This report summarizes some of the main Luxembourg tax developments that took place between the end of 2015 and August 2016. The selected developments are mainly relevant to companies and the international tax practice.
1. Repeal of the minimum corporate income tax (CIT) - Introduction of a differentiated rate of net wealth tax (NWT) and of a minimum NWT - Introduction of a step-up in basis for individuals migrating to Luxembourg
1.1 Repeal of the minimum CIT - Introduction of a differentiated rate of NWT and of a minimum NWT
By law of 18 December 20151, a digressive scale for NWT rates was introduced with effect as from 1 January 2016:
- A rate of 0.5% applies on the taxable net wealth2 up to and including €500,000,000 (e.g. for a taxable wealth of €500,000,000 a normal NWT of €2,500,000 is due).
- A reduced rate of 0.05% applies on the portion of the taxable net wealth exceeding €500,000,000 (e.g. for a taxable wealth of €1,750,000,000 the normal NWT will amount to €3,152,000 (i.e. 2,500,000 + 0.05% x (1,750,000,000 - 500,000,000)).
Additionally, the minimum CIT was abolished and the existing provisions related to the minimum NWT (of €25 for private limited liability companies (Sàrl), €62.5 for public limited liability companies (SA) and for partnerships limited by shares (SCA)) have been replaced by new rules. The new minimum NWT applies to Luxembourg resident corporate entities, i.e. entities which have their statutory seat and/or their central administration in Luxembourg. Non-resident entities are out of the scope of the minimum NWT3. Permanent establishment of non-resident entities are subject to the normal NWT.
A minimum NWT of €3,210 applies for the entities having the sum of their fixed financial assets, amounts owed by affiliated undertakings, transferable securities, cash at bank, cash in postal check accounts and cash in hand exceeding:
- 90% of the total of their balance sheet4 of the year N-1.
Entities that do not fulfil at least one the above criteria are subject to a minimum NWT ranging from €535 to €32,100 depending on the total of their balance sheet:
The minimum NWT is further adjusted/reduced by the CIT of the year N-1 (increased by the solidarity surcharge and decreased by available tax credits).
The laws on securitization vehicles, investment companies in risk capital (sociétés d'investissment en capital risque or SICARs), pension savings companies in the form of the so-called SEPCAVs (sociétés d'épargne pension à capital variable) and pension savings associations in the form of the so-called ASSEPs (associations d'épargne pension) are amended so that the new minimum NWT is also applicable to these entities although they remain exempt from the normal NWT.
As a consequence of the co-existence of the normal NWT and the minimum NWT, taxpayers will be liable to the highest amount between their normal NWT and their minimum NWT. A comparative calculation should be prepared annually in order to determine the applicable NWT.
In case of a tax unity, each company remains individually liable to its minimum NWT. The overall amount of minimum NWT within a tax consolidated group is however capped at €32,100. The minimum NWT due by the members of a tax consolidated group is automatically adjusted/reduced by the CIT of the year N-1 of the tax consolidated group (increased by the solidarity surcharge and decreased by available tax credits) in a certain order.
Although it is still possible for taxpayers to reduce their normal NWT burden through the creation of a specific reserve (corresponding to 5 times the amount of NWT reduced) to be maintained for 5 years as foreseen by §8a of the NWT law (VSTG), the amount of normal NWT eligible for the reduction by a resident entity is however limited to its minimum NWT calculated as described above (the minimum NWT may not be reduced based on §8a VSTG5 ). This limitation does not apply for Luxembourg permanent establishments of nonresident entities.
1.2 Step up for individuals migrating to Luxembourg whilst owning substantial shareholdings
The first law of 18 December 2015 also introduces the principle of a step-up for individuals who relocate their tax residence to Luxembourg whilst either owning:
- Stocks, equity shares, beneficiary shares or, any other form of investment in collective undertakings that qualify as substantial shareholding (i.e., more than 10%).
- A convertible loan issued by an entity in which they hold a substantial participation.
According to the newly introduced article 102(4a) of Luxembourg Income Tax Law (LITL), the acquisition price of these assets will be revalued at their estimated market value as at the date of the individual's migration to Luxembourg.
Such step-up is however not applicable for other assets or if, at the aforementioned date, the individual has been formerly resident in Luxembourg for more than 15 years and subsequently non-resident for less than 5 years. The step-up does not affect the holding period, and therefore the migration to Luxembourg does not trigger the start of a new holding period. This provision applies as from the fiscal year 2015 (for shareholders who migrated to Luxembourg in the course of 2015 or later).
2. Amendments to the parent-subsidiary regime/tax unity regime/exit tax rules/ investment tax credit rules
In a second law of 18 December 2015, Luxembourg has introduced the following other important changes to its CIT legislation:
2.1 New provisions of the parent-subsidiary regime
Luxembourg implemented two major amendments to the Parent-Subsidiary regime resulting from the transposition of Directives 2014/86/EU and 2015/121/EU and effective as from 1 January 2016.
2.1.1 Anti-hybrid financial instrument provision
In order to eliminate double non taxation situations of profits arising from the asymmetry in the tax treatment of profit distributions among EU Member States, dividends and other profit distributions paid by qualifying subsidiaries to their Luxembourg parent company will no longer be tax exempt in the hands of the parent to the extent that such distributions are deductible at the level of the subsidiary.
A new paragraph will be added to article 166 LITL whereby the participation exemption would be denied to income derived from a (hybrid) instrument to the extent it is tax deductible in the residence jurisdiction of the taxpayer.
2.1.2 New anti-abuse rule
Luxembourg will not grant the benefit of the Parent- Subsidiary Directive (Directive 2011/96/EU, as amended, the Directive) to an arrangement or a series of arrangements which, having been put into place for the main purpose (or one of the main purposes) of obtaining a tax advantage that challenges the object or purpose of the Directive, are not genuine having regard to all relevant facts and circumstances. In this respect, an arrangement or a series of arrangements shall be regarded as not genuine to the extent that they are not put into place for valid commercial reasons which reflect an economic reality.
There are two main parts in a non-genuine arrangement: firstly, a purpose of obtaining a tax advantage challenging the object or purpose of the Directive and secondly, the absence of valid commercial reasons which reflect economic reality. An increasing focus by the tax authorities on economic reality may therefore be expected.
2.2 Widening of the scope of the tax unity regime
Further to case law of the European Court of Justice ("ECJ") in the field of corporate group taxation6, the law of 18 December 2015 enables the creation of a "horizontal" tax unity between Luxembourg entities when their parent company is resident of a state party to the European Economic Area (i.e. EU Member States, Iceland, Liechtenstein, and Norway, the EEA) and fully subject to an income tax comparable to the Luxembourg CIT.
In addition, each member of the tax unity is now fully liable for the tax liabilities, interest for late payments, charges and penalties of the integrating parent or integrating subsidiary company.
It is also important to note that a company cannot be part of more than one tax unity.
2.3 Exit tax
The scope of migrations and transfers entitled to benefit, under specific conditions, from a tax payment deferral has been broadened.
While in the past the tax payment deferral was granted only in case of a transfer to an EEA country, it is now possible to benefit from this provision upon relocation to a third country with whom Luxembourg has a double tax treaty containing an article 26 (on exchange of information upon request) in line with the Model Convention of the Organization for Economic Cooperation and Development (OECD).
2.4 Investment tax credit in the maritime sector
Given the substantial expansion of the maritime sector and its important contribution to the Luxembourg economy, lessors of vessels used in international traffic are now allowed to benefit from investment tax credits. This new provision puts shipping companies on an equal footing with other industries involved in the transport of goods and people.
3. Introduction of the Common Reporting Standard (CRS) in Luxembourg legislation
In a third law of 18 December 2015 (the law on the automatic exchange of financial account information in the field of taxation, the AEI Law) Luxembourg introduced in its legislation the so-called Common Reporting Standard (CRS) developed by the OECD.
The AEI Law implements the so-called DAC2 Directive (2014/107/EU) which has amended the Directive on administrative cooperation in the field of taxation (DAC 2011/16/EU) as regards mandatory automatic exchange of information in the field of taxation.
Under the AEI Law, the Luxembourg financial institutions falling within its scope have to:
- Annually report information on reportable financial accounts to the Luxembourg tax authorities by 30 June following the end of the calendar year to which the information relates. The first calendar year covered by the AEI Law is 2016, which means that the first information reporting under the AEI Law should be made by 30 June 2017.
- Implement due diligence procedures for the identification of reportable accounts.
The information will then be automatically exchanged by the Luxembourg tax authorities with the tax authorities of the other jurisdictions applying the CRS by 30 September following the end of the calendar year to which the information relates (the first automatic exchange of information, related to 2016, should consequently occur by 30 September 2017).
The CRS and automatic exchange of information will be applicable as from 2017 for periods as from 2016 between the EU Member States in application of the DAC 2 Directive (except Austria with whom the automatic exchange will apply as from 2018 for periods as from 2017). It will be applicable as from 2017 or 2018 for periods as from 2016 or 2017 with the other jurisdictions applying the CRS (as at 9 May 2016, 101 jurisdictions, including the EU Member States, have committed to apply the CRS).
The financial institutions falling within the scope of the CRS and the AEI Law include custodial institutions, depositary institutions, investment entities and specified insurance companies.
Reportable financial accounts include depositary accounts, custodial accounts, certain specified insurance contracts and, for investment entities, any equity or debt interest in such investment entities, held by reportable persons or by certain passive entities (the so-called passive non-financial entities or passive NFE) with (ultimately) controlling persons that are reportable persons.
Reportable persons include individuals or entities of an EU Member State or of a jurisdiction also applying the CRS (except for corporations whose stock is regularly traded or entities related to such corporations, governmental entities, central banks and other financial institutions within the meaning of the AEI Law).
The information to be reported with respect to reportable accounts include the name, address, tax residence, tax identification number (TIN) and place and date of birth (for individuals) of the reportable persons, account number, account balance or value, amount of interest, dividend, sales and redemption proceeds from financial assets and other income generated with respect to the assets held in the account.
Financial institutions that do not comply with the due diligence and reporting obligations under the AEI Law are fined as follows:
- Failure to comply with the due diligence obligations or with the requirements to implement procedures for the information reporting: penalty of up to €250,000.
- Absence of information reporting or late, incomplete or inaccurate information reporting: penalty of up to 0.5% of the amounts that should have been reported with a minimum of €1,500.
4. Circular 99ter/1bis on the taxation of capital gains arising from the disposal of real rights relating to immovable property
The Luxembourg Tax Authorities released the Circular 99ter/1bis on 7 March 2016 on the taxation of capital gains arising from the disposal of real rights relating to immovable property (hereafter the Circular). The aim of the Circular is to clarify the taxation of the transfer of bare ownership (nue-propriété) or usufruct (usufruit) as provided for by article 108bis LITL.
Based on article 108bis LITL, capital gains resulting from the disposal of the bare ownership or the usufruct of a given asset are taxable only if the capital gains derived from the disposal of the full ownership would have been taxable.
The Circular specifies that taxable capital gains shall only be assessed on the basis of the increase in value of the bare ownership or usufruct. Any random gain linked to the specific nature of the rights or actuarial gain (resulting from the usufructuary's advanced aging) are not to be taken into account for the purpose of determining the amount of capital gains.
The Circular also states that the principles set out in §2 of article 108bis LITL (i.e. taxation of the transfer of bare ownership or usufruct) shall not result in taxing a higher or lower amount of income in comparison to the gain that would have been derived from the disposal of the full ownership. The sum of the gains on bare ownership and usufruct shall always correspond to the amount of the capital gains in connection with the full ownership. Should the asset consist of immovable property, the Circular provides guidelines on how to calculate the holding period:
- In case of acquisition of the full ownership and further disposal of the usufruct, the holding period starts at the time of the acquisition of the full ownership.
- In case the bare ownership and the usufruct have been acquired at different dates with subsequent disposal of the full ownership, the holding period starts upon the first acquisition (i.e. bare ownership or usufruct).
- If the usufruct or the bare ownership were acquired separately and subsequently transferred separately, the holding period starts at the time of the acquisition of the relevant right.
To read this article in full, please click here.
1 As further clarified in the circular I.Fort.n°51 issued by the Luxembourg tax authorities on 2 June 2016
2 i.e. on the unitary value calculated based on the same rules as before the law of 18 December 2015
3 As further clarified in the circular I.Fort.n°47ter issued by the Luxembourg tax authorities on 16 June 2016
4 Total of balance-sheet determined based on the same rules which were applicable under the minimum CIT regime.
5 As further clarified in the circular I.Fort.n°47ter issued by the Luxembourg tax authorities on 16 June 2016.
6 ECJ case law SCA Group Holding BV (C40/13)
Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries. www.dentons.com.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.