On 15 June 2018, the Luxembourg Council of Government (i.e., the Cabinet) adopted the draft law (Draft Law) implementing the European Union (EU) Anti-Tax Avoidance Directive1 (ATAD) and the draft law ratifying the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI), which was signed on 7 June 2017.2
The ATAD is intended to provide for uniform legislative implementation of certain Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) recommendations. It establishes minimum standards (allowing for certain options and choices to be taken) with respect to five areas: limitation to interest deductibility, exit taxation (including provisions relating to inbound transfers), a General Anti-Abuse Rule (GAAR), Controlled Foreign Company (CFC) rules and rules countering hybrid mismatches within the EU.
While the text of the Draft Law has not yet been published, the Minister of Finance gave some details on the content in a press conference following the Cabinet’s adoption:
- A new provision will be introduced that limits interest deductibility for interest expenses exceeding interest income (exceeding borrowing cost) to 30% of the taxpayer’s taxable earnings before interest, tax, depreciation and amortization (taxable EBITDA). The Minister of Finance confirmed that a number of options provided for by ATAD have been taken, among which the grandfathering provision that excludes interest on loans concluded before 17 June 2016 from the scope of the interest limitation rule.
- CFC rules will be introduced. The ATAD foresees two options for CFC rules (options A and B). The Draft Law is based on option B, according to which the non-distributed income of low-taxed CFCs arising from “non-genuine arrangements which have been put in place for the essential purpose of obtaining a tax advantage” must be included in the tax base of the Luxembourg taxpayer in the year in which the income is derived, if the Luxembourg taxpayer carries on the significant people functions in relation to assets owned and/or risks undertaken by the CFC. Any income inclusion will have to be based on the arm’s-length principle as defined in Luxembourg law.
- The Draft Law contains hybrid mismatch rules that apply to hybrid mismatches resulting from financial instruments or entities between associated enterprises that are treated differently in two or more EU Member States.
- The current rules that allow taxpayers to defer the payment of the exit tax that is due upon an exit tax event will be significantly amended, in the sense that the current unlimited deferral of the payment of exit tax is abolished and replaced by payment over a maximum period of five years.
- The existing domestic GAAR will be modernized to better reflect the content of the ATAD GAAR.
In addition to the implementation of the ATAD, the Minister of Finance announced two further measures to be introduced, with the aim to put an end to certain practices that, while being compliant with existing legislation, are no longer in line with international tax standards and more specifically with the BEPS recommendations:
- Amendment of the definition of permanent establishment in order to avoid situations where income is neither taxed abroad, nor in Luxembourg, because of an asymmetric recognition of the existence of such permanent establishment.
- The tax neutral conversion of loans into shares, as currently foreseen by domestic law, will be abolished; going forward, latent capital gains attached to such convertible loans will become taxable at the time of their conversion into shares.
The ATAD needs to be implemented by the Member States through national legislation by 31 December 2018 and its rules will have to apply as from 1 January 2019 (31 December 2019 and 1 January 2020, respectively, for the rules on exit taxation).
With the exception of the amended GAAR (which applies to all taxpayers) and most of the exit tax provisions (which apply to entrepreneurs in general), the provisions of the Draft Law only apply to corporate taxpayers subject to corporate income tax.
A detailed Tax Alert discussing the provisions of the Draft Law as well as their implications will be issued as soon as the text of the draft law becomes available.
With respect to the MLI, the Minister of Finance reconfirmed that all the 81 double taxation treaties concluded by Luxembourg that are currently in force are designated as Covered Tax Agreements (CTAs), i.e., to be amended through the MLI. No further information was provided on the definitive MLI positions that Luxembourg will take, but it is likely that the MLI positions taken at the time of the signature will be maintained.
1. Council Directive (EU) 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices that directly affect the functioning of the internal market.
2. See EY Global Tax Alert, Luxembourg explains its positions on Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS, 13 June 2017.
EYG no. 03679-181Gbl
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