Luxembourg Tax Alert 2021-04

Luxembourg Tax Alert 2021-04



Deduction of certain payments to “blacklisted countries” limited as of 1 March 2021

On 28 January 2021, the Parliament passed the bill disallowing (under certain conditions) the tax deductibility of interest and royalties due to associated enterprises located in a country listed on the EU list of non-cooperative jurisdictions, often referred to as the “EU Blacklist.” This new law follows guidance issued in 2019 by the Council of the European Union (“EU Council”) encouraging EU Member States to introduce national defensive measures regarding jurisdictions on the EU Blacklist.

Please refer to our previous newsletter (Luxembourg Tax Alert 2020-06) for an overview of the new provisions. Certain changes have been adopted since the publication of the draft bill, the most significant being:

  • Change of date of application: since the bill was not voted by the end of 2020, the provisions will become applicable as of 1 March 2021.
  • Change of definition: only interest and royalties due should not be deductible for tax purposes (instead of “paid or due”). This change was mainly done to avoid a retroactive effect of the new provisions.

The new provisions would not be applicable if the taxpayer is able to prove that the transaction giving rise to the interest or royalties payments was done for valid commercial reasons, reflecting the economic reality.

For the first year, reference should be made to the EU Blacklist as published by the EU Council as of 1 March 2021. For the following years, the list as of 1 January of the given year should be consulted. If a country or territory is being removed from the EU blacklist during the year, the provisions of this article would cease to apply as from the official day of the removal as published by the EU.

For other countries that are not on the list (and for payments made to non-related entities in blacklisted countries), the Luxembourg tax authorities will continue to verify that payments made by Luxembourg taxpayers are economically justified and comply with the arm’s length principle.

On 6 October 2020, the EU Council provided its latest revision to the EU blacklist, by adding Anguilla and Barbados, and removing Cayman Islands and Oman. The current EU blacklist includes the following countries: American Samoa, Anguilla, Barbados, Fiji, Guam, Palau, Panama, Samoa, Trinidad and Tobago, US Virgin Islands, Vanuatu, and Seychelles. The next revision of the list is planned for February 2021.

Due to the ever-evolving EU Blacklist, close attention should be paid to whether these new provisions could have an impact on your structures. Our tax team is available for 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.

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