Luxembourg Parliament Adopts Legislation Implementing EU Anti-Tax Avoidance Directive

; posted on
December 20th, 2018

The Luxembourg parliament voted to approve Bill No. 7318, which includes measures for the implementation of the EU Anti-Tax Avoidance Directive (ATAD).

The Extended Scope of CFC Rules

The new bill introduces new controlled foreign company (CFC) to provide the inclusion of low-taxed CFC income arising from non-genuine arrangements that have been put into place for the essential purpose of obtaining a tax advantage.

A foreign entity or permanent establishment will be considered a CFC when the following conditions are met:

  • In the case of an entity, the Luxembourg taxpayer itself or together with associated enterprises holds/owns a direct or indirect participation of more than 50% in the voting rights, capital, or rights to profit of the entity. For the purpose of the CFC rules, associated enterprises are defined to include where one owns/holds 25% of the voting rights, capital, or rights to profit in the other, or where two or more enterprises are 25% owned/held by a third party. ; and
  • The actual corporate tax paid on the profits of the foreign entity or permanent establishment is lower than the difference between the tax that would have been charged on the entity or permanent establishment in Luxembourg and the actual corporate tax paid (i.e., less than half of the Luxembourg tax);

Where an entity or permanent establishment is treated as a CFC, non-distributed income of the CFC will be included in the tax base of the Luxembourg taxpayer when arising from non-genuine arrangements that have been put in place for the essential purpose of obtaining a tax advantage.

Hybrid Mismatch Rules

The new rules concern the mismatch that leads to the double deduction, deduction without inclusion, and hybrid PE no taxation without inclusion. Therefore to avoid such mismatch, the bill reiterates that taxpayers must be able to provide documentation to the tax authority that proves that expenses were not deductible in the other Member State or have been taxed in the other State. This documentation must be provided upon request.

The ATAD rules for mismatches involving third (non-EU) countries (ATAD2 rules) will be implemented in future legislation.

Interest Deduction Limitation

New interest deduction restriction rules are introduced to limit the deduction of net interest expense to 30% of EBITDA or a EUR 3 million safe harbor. Excess interest exceeding the limits may carry forward indefinitely and unused interest capacity may carry forward for five years.

Other Changes

The Law also amends the existing exit taxation regime (including provisions relating to inbound transfers) and the General Anti-Abuse Rule (GAAR) as a part of EU ATAD. Beyond the ATAD, the aforementioned law also amends two existing domestic provisions, the conversion of debt into equity and the amendment of the permanent establishment (PE) definition.

As recently announced by Luxembourg’s Minister of Finance, the law will apply to tax years starting on or after 1 January 2019, except for the provisions regarding exit taxation that will apply to accounting years, starting on or after 1 January 2020.

Source: Luxembourg Government

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