On 9 August 2019, the bill transposing the EU Anti-Tax Avoidance Directive 2 (“ATAD 2”) was published by the Luxembourg Chamber of Deputies.
The ATAD 2 was adopted on 29 May 2017 by the Council of the EU, neutralising hybrid mismatches with third countries (hybrid mismatches within the EU being already targeted by the Anti-Tax Avoidance Directive 1 which was transposed into Luxembourg domestic law in December 2018), as well as mismatches involving permanent establishments, imported mismatches, hybrid transfers and residency mismatches.
For more details on ATAD 2, please refer to our tax alert.
The bill confirms the scope of the anti-hybrid mismatches as foreseen by the ATAD 2: payments made to associated enterprises or related to structured arrangements, triggering “deduction without inclusion” or “double deduction”, as a result of hybrid mismatches involving hybrid instruments, hybrid entities, permanent establishments, imported mismatches, hybrid transfers and residency mismatches.
Some situations are expressly out of scope.
The Luxembourg bill confirms the definition of payments as construed by the international standards (OECD BEPS working groups). This definition of “payments” clearly exclude payments that are only deemed to be made for tax purposes (transfer pricing adjustment on interest-free loans for instance). The bill further concludes in its commentaries that the mismatches exclusively attributable to those tax adjustments shall not generate a targeted deduction without inclusion.
The Luxembourg bill provides a very welcomed clarification for investment funds. To make a long story short, investment funds, held by several unrelated investors and for which the interests are managed by the same person, could benefit from the ‘de minimis’ rule and could therefore not be affected by the anti-hybrid rules.
Indeed, “associated enterprises” refers inter alia to the concept of ‘acting together’ which shall be limited by the ‘de minimis’ rule under the current proposition of the Luxembourg Government. Individual or enterprise holding, directly or indirectly, less than 10% in the capital of an investment fund, and who is entitled to receive less than 10% of the profit of the latter investment fund should not qualify as “associated enterprises” under the ‘acting together’ concept as they are deemed not to control investments made by the investment fund.
The Luxembourg bill also clarifies the situation for payments to tax-exempt entity under both hybrid instruments and hybrid entities cases. It specifies in the commentaries that payments to tax-exempt entity (e.g. tax-exempt investment funds or pension funds) should not give rise to a deduction without inclusion given the specific tax status of those investors in their respective jurisdictions. This analysis could be transposed to Luxembourg entities which are tax-exempt under specific regulations.
The provisions of the bill will come into effect from 1 January 2020 with the exception of (i) the reverse hybrid provisions which will apply as from 1 January 2022 and (ii) certain financial instruments issued by banks which benefit from a grand-fathering rule until 31 December 2022.
The bill must now follow the legislative process.
KPMG Luxembourg’s dedicated tax professionals can help you in assessing any potential impacts of ATAD 2 to your organization and perform with you a health-check – act now, the new legislation will apply in a few months!
© 2020 KPMG Luxembourg, Société coopérative, a Luxembourg entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.