Luxembourg: Disallowed deductions of interest, royalties to “blacklist” jurisdictions; effective 1 March 2021

Luxembourg: Disallowed deductions of interest

The Parliament on 28 January 2021 passed a bill to disallow (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 (the “EU blacklist”). The measures to disallow these deductions have an effective date of 1 March 2021.

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The action by Luxembourg’s Parliament 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.

Luxembourg legislation

These provisions were introduced as a draft bill in 2020. Read TaxNewsFlash

Changes to the draft bill were adopted, including:

  • Change to effective date, new effective date of 1 March 2021
  • Change to definitions so that only interest and royalties “due” (instead of “paid or due”) are not deductible, to a retroactive effect

The new provisions will not apply if the taxpayer is able to prove that the transaction giving rise to the interest or royalties payments was entered into for valid commercial reasons, reflecting the economic reality.

For the first year, reference is to be made to the EU blacklist (as published by the EU Council as of 1 March 2021). For the following years, the reference is to be made to the EU blacklist as of 1 January of a given year. If a country or territory is removed from the EU blacklist during the year, the provisions of Luxembourg legislation will 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.

Current EU blacklist

The EU Council in October 2020 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, U.S. Virgin Islands, Vanuatu, and Seychelles.

The next revision of the list is planned for February 2021.

Read a January 2021 report prepared by the KPMG member firm in Luxembourg 

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