New tax law for 2017
On 14 December 2016, the Luxembourg Parliament approved a law making changes to the Luxembourg corporate and personal tax systems applicable as of 2017. The changes include, notably, a reduction of the corporate income tax (CIT) rate.
Reduction of the CIT rate
The CIT rate will be reduced from 21% to 18% over the next two years. There are no changes to the ‘solidarity surtax’ on the CIT rate nor any change in the rate of municipal business tax due by companies.
The CIT rate for companies having a net taxable base of more than 30,000 euros (EUR) has been reduced to 19% for 2017, leading to an overall tax rate for companies of 27.08% in Luxembourg City for fiscal year (FY) 2017 (taking into account the solidarity surtax of 7% on the CIT rate, and including the 6.75% municipal business tax rate applicable).
The CIT rate for companies having a net taxable base of more than EUR 30,000 will be further reduced to 18% for 2018, leading to an overall tax rate of 26.01% in Luxembourg City for FY 2018 (taking into account the solidarity surtax of 7% on the CIT rate, and including the 6.75% municipal business tax rate applicable).
Also, the CIT rate for small and start-up companies (i.e. companies having taxable income below EUR 25,000) has been reduced in a single step to 15% for 2017, leading to an overall tax rate of 22.08% in Luxembourg City (taking into account the solidarity surtax of 7% on the CIT rate, and including the 6.75% municipal business tax rate applicable). For companies with a tax base of between EUR 25,000 and EUR 30,001, the CIT would be EUR 3,750 plus 39% of the tax base above EUR 25,000 (for FY 2017) or 33% of the tax base above EUR 25,000 (for FY 2018).
Increase of the minimum net wealth tax (NWT)
As of FY 2017, holding and finance companies (i.e. companies whose sum of fixed financial assets, inter-company loans, transferable securities, and cash at bank exceeds both 90% of their total gross assets and EUR 350,000 are subject to a minimum NWT of EUR 4,815 (including the solidarity surtax).
The minimum NWT applicable to all other corporations having their statutory seat or central administration in Luxembourg remains unchanged (see Net wealth tax [NWT] in the Other taxes section).
Restrictions on the use of future losses
The use of losses generated as of 1 January 2017 is limited. Losses generated during and after 1 January 2017 will only be able to be carried forward for a maximum period of 17 years.
It should be noted that the losses that arose before 1 January 2017 are not affected in any way by this limitation.
Other new tax measures
Other measures of the tax reform that would benefit companies are as follows:
- The scope of Article 54bis of the Luxembourg Income Tax Law (LITL), which covers the deferred taxation for foreign-exchange gains on certain assets denominated in a foreign currency, has been extended to all companies as of FY 2016.
- Investment, especially in research and development (R&D), has been further encouraged through the increase of investment tax credits as of FY 2017. Complementary and overall investment tax credits are increased from 12% to 13%, and from 7% to 8%, respectively. The rate of overall investment tax credit for investment exceeding EUR 150,000, however, remains at 2%. The investment tax credit for assets eligible for the special depreciation regime is increased from 8% to 9% (the tax credit for investment exceeding EUR 150,000 remains at 4%). In addition, the scope of eligible investments has been extended to include investments made anywhere within the European Economic Area (EEA).
- In order to make inter-generational transfers of family businesses easier, capital gains linked to real estate assets (both land and buildings) will benefit from a tax-neutral treatment.
- Farming businesses may deduct 30% of the amount of any new investment of up to a total of EUR 250,000 made in the business. Investment above this amount is eligible for a deduction of 20% of the difference between the investment amount and the aforementioned EUR 250,000 limit.
- As of FY 2017, tax returns for companies liable to CIT are no longer allowed to be filed by post; it is mandatory to file them electronically.
- Deferred depreciation would be introduced. Under this regime, taxpayers could opt to defer a deduction deriving from a depreciation. These measures would increase the CIT for a given year and may allow a reduction of the net wealth tax due under certain conditions.
New value-added tax (VAT) measures
The tax reform for 2017 has also introduced new VAT measures, as follows.
Introduction of the personal and joint liability of managers in the Luxembourg VAT Law
Since 1 January 2017, managing directors, managers of companies (established and/or VAT registered in Luxembourg), as well as ‘de jure’ and ‘de facto’ managers in charge of the daily management of such companies, can be held jointly and personally liable in the event of breach of VAT compliance obligations and/or non-payment of the VAT due by the taxpayer they manage.
Increase of penalties for infringements to the VAT Law
Below are some examples of VAT penalties that apply since 1 January 2017:
- Between EUR 250 and EUR 10,000 per infringement in case of breach of VAT compliance rules (e.g. late VAT registration, invoicing, VAT filing and accounting rules) and VAT payment obligations.
- Daily penalties of maximum EUR 25,000 per day in case of absence of/delay in communicating documents/information upon request by the Luxembourg VAT authorities.
These penalties can be higher if the aim or result of the infringement(s) is to elude the payment of VAT or to recover VAT in an irregular manner (penalties can now reach between 10% and 50% of the VAT avoided or improperly claimed back).
Furthermore, aggravated tax fraud (fraude fiscale aggravée) and tax swindle (escroquerie fiscale) can now be punished with imprisonment.
Automatic exchange of information with respect to tax rulings and advance pricing agreements (APAs)
The Law dated 23 July 2016 concerning the automatic exchange of information with respect to tax rulings and APAs amends and supplements the Law of 29 March 2013 on the exchange of tax information. The Law dated 23 July 2016 aims at implementing the Amending Directive (European Union [EU]) 2015/2376 ('DAC 3') on administrative cooperation in the field of taxation.
According to this Law, the Luxembourg tax authorities must automatically exchange a detailed set of information with other EU member states’ tax authorities and the European Commission (EC) (to a more limited extent) for:
- all cross-border rulings or APAs issued, amended, or renewed after 31 December 2016; such exchanges must occur within three months of the end of the half of the calendar year during which the ruling or APA was issued, amended, or renewed
- existing cross-border rulings and APAs issued, amended, or renewed between 1 January 2012 and 31 December 2013; the information must only be communicated if the ruling or APA was still applicable on 1 January 2014, and
- existing cross-border rulings and APAs issued, amended, or renewed between 1 January 2014 and 31 December 2016; the information must be communicated regardless of whether the ruling or APA is still applicable.
By way of exception, the above communication procedure does not apply in cases where a ruling or APA was issued, amended, or renewed before 1 April 2016 for a specific person or group of persons with a group-wide annual net turnover of less than EUR 40 million in the preceding fiscal year. However, this exception does not apply to persons or groups of persons conducting primarily financial or investment activities. Another exception encompasses cases solely related to the tax treatments of one or more individuals. The set of information to be exchanged is summarised in the Form 777 made available by the Luxembourg tax authorities.
Country-by-country (CbC) reporting obligations
On 13 December 2016, the Luxembourg Parliament passed legislation implementing CbC reporting requirements for Luxembourg entities that are part of a multinational enterprise (MNE) group. The new CbC reporting legislation implements into Luxembourg law Council Directive (EU) 20016/881 of 25 May 2016 regarding the mandatory automatic exchange of information in the field of taxation (DAC 4) and it transposes into Luxembourg law part of the three-tiered standardised approach to transfer pricing documentation introduced in Action 13 of the Organisation for Economic Co-operation and Development (OECD)/G20 Base Erosion and Profit Shifting (BEPS) Project.
The Luxembourg CbC reporting obligations require Luxembourg ultimate parent entities controlling an MNE group whose total consolidated group revenue exceeds EUR 750 million to file CbC reports with the Luxembourg tax authorities. Other Luxembourg companies that are members of MNE groups may also have obligations to file CbC reports in Luxembourg, though foreign voluntary filings are, in practice, accepted. Both Luxembourg MNE group parents and other Luxembourg companies that are members of MNE groups must also comply with (electronic) notification requirements where relevant.
Penalties up to EUR 250,000 are applicable in respect of the notification or CbC reporting in case of late or no filing, incomplete or incorrect filing, or refusal to provide information in case of application of the ‘secondary’ mechanism.
Updates to the transfer pricing legislation
On 23 December 2016, the Luxembourg Parliament passed legislation that especially sets out new transfer pricing provisions, augmenting the basic arm’s-length rule in force since 1 January 2015 and which formally aims at adopting the OECD standard into Luxembourg law.
Luxembourg’s transfer pricing regime has been based on Article 56 LITL since 1 January 2015, which broadly replicates the arm’s-length principle wording as set out in Article 9 of the OECD Model Tax Convention. The new legislation now introduces a further Article 56bis in the LITL to bring into Luxembourg law some of the key principles and methodologies set out in the OECD transfer pricing guidelines in their 2016 form.
However, the envisaged introduction of those principles does not represent a radical change, as Luxembourg has already recognised the application of the OECD transfer pricing guidelines previously. The Luxembourg legislation becomes more explicit in this area, and, at the same time, adopts the new recommendations stemming from the OECD BEPS project.
In relation to Article 56bis LITL, the Luxembourg tax authorities issued on 27 December 2016 a new transfer pricing circular (Circulaire du directeur des contributions L.I.R. n° 56/1 - 56/bis/1 - TP Circular) providing guidance for the tax treatment of intragroup financial transactions. The aforementioned TP Circular is effective as of 1 January 2017 and emphasises the importance of adequate substance and a functional analysis, covering the functions, assets, and risks of the transacting parties and their commercial relationship, to determine the appropriate equity level.