On 18 December 2018, the Luxembourg Parliament passed the law (the Law) on the transposition of the EU Anti-Tax Avoidance Directive (ATAD 1) into Luxembourg domestic tax law. A request to dispense with the second vote has been filed with the State Council.
Additionally, a bill on the measure of interest limitation and fiscal unity is expected to be issued in 2019, with a retrospective effect from 1 January 2019.
Finally, the bills on the ratification of the new tax treaty between Luxembourg and France and of the Multilateral Instrument (MLI) are expected to be voted on by the Luxembourg Parliament in 2019.
ATAD 1 bill passed
As mentioned in our previous newsletters, bill 7318 transposing the ATAD 1 into Luxembourg domestic law went before the parliament in June this year and was further amended by the Government in early December (see tax alerts 2018-2 and 2018-22). Since then, no further amendments to the bill have been made. The Law thus 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. It also includes two additional measures, namely the modification to the rules on tax neutrality applicable to the conversion of debts and the modification to the domestic definition of permanent establishment. As mentioned before, the business-friendly approach taken by Luxembourg is to respect all requirements from the Directive, but also to use all the exemptions allowed by it (see our previous newsletters for details).
These new measures will apply to financial years starting on or after 1 January 2019, except for the provisions on exit taxation, which will apply to financial years starting from 1 January 2020.
A bill on interest limitation and fiscal unity expected to be issued next year
The Law currently does not foresee the possibility to apply the interest limitation rules at the level of a fiscal unity (and not on a standalone basis), an option offered by the ATAD 1 to EU Member States.
However, the Luxembourg Finance Commission mentioned on 14 December 2018 that the Luxembourg government is committed to introducing this measure into Luxembourg tax law in 2019. This means that the interest limitation rule, which broadly restricts an entity’s net interest expense deduction to the highest of 30% of its tax EBITDA or EUR 3 million, would apply at the level of a fiscal unity and no longer on a standalone basis. A new bill is therefore expected to be released early next year and it would apply with a retrospective effect as from 1 January 2019.
Ratification of the new double tax treaty between Luxembourg and France not expected in 2018
Bill 7390, which relates to the approval of the new double tax treaty between France and Luxembourg issued on 4 December 2018, is not expected to be voted on in 2018. Indeed, as part of the legislative process, the State Council will issue an opinion, which is expected to occur in 2019.
As mentioned in our tax alert 2018-22, the treaty will come into force on 1 January of the year following its ratification by Luxembourg and France.
If ratified in 2019 by both countries, the treaty provisions would therefore apply as of 1 January 2020.
We note that on 17 December 2018, the French Senate approved the tax treaty and sent it to the French National assembly for approval.
Ratification of the MLI not expected in 2018
Bill 7333, which would ratify the MLI, was issued on 3 July 2018 but is also not expected to be voted on until next year.
Luxembourg signed the MLI, which was developed by the OECD to integrate BEPS measures into double tax treaties, in June 2017. After the bill’s ratification, its application per covered tax agreement (i.e. double tax treaties for which the MLI will apply) will depend on the ratification by the other contracting state and on the type of tax concerned, i.e., withholding tax or other taxes. For more details on this topic, please read our tax alerts.
KPMG Luxembourg comment
Luxembourg has implemented the ATAD 1 provisions in a timely manner, and most of its provisions will be applicable as of 1 January 2019.
In addition, one must welcome the commitment made with respect to the application of the interest limitation rule at the level of a fiscal unity as from next year. The next developments in this respect must therefore be watched closely.
The ratification process of the new tax treaty between Luxembourg and France and of the MLI will also need to be closely monitored. The application of their provisions is however generally not expected before 2020.
Any tax advice in this communication is not intended or written by KPMG to be used, and cannot be used, by a client or any other person or entity for the purpose of (i) avoiding penalties that may be imposed on any taxpayer or (ii) promoting, marketing, or recommending to another party any matters addressed herein.The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity.
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