On 5 March 2019, the Luxembourg government presented the bill (7450) for the 2019 budget law, which contains, inter alia, the main tax measures announced at the end of last year.
For corporate entities, the bill introduces the much-awaited additional provisions on interest limitation and fiscal unity, as well as the decrease in the global corporate tax rate.
As regards VAT, the focus has been set on the extension of the super-reduced rate (3%).
Please find below a summary of the most important measures:
The bill introduces the much-awaited additional provisions on interest limitation and fiscal unity, as well as the decrease in the global corporate tax rate to 24.94%.
From a personal tax perspective, the budget foresees the setup of a minimum social salary tax credit (« crédit d'impôt salaire social minimum (CISSM) »).
The purpose of this credit will be to increase the minimum social salary by €100 net per month, retrospectively as of 1 January 2019.
The current interest limitation rule, which broadly restricts an entity’s net interest expense deduction to the highest of 30% of its tax EBITDA or €3 million, does not apply on a consolidated basis in the context of a fiscal unity group but only on a standalone basis.
In line with the Luxembourg government’s commitment and in order to address motion PL 7318 of the Luxembourg parliament, the bill amends article 164bis on the fiscal unity regime to implement the option offered by the EU Anti-Tax Avoidance Directive (ATAD 1) to apply the interest limitation rule at the level of the fiscal unity.
The proposed amendment to article 164bis foresees that corporate taxpayers under the fiscal unity regime can apply the interest limitation rule either on a tax consolidated basis (general rule — EBITDA and exceeding borrowing costs determined at the tax group level) or on a standalone basis in line with article 168bis (by derogation — upon request of all fiscal unity members for the whole period during which they are part of the fiscal unity). These new provisions should apply to financial years starting from 1 January 2019.
Taxpayers forming part of an existing tax group shall be able to opt for the derogation regime (standalone approach) upon written request to be filed prior to the end of the first financial year of the period for which article 168bis applies to such taxpayers for the first time.
The new proposed article 164bis basically replicates the provisions of article 168bis with regard to interest limitation (including for example the group ratio rule, the exemption for financial undertakings and the grand-fathering clause applicable to loans concluded before 17 June 2016), subject to some adjustments required for fiscal unity purposes.
Other provisions of article 164bis are reshaped as a result of the introduction of interest limitation, and provide for further clarification in relation to specific aspects (such as the treatment of tax losses, liberalities or investment tax credit) that are currently partially covered in the Grand-Ducal Decree of 18 December 2015 or by an administrative circular.
Decrease in the global corporate tax rate
Following the trends in the international scene, the corporate income tax rate shall be decreased by 1 percentage point, from 18% to 17%. This should lead to a global corporate tax rate of 24.94% (18.19% of corporate income tax including contribution to unemployment fund, plus 6.75% of municipal business tax) for companies established in Luxembourg City as from tax year 2019.
In addition, the tax base subject to the reduced 15% corporate income tax rate should be broadened from €25,000 to €175,000 (i.e. the 15% tax rate should apply if the taxable income does not exceed €175,000).
The main VAT measures relate to the extension of the super-reduced rate (3%), in particular to electronic books, publications and online press, finally aligning the VAT rate applicable to all publications notwithstanding their format. From now on, this super-reduced VAT rate should also apply to essential hygienic items (i.e. tampons and sanitary pads).
Finally, plant protection products authorized for organic agriculture should benefit from the application of the reduced VAT rate of 8%.These measures should apply from 1 May 2019.
The bill must now follow the whole legislative process in the Luxembourg parliament. The final vote is expected to take place by the end of April.
The proposed measures reflect the Luxembourg government’s commitment for a balanced and competitive tax policy.
While additional guidance is still expected as regards the interest limitation rule (for example, its application to securitization vehicles) and some additional measures announced in the government coalition agreement, one must welcome the planned fulfilment of the commitment made last year regarding the application of the interest limitation rule at the level of a fiscal unity.