On 14 May 2020, the European Commission (“EC”) decided to send two letters of formal notice to Luxembourg in relation to securitization. The first letter addresses the exemption of certain regulated securitization entities from interest limitation rules under the ATAD implementation law and the second addresses discriminatory tax rules towards foreign securitization enterprises.
Interest limitation rules under ATAD implementation law
The EC has decided to ask both Luxembourg and Portugal to correctly transpose the interest limitation rule of the ATAD. Both member states make use of the possibility to exempt financial undertakings from this rule. As far as Luxembourg is concerned, the EC considers that the domestic legislation however goes beyond the allowed exemptions by providing unlimited deductibility of interest for corporate income tax purposes to EU regulated securitization entities, which in the EC’s view do not qualify as “financial undertakings” under the ATAD.
It is worth mentioning that the definition of “financial undertaking” in the ATAD does not include those securitization entities governed by article 2, point 2) of Regulation (EU) 2017/2402, such EU regulation being dated 2017 after the publication of ATAD in 2016.
Foreign securitization enterprises
The EC considers that Luxembourg taxes more heavily securitization enterprises with taxable operations in Luxembourg, whose statutory seat is in another EU or EEA member state. The Commission considers that the legislation at issue is not compatible with the freedom of establishment. The EC has not provided further details on the issue at stake.
These letters of formal notice are the first step of the EU infringement procedure, which gives the power to the EU to take legal action against member states that do not respect their obligation to comply with EU law. Should Luxembourg not take proper actions within the next four months, the Commission may, as a second step of the infringement procedure, send a reasoned opinion (i.e. a formal request to comply with EU law).
The next steps in relation to the two formal notices should be carefully monitored in the coming months to assess the potential impact on Luxembourg securitization vehicles. While the impact on foreign securitization enterprises conducting taxable operations in Luxembourg should in principle be limited, the impact on Luxembourg securitization entities subject to the EU Regulation 2017/2402 might be more critical. Stay tuned for any further development on Luxembourg securitization and interest limitation rules.
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