On 19 December 2019, the Luxembourg Parliament passed the 2020 Budget bill covering the expiry of pre-2015 advance tax agreements as well as bill 7466 on the transposition of the EU Anti-Tax Avoidance Directive 2 (ATAD 2) into Luxembourg domestic tax law. A request to dispense with the second vote has been filed with the State Council.
The main tax measure relates to the expiry of advance tax agreements (ATAs) issued by direct tax authorities before 1 January 2015. Those ATAs will no longer be valid after tax year 2019 (no change made to the initial bill in this respect), but taxpayers will be allowed to request a new ATA under the procedure applicable since 2015.
On 3 December 2019, the tax administration issued a newsletter, clarifying the process for obtaining a new ATA:
The Law largely reflects the wording of the ATAD 2 and, compared to the text of bill 7466 issued on 8 August 2019, a few (minor) amendments have been made as a result of the State Council’s opinion, including a clarification on the reverse hybrid provision as described below.
The Law extends the scope of existing anti-hybrid rules to additional categories of mismatches and to mismatches with third countries. These new measures will apply to financial years starting on or after 1 January 2020, except for reverse hybrid provisions that will apply as from tax year 2022.
The Law applies to Luxembourg corporate taxpayers (including Luxembourg permanent establishments of foreign entities) and primarily targets payments triggering a “deduction without inclusion” or “double deduction” mismatch outcome between associated enterprises or in the context of structured arrangements, as a result of hybrid mismatches involving hybrid instruments, hybrid entities, permanent establishments, as well as imported mismatches. The Law also contains specific provisions addressing hybrid transfers and residency mismatches.
The Commentaries of bill 7466, which reflect the recitals of the ATAD 2, specify that differences in the value ascribed to a payment, including transfer pricing adjustment, are not targeted by the anti-hybrid rules.
An entity or individual qualifies as ‘associated enterprise’ of the taxpayer in the following cases:
For the purpose of the 50% or 25% threshold, any entity or individual acting together with another entity or individual in respect of the voting rights or capital ownership of an entity, is deemed to hold the rights/capital held by the other individual/entity in such entity. Unless otherwise demonstrated, an individual or entity holding, directly or indirectly, less than 10% in the shares/units of an investment fund, and who is entitled to receive less than 10% of the profit of this investment fund, is not treated as acting together with the other investors, as it is deemed not to control the investments made by the investment fund. The State Council considers this rebuttable presumption consistent with the spirit of the ATAD 2.
To the extent the mismatch outcome takes the form of:
Targeted hybrid mismatches
The Law targets the following categories of hybrid mismatches giving rise to D/NI:
In line with the recitals of ATAD 2, the commentaries of bill 7466 clarify that payments to tax exempt payees (e.g. tax-exempt investment funds or sovereign wealth funds) do not trigger any hybrid mismatch. The State Council further considers that the same conclusion should apply to payments made to payees established in zero tax, low tax or territorial tax jurisdictions.
Burden of proof and documentation
If the taxpayer considers that the hybrid mismatch rules are not applicable, such taxpayer must be able to prove this upon request from the tax authorities and provide the latter with reasonable proof.
Given the complexity of the ATAD 2 and the lack of detailed guidance provided so far in the Law, its implementation in Luxembourg and, especially, the issuance of a circular by the Luxembourg tax authorities will need to be closely monitored.
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