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Luxembourg: EC “letters of formal notice” to amend tax law on securitization

Luxembourg: Tax law on securitization

The European Commission (EC) on 14 May 2020 sent two “letters of formal notice” to Luxembourg authorities with regards to securitization.

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Interest limitation rules under ATAD implementation law

The first letter, addressing the exemption of certain regulated securitization entities from the interest limitation rules under Luxembourg legislation implementing the anti-tax avoidance directive (ATAD), requests that Luxembourg correctly transpose the interest limitation rule of the ATAD. Luxembourg allows a possibility to exempt financial undertakings from this rule. However, the EC considers that the Luxembourg implementing legislation goes beyond the allowed exemptions by providing unlimited deductibility of interest for corporate income tax purposes to EU regulated securitization entities, which in the EC’s view, do not qualify as “financial undertakings” under the ATAD. 
 

Foreign securitization enterprises

The second letter addresses discriminatory tax rules towards foreign securitization enterprises. The EC considers that Luxembourg taxes more heavily securitization enterprises with taxable operations in Luxembourg, but with a “statutory seat” in another EU or EEA Member State. The EC considers that the Luxembourg legislation is not compatible with the freedom of establishment, but has not provided further details on the issue.
 

What’s next?

The letters of formal notice are the first step of the EU infringement procedure, which gives the power to the EU to take legal action against EU Member States that do not respect their obligation to comply with EU law. If Luxembourg were not to take proper actions within the next four months, the EC may, as a second step of the infringement procedure, send a “reasoned opinion”(i.e., a formal request to comply with EU law).
 

KPMG observation

Until the next steps in relation to the two formal notices are taken, possibly affected taxpayers need to monitor to assess the potential implications for Luxembourg securitization vehicles. While the effect on foreign securitization enterprises conducting taxable operations in Luxembourg may be limited, the implications for Luxembourg securitization entities subject to the EU Regulation 2017/2402 may be more critical.
 

Read a May 2020 report prepared by the KPMG member firm in Luxembourg

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