Luxembourg Tax Alert 2020-21

Luxembourg Tax Alert 2020-21

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Everything you need to know for 2021!

The 2021 Budget Law

Yesterday, 17 December 2020, the Parliament passed the 2021 budget law including several new tax measures impacting the Luxembourg real estate sector, the Luxembourg fiscal unity regime, and more. A request to be exempted from the second vote was filed with the State Council.

New changes have also been introduced for personal income taxation, with the most significant being the abolishment of stock options and warrant plans, as well as changes to the impatriate regime. In this respect, the Luxembourg tax authorities have recently issued two newsletters announcing the repeal of Circular L.I.R. n° 104/2 of 29 November 2017 on stock option and warrant plans and Circular L.I.R. n° 95/2 of 27 January 2014 regarding the Luxembourg impatriate regime.

A full overview of all the new tax measures can be found in our Tax Alert 2020-17

New Circular on the application of Luxembourg participation exemption regime for companies established in Gibraltar

Background

On 1 December 2020, the Luxembourg tax authorities issued Circular L.I.R. n° 147/2, 166/2 and Eval. n° 63 (“the Circular”) which excludes companies incorporated in Gibraltar (“GibCo”) from the companies eligible for the benefits of the EU Parent-Subsidiary Directive for the purpose of the application of the Luxembourg participation exemption regime (“LPER”), starting 1 January 2021.

The Circular is a response to the decision of the Court of Justice of the European Union (“CJEU”) case (C-458/18) of 2 April 2020 in which the CJEU concluded that “companies incorporated under the laws of the United Kingdom" and "corporation tax in the United Kingdom" do not cover companies incorporated in Gibraltar, excluding them hereby from the benefits of the EU Parent-Subsidiary Directive.

Implications for Luxembourg companies

The Circular will have an impact for (i) Luxembourg companies (“LuxCos”) having a participation in a GibCo and relying on the LPER for dividend, capital gains and net wealth tax exemption, and (ii) LuxCos distributing dividends to a GibCo.

LuxCos with a participation in a GibCo will now need to rely on the comparable tax test in order to continue to benefit from the dividend, capital gains and net wealth tax exemption under the LPER. The comparable tax test should generally be satisfied if the company held by a LuxCo is a fully taxable company with a share capital subject to an income tax comparable to Luxembourg corporate income tax (a rate of 8.5% on a comparable basis usually satisfies this requirement). 

For dividends distributed by a LuxCo to a GibCo that is tax resident in Gibraltar, an exemption should, however, no longer be available. Under Luxembourg tax law, a dividend withholding tax exemption should only be available for fully taxable companies resident in a country with which Luxembourg has concluded a double tax treaty, which is not the case for Gibraltar.

How KPMG can help

The Circular usefully confirms that existing structures should not be impacted before 2021.

Taxpayers falling within the scope of the Circular should nevertheless assess the impact on their structure. Our tax advisors are happy to help with any questions you might have.

DAC 6 – The reporting starts in January!

The 6-month deferral period of the DAC 6 law is now coming to an end.

On 1 January 2021, the 30-day period for reporting cross-border arrangements will start. Any cross-border arrangements triggering a reporting obligation between 1 July 2020 and 31 December 2020 will have to be reported by 30 January 2021. In addition, intermediaries covered by legal professional privilege will have to notify other intermediaries and, in certain cases, taxpayers of their reporting obligation. The notification is due within 10 days, with a first deadline on 10 January 2021 for arrangements with a trigger date between 1 July 2020 and 31 December 2020.

DAC 6: Key dates for your diary
DAC 6: Key dates for your diary

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For more information, see also our Tax Alert 2020-15.

The countdown is on!

KPMG provides tailor-made solutions to get you DAC 6 ready. Our innovative DAC 6 IT solution — the KPMG DAC 6 processor — is also at hand to help you categorize arrangements, monitor deadlines and streamline the reporting process based on EU-wide domestic rules.

Stay ahead of the curve — get in touch today!

Brexit – End of the transition period

On 31 December 2020, the transition period for the United Kingdom’s (“UK”) departure from the European Union (“EU”) will end and certain tax reliefs that were available for transactions between EU and UK entities should cease to apply.  

Please refer to this chart for an overview of the potential impact Brexit should have on corporate income tax, assuming no agreement is reached to further extend the benefits of the relevant EU Directives to the UK and the UK will no longer be part of the EU and the European Economic Area as of 1 January 2021. 

Brexit – End of the transition period

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Please also refer to our recently released Tax Alert 2020-20 on Brexit and indirect tax consequences.

Our team is available to help you with any questions you might have!

Don’t forget: the Multilateral Instrument is already in effect for a large number of double tax treaties

The Multilateral Instrument (“MLI”) has entered into force for Luxembourg on 1 August 2019. At the earliest, it applies for taxable periods beginning on or after 1 January 2020 for withholding taxes, and for taxable periods beginning on or after 1 February 2020 for other taxes. Calendar year taxpayers should therefore notice first impacts on other taxes starting 1 January 2021. The exact entry into effect of the provisions varies for each of the Covered Tax Agreements (“CTA”).

Over the past few months, the Luxembourg tax authorities have started publishing synthesized texts of double tax treaties (“DTT”) that have been amended by the MLI. These texts provide some helpful guidance of the new provisions, options selected by the parties of each CTA, and the entry into effect of the provisions for each party of the CTA. At this stage, synthesized texts are available for 26 CTAs. Please refer to Tax Alert 2020-13 for more information.

The MLI certainly comes with some complexity. The determination of the timing and the impact of the provisions on existing DTTs can be challenging. One of the biggest impacts should be the newly introduced principal purpose test, which can restrict the access to DTTs in certain circumstances.”

We have a dedicated team of experts to guide you through this new complexity. We can assist you by doing an impact assessment of your structure and generally help with any questions you might have.

Any tax advice in this communication is not intended or written by KPMG to be used, and cannot be used, by a client or any other person or entity for the purpose of (i) avoiding penalties that may be imposed on any taxpayer or (ii) promoting, marketing, or recommending to another party any matters addressed herein.The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity.

Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

© 2021 KPMG Luxembourg, Société coopérative, a Luxembourg entity and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.

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