Luxembourg participation exemption regime
If there is no transition period, tax exemption of United Kingdom (UK) participations and related income — or Withholding Tax (WHT) exemption on dividend payments to UK parents — would need to meet the comparable tax test post-Brexit.
Without a transition period or confirmation that UK corporations would meet the comparable tax test based on the UK corporate tax system, this would trigger uncertainty about how the participation exemption is applied — potentially causing disruption. Currently, they are eligible because they qualify under the European Union (EU) Parent-Subsidiary Directive.
It is likely that UK corporations will meet the comparable tax test based on the current and forthcoming tax rates that apply in the UK. However, additional confirmation from authorities or lawmakers would be useful.
Under the horizontal fiscal unity, a foreign non-integrating parent must meet the comparable tax test and act either directly as an European Economic Area (EEA) resident or through a Luxembourg/EEA Permanent establishment (PE).
UK corporations not acting through a Luxembourg/EEA PE in a horizontal fiscal unity framework would not qualify as non-integrating parents if there is no post-Brexit transition.
If there is no transition and/or grand-fathering measure, existing tax consolidations with UK non-integrating parents would end, triggering an immediate cost — possibly retroactively if the required five-year fiscal unity period was not fulfilled before Brexit.
Any clarification from the Luxembourg Tax Authorities (LTA) or lawmakers may be appropriate in this respect.
Mergers and acquisitions
Rollover of capital gains on a share-for-share exchange (art. 22bis Luxembourg Income Tax Law (LITL)) where a company acquires or increases its voting right majority in another company: if these companies reside in the UK, they would need to fulfill the comparable tax test if there is no post-Brexit transition period. See the participation exemption section above.
Cross-border contribution of a whole or part of a business or an EU PE in exchange for shares (art 59bis LITL): these may be tax-neutral under rollover rules if the business contributed to the Lux PE of an EU company or if the EU PE is contributed to another EU company. If there is no post-Brexit transition, those EU PE/business contributions will no longer benefit from the rollover provisions if the receiving entity is a UK corporation or its Luxembourg PE — and the same for the contribution of a UK PE.
Cross-border mergers/demergers/PE transfers (art 170bis and 170ter LITL): these may be tax neutral under rollover provisions only if they involve EU/EEA tax residents. This provision should not apply to UK tax residents if there is no post-Brexit transition.
Rollover of capital gains
Rollover of capital gains through reinvesting fixed assets held by a UK PE would no longer be possible after Brexit, triggering immediate taxation of existing rolled-over gains if there is no post-Brexit transition or grandfathering measure.
Investment tax credit
Investments physically made in the UK and eligible for investment tax credit (art 152bis LITL) would no longer qualify after Brexit, triggering immediate cost if there is no post-Brexit transition or grandfathering measure.
Intellectual property regime
Luxembourg taxpayers’ research and development activities currently eligible under the IP regime and carried out by a UK PE will be ineligible after Brexit, triggering immediate cost for existing activities if there is no post-Brexit transition or grandfathering measure.