broadly restricts an entity’s net interest expense deduction to the highest of 30% of its tax EBITDA or EUR 3 million.
The amendments clarify some wordings on the grand fathering period, according to which loans concluded before 17 June 2016 will not be impacted by the new interest limitation rules, to the extent that their terms are not subsequently modified. The amendment reverts to the exact wording of the French version of ATAD 1. We therefore expect these amendments to make no major difference in practice.
The rule broadly aims to attribute and tax undistributed profits from a low-taxed foreign subsidiary (held directly or indirectly) or PE (i.e., the CFC) at the level of its Luxembourg parent entity/head office.
The amendments clarify that income of the CFC that is not distributed to the Luxembourg taxpayer is to be included in the Luxembourg tax basis. This means that if the CFC income is distributed by the CFC only to an intermediary holding company, this will be of no relevance and the Luxembourg taxpayer will still need to include the CFC income. Furthermore, it is clarified that (for this purpose) the distribution must occur during the same financial year.
The rule, which relates to cross-border hybrid mismatches involving hybrid entities, hybrid instruments and structured arrangements within the EU, notably provides that when a structure includes a hybrid mismatch with deduction without a corresponding taxation, the EU member state of residence of the recipient shall deny the deduction of such operating expenses.
The amendments replace the terms ‘operating expenses’ by payments. This modification, which was required by the State Council, brings the bill in line with the exact wording of ATAD 1.
The bill still needs to follow the whole legislative process before its final vote by the Luxembourg parliament, which may still occur before year-end.
One step further towards the applicability of the new double tax treaty between Luxembourg and France
the text is available here
(PDF | 2.2Mb) and please refer to our
In the frame of the ratification process, the bill 7390 in relation to the approval of the new double tax treaty between France and Luxembourg was issued on Tuesday, 4 December.
The treaty will come into force on 1 January of the year following its ratification by Luxembourg and France.
The bill now must follow the whole legislative process before its final vote by the Luxembourg parliament. If ratified before year-end by both countries, the treaty provisions would therefore apply as of 1 January 2019.
We note that France has also not yet ratified the new tax treaty.
Further to the elections held in October this year, the new government formed by an alliance between DP (Democratic group), LSAP (Social group) and Déi Gréng (green political group) has just released its vision of the future of Luxembourg. Such vision is enclosed in the coalition agreement released on December 3, which has set the political guidelines to be followed by the alliance for the five-year period to come (2018 - 2023).
We have highlighted below the main elements that may be relevant for Luxembourg taxpayers, although it remains to be seen what concrete measures will effectively emerge.
Corporate income tax
The balanced and competitive tax policy should embed the latest international changes such as the OECD Base Erosion and Profit Shifting (BEPS) project and European Anti-Tax Avoidance Directives (ATAD 1 and ATAD 2). In reaction to the trends observed on the international scene, and especially the decrease in the corporate tax rates of certain countries, the government is committed to decreasing the corporate tax rate by 1 percentage point in 2019 (leading to a global rate of 25.01%) and to broaden the tax base subject to the reduced 15% corporate income tax rate from €25,000 to €175,000.
With respect to the ongoing actions at the international level, the government reaffirmed its commitment to promote a ‘level playing field’. The government is thus favourable to a long-term solution for digital taxation at the OECD level, but is not opposed to a temporary short-term solution at the European level if it contains a clear sunset clause. The government is opposed to a European financial transaction tax (FTT) but could agree on a global FTT that would preserve the competitiveness of the EU market.
Stressing the key role of the investment funds industry in Luxembourg, the government plans to further support the alternative investment industry, notably by ensuring that regulatory and legal frameworks do not constitute barriers to this development.
In this respect, the government is committed not to increase the subscription tax for investment funds and alternative investment funds. Tax incentives should also be envisaged to support ‘sustainable and socially responsible’ investment funds. Lastly, the government mentions that measures will be taken to counteract abusive use of the SICAV-SIF tax regime by funds investing in Luxembourg’s real estate sector.
Value-added tax (VAT)
As regards VAT, focus has been set on the extension of the super-reduced VAT rate (3%), in particular to electronic books, publications and online press, as well as some first necessity hygienic products (tampons and sanitary pads).
Besides, to combat climate change and support energy-efficient renovation, the government would like to analyse the possibility to apply the 3% VAT rate on (a maximum amount of) renovations regarding immovable properties older than 10 years (opposed to 20 years currently). Finally, the government would like to boost circular economy by introducing the application of this VAT rate to reparation works qualifying as eligible under EU law.
The agreement also stipulates that emphasis should be set on the use of new technologies by the tax authorities, which could also impact indirect taxes.
In a nutshell, the new Luxembourg government intends to implement the following personal income tax measures:
- Increase the minimum welfare wage by €100 with a retroactive effect as from 1 January 2019. In this respect and on the same timing, increase the minimum welfare wage by 0.9% on top of the 1.1% adjustment already foreseen.
- Apply a single tax scale on a standalone basis.
- Simplify the personal income tax regime, including the introduction of a lump-sum exemption for benefit-in-kind.
- Revisit the deductible lump-sum travel expenses in light of the intended introduction of the free public transportation in 2020.
- Introduce tax incentives for individuals investing in innovative businesses, as well as study the possibility to encourage investments in the field of sustainable development and climate transition via tax leverages.
- Adapt the current ‘impatriate’ tax regime to develop and attract high-added value activities.
- Consider potential amendment to the ‘carried interest’ tax regime.
- Revisit employee incentives and progressively withdraw the current ‘stock options’ regime in favour of a new regime to foster the participation of employees in the profit of their employer.
- Increase tax incentives for zero- or low-emission vehicles.
- Encourage teleworking for commuters.