Despite this unprecedented moment in time, life continues, and the tax landscape is no exception to the rule. As from March 2021, Luxembourg will deny deduction of interest/royalties due to associated enterprises in blacklisted countries. Luxembourg tax authorities have also provided guidance on the interest limitation rules applicable as from tax years starting on or after 1 January 2019.
Michael Ayachi: Grandfathering is an important point for a lot of our clients. The key message is that initial rights should be maintained. For example, in case of an increase of interest rate, the part of interest charges linked to the initial rate should not be restricted whereas the exceeding part should be subject to interest limitation rules.
However, subsequent modifications on or after 17 June 2016 can still benefit from the grandfathering under certain conditions. The circular provides examples of what should or not constitute “acceptable” subsequent modifications. For instance, additional draw downs on credit facilities should be grandfathered.
Benjamin Brugerolle: Good one!
Michael Ayachi: Indeed Benjamin. It’s a case-by-case. Next one?
Benjamin Brugerolle: There are so many different instruments on the market that it would have been really difficult to provide exhaustive clarifications. In my view, examples provided by the circular should constitute a good starting point. In practice, some cases that are not specifically addressed could be analyzed by assimilation to one of those examples. If we take derivatives for instance, the interest rate swap example sheds some light on the fact that, in principle, “the accessory follows the principal”.
Now, we can nevertheless note some clear-cut examples, among other on computations and forex. Forex in relation to interest are in scope. Forex in relation to principals are out. Although this is what the market was somehow already doing, it’s always good to have it confirmed.
Same for the definition of interest income. Based on the symmetry principle, when you don’t know whether the income qualifies as interest or not, have a look at the debtor point of view!
Michael Ayachi: For the C&I world, the biggest impact will relate to operating companies, usually realizing taxable income. This is however no surprise if we look at the aim of the BEPS rules.
However, group entities performing so-called “holding and financing activities” should be much less impacted. The main impact would lie at the level of potential tax losses to be carried forward. They should be lower than they used to be, but this should not result in additional tax charge.
Benjamin Brugerolle: In alternative investment, we are, to some extent, collateral damages of all these new BEPS rules. The main point of attention for our business would thus relate to credit activities such as distressed debt or discounted debt portfolios, being securitized or not.
On this specific point, the circular does not provide for any clarification so this will continue to be a point of attention for our clients, which should review and assess their position on a regular basis.
Michael Ayachi: As from 1 March 2021, Luxembourg will deny the tax deduction of interest or royalties due to an associated enterprise, if that beneficiary is established in a non-cooperative jurisdiction listed in the EU blacklist.
The tax deduction remains nevertheless accepted to the extent it can be demonstrated that the arrangement giving rise to the expense has “valid commercial reasons that reflect economic reality”.
Lost in translation, feel free to contact us!
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What about interest limitation?