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Luxembourg: Hybrid mismatch bill (ATAD 2) pending in parliament

Luxembourg: ATAD 2 pending in parliament

A bill to transpose the EU Anti-Tax Avoidance Directive 2 (ATAD 2) into Luxembourg domestic tax law was published today, 9 August 2019, by the Luxembourg Chamber of Deputies. The bill is now subject to the parliamentary process before being enacted.

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The ATAD 2 is intended to “neutralise” hybrid mismatches with third countries (hybrid mismatches within the EU having been already targeted by the Anti-Tax Avoidance Directive 1 which was transposed into Luxembourg domestic law in December 2018), as well as mismatches involving permanent establishments, imported mismatches, hybrid transfers, and residency mismatches.

The bill confirms the scope of the anti-hybrid mismatches as foreseen by the ATAD 2—that is, payments made to associated enterprises or related to structured arrangements, triggering “deduction without inclusion” or “double deduction” as a result of hybrid mismatches involving hybrid instruments, hybrid entities, permanent establishments, imported mismatches, hybrid transfers and residency mismatches. However, some situations are expressly “out of scope.”

Transfer pricing adjustments

The Luxembourg bill confirms the definition of payments as construed by the international standards (OECD BEPS working groups). This definition of “payments” clearly excludes payments that are only deemed to be made for tax purposes (transfer pricing adjustment on interest-free loans, for example). The bill further concludes (in the related commentaries) that the mismatches exclusively attributable to those tax adjustments would not generate a targeted deduction without inclusion.


Non-controlling investors

The Luxembourg bill includes a clarification for investment funds and provides investment funds held by several unrelated investors, and for which the interests are managed by the same person, could benefit from the “de minimis” rule and therefore not affected by the anti-hybrid rules.

The term “associated enterprises” refers to the concept of “acting together” that would be limited by the “de minimis” rule under the current proposal of the Luxembourg government. Individuals or enterprises holding, directly or indirectly, less than 10% in the capital of an investment fund, and that are entitled to receive less than 10% of the profit of the investment fund would not qualify as “associated enterprises” under the “acting together” concept because they would be deemed not to control investments made by the investment fund.


Tax-exempt entities

The Luxembourg bill also clarifies the situation for payments to tax-exempt entity under both hybrid instruments and hybrid entity cases. The bill specifies (in the commentaries) that payments to tax-exempt entity (e.g., tax-exempt investment funds or pension funds) would not give rise to a deduction without inclusion, given the specific tax status of those investors in their respective jurisdictions. This analysis could be transposed to Luxembourg entities that are tax-exempt under specific regulations.
 

Effective date 

The provisions of the bill generally are proposed to be effective 1 January 2020 except:

  • The reverse hybrid provisions would apply as from 1 January 2022.
  • Certain financial instruments issued by banks would benefit from a grandfathering rule until 31 December 2022.

 
Read an August 2019 report prepared by the KPMG member firm in Luxembourg

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