Fund Taxation Alert 2021-03

Fund Taxation Alert 2021-03

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Reduced rate of subscription tax for investments in sustainable assets

Starting 1 January 2021, UCITS and Part II UCIs (or their individual compartments)  can benefit from a reduced subscription tax rate for their portion of net assets invested in “taxonomy” compliant activities within the meaning of article 3 of EU regulation 2020/852 of 18 June 2020 on the establishment of a framework to facilitate sustainable investment (hereafter “qualifying assets”). Under the EU regulation, an environmentally sustainable economic activity is an activity that contributes substantially to (i) climate change mitigation or adaptation, (ii) the sustainable use and protection of water and marine resources, (iii) the transition to a circular economy, (iv) pollution prevention and control, (v) the protection and restoration of biodiversity and ecosystems. This new rule was introduced as part of the 2021 budget law in the overall context and priority of the Luxembourg government to promote investments into sustainable projects.

An administrative circular (PDF, 956KB) (Circular N° 804 of 23 December 2020 - “the Circular”) was issued by the Luxembourg tax authorities late in December, clarifying the rules and procedures and providing numerical examples for illustration purposes.

Overview of the new law and the Circular

Retail funds are generally subject to an annual subscription tax at a rate of 0.05 percent on their net assets. With the new law, this rate may now be reduced  up to 0.01 percent if part of the net assets is invested as follows (not relevant for SIFs and RAIFs which already benefit from a rate of 0.01 percent without conditions):

Percentage of net assets invested into qualifying assets

Subscription tax rate applicable to the portion of qualifying assets

At least 5%

0.04%

At least 20%

0.03%

At least 35%

0.02%

At least 50%

0.01%

Certain steps need to be considered in order to be able to benefit from these reduced rates:

  • The percentage of the total net assets of the fund or sub-fund invested in qualifying assets determined as at the end of the financial year of the fund must be published in the fund’s annual report or in a separate reasonable assurance report.
  • The statutory auditor must issue a certificate confirming the percentage of the qualifying assets as disclosed in the annual report or in the assurance report, which would then be filed with the Luxembourg indirect tax authorities (Administration de l’Enregistrement, des Domaines et de la TVA) together with the first subscription tax return following the issuance of the annual report or assurance report.
  • Once the certificate is filed, the reduced rate will apply for the following four quarters. Although the certificate filed will fix the applicable rate of subscription tax that will be applicable for the following four quarters, the taxable basis, that is the net assets that are in invested in qualifying assets, will be recalculated on the last day of each of those four quarters.

A transition period applies from 1 January 2021 until 1 January 2022 in order to give some time for the tax authorities to set up their IT systems and procedures. The Circular clarifies that during this period, the quarterly subscription tax return of 0.05% needs to be filed and the certificate sent via e-mail to the indirect tax authority as that will adapt the amount of tax payable.

KPMG Comment

The reduced subscription tax is a welcome measure for funds investing in sustainable activities. It allows these funds to increase their performance through investments in sustainable assets.

The computation of the percentage of qualifying assets can be a challenging and cumbersome exercise requiring specific levels of expertise. Through its multidisciplinary team, and an end to end process, KPMG can help you to efficiently reduce the subscription tax by (1) identifying the eligible fund,  (2) performing a cost-benefit analysis, (3) preparing the reasonable assurance report (4) filing of subscription tax return and (5) support and advice on subscription tax filing process.

Please contact us if you think your fund may qualify for this reduced rate. KPMG is pleased to guide you through each of the steps.

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