Luxembourg Tax Alert 2020-06
Luxembourg Tax Alert 2020-06
Non-deduction of interest and royalty payments made to blacklisted countries as from 1st January 2021
Luxembourg Government Council approved on 25 March 2020, a draft law refusing the tax deductibility of interest and royalties paid or due to associated enterprises located in a country listed on the EU list of non-cooperative countries and territories (“EU blacklist”).
The draft law has been filed with the Luxembourg Chamber of Deputies under bill number 7547 (“the Bill”).
The Bill follows conclusions of the Economic and Financial Affairs Council of the EU (ECOFIN) issued on 5 December 2019. At this occasion, the ECOFIN stressed the need for Member States to agree to take coordinated defensive measures against blacklisted jurisdictions (please refer to our newsletter in this respect).
It was agreed in the framework of the EU Code of Conduct Group that Member States should apply at least one of the following defensive legislative measures against non-cooperative jurisdictions: non-deductibility of costs, Controlled Foreign Company (CFC) rules, withholding tax measures or limitation of participation exemption on profit distribution.
The Luxembourg Government took the choice to go for the first option and to apply limitations to the deductibility of some costs, by proposing amendments to Article 168 of the Luxembourg Income Tax Law (“LITL”).
All the other rules remain unchanged, i.e. general principle of deductibility of interest and royalties, and absence of withholding tax on these payments (except in very specific circumstances). The administrative measure of the Circular of 7 May 2018, requiring corporate taxpayers to indicate in their tax returns whether they have performed transactions with associated enterprises situated in blacklisted jurisdictions, also remains applicable.
Provisions of the Bill
Interest or royalties, due or paid, should not be deductible for tax purposes, provided that the following conditions are met:
- The beneficiary of the interest or royalties is a collective entity, as defined by Article 159 LITL. If the beneficiary of the interest or royalties is not their beneficial owner, the actual beneficial owner will have to be considered.
Collective entities defined by Article 159 LITL should generally be understood as tax opaque entities.
- The collective entity, which is the beneficial owner, is an associated enterprise of the person owing the interest or royalties, within the meaning of Article 56 LITL.
Article 56 LITL states that two undertakings are associated enterprises where one of them participates directly or indirectly in the management, control or capital of the other, or where the same persons participate directly or indirectly in the management, control or capital of both undertakings.
- The collective entity which is the beneficial owner of the interest or royalties is established in a country included in the list of non-cooperative countries and territories (“Blacklist”).
The applicable Blacklist will be issued by the Chamber of Deputies on a yearly basis, based on a proposal from the Luxembourg Government, relying on the applicable EU blacklist at the time of such proposal.
Updates to the Blacklist of new countries or territories added will be applicable to interest and royalties paid or due as from 1 January following the Government’s proposal. The removal of countries or territories from the Blacklist will be applicable to interest and royalties paid or due as from the date of their removal from the EU blacklist.
The definition of interest and royalties broadly reflects the EU Interest and Royalty Directive. “Interest” includes interest from debt claims of every kind (whether or not secured by mortgage and whether or not carrying a right to participate in the debtor’s profits), including interest on bonds as well as premiums and prizes attaching to such securities. Penalties for late payments are not covered by the above provision. Payments for the use of software or industrial, commercial or scientific equipment are not listed in the definition of “royalties”.
In addition, the above provision should not be applicable if the entity requesting a deduction proves that the transaction giving rise to the interest or royalties is used for valid commercial reasons, reflecting the economic reality. Interestingly, this reference to valid commercial reasons reflecting economic reality is also used in the definition of non-genuine arrangements as per §6 StAnpG (Luxembourg Fiscal Adaptation Law) implementing the General Anti Abuse Rule (GAAR) of the EU Anti-Tax Avoidance Directive.
This new provision should be applicable as from 1 January 2021.
The EU blacklist was last updated on 18 February 2020 (please refer to our newsletter in this respect). The EU blacklist currently includes American Samoa, the Cayman Islands, Fiji, Guam, Oman, Palau, Panama, Samoa, Seychelles, Trinidad and Tobago, the US Virgin Islands and Vanuatu.
As from 2020, the EU blacklist should be updated only twice a year and it might be amended in October 2020. It should therefore be closely monitored, to check which countries will actually be in scope of the Bill when it enters into force.
The Bill was proposed to Parliament on 30 March 2020 and it must now follow the usual legislative process before becoming law.
In the meantime, our tax advisory team is available to answer any questions you may have.
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