Luxembourg

New tax law for 2020

Law implementing the EU Anti-Tax Avoidance Directive 2 (ATAD 2)

On 19 December 2019, the Luxembourg Parliament voted to approve the law implementing the EU Anti Tax Avoidance Directive regarding hybrid mismatches with third countries (“ATAD 2”) into Luxembourg domestic law (the “Law”).

The Law generally follows the text of ATAD 2 rather closely, adapting it mainly to integrate with the structure and terminology used in the Luxembourg Income Tax Law (“LITL”).

The Law aims at preventing “deductions without inclusion” and “double deductions” caused by “hybrid mismatch” tax treatments.

As anticipated by ATAD 2, the Law will in general apply to tax years starting as from 1 January 2020, with the additional “reverse hybrid” measures that comprise Article 9a of ATAD 2 applying from the 2022 tax year, i.e. to tax years closing in 2022. For taxpayer having a tax year diverging from the calendar year, this means that Article 9a of ATAD 2 may apply to them already in 2021.

Multilateral convention

In 2017, Luxembourg was one of the original 68 jurisdictions to sign the Organisation for Economic Co-operation and Development (OECD)-sponsored Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (BEPS), commonly referred to as the ‘Multilateral Convention’ or ‘MLI’.

On 14 February 2019, Luxembourg’s Chambre des Députés voted to approve Bill N^o 7333, necessary to ratify the text of the MLI. No changes have been made to the original list of reservations and notifications submitted to the OECD.

Following this, on 9 April 2019 Luxembourg deposited with the OECD its instrument of ratification of the MLI. Under the provisions of the MLI, this formal action defines the subsequent timing for the MLI to begin to come into effect for Luxembourg’s network of tax treaties.

The MLI formally 'entered into force' for Luxembourg on 1 August 2019.

The dates on which the provisions of the MLI that apply to Luxembourg’s DTT network then actually come into effect are variable, as these also depend on the timing of ratification process for the MLI by each relevant treaty co-signatory. However, it is now clear that, insofar as the new 'Principal Purposes Test' in the MLI potentially limits the treaty benefits of reduced or zero rates of withholding taxes, for many of Luxembourg’s treaties these MLI measures take effect on 1 January 2020.

Conversely, Luxembourg’s treaties with countries that have yet to sign the MLI, such as the United States (US), cannot be affected by any MLI modifications, unless and until the country concerned has both subsequently signed the MLI and gone through its ratification and deposit processes.

DAC 6 Luxembourg Bill

On 8 August 2019, the Luxembourg Government tabled a Bill before the Luxembourg Parliament setting out draft legislation (the “Draft Law”) that will implement the Directive (EU) 2018/822 amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements (commonly referred as "DAC 6"). EU Member States have until 31 December 2019 to transpose most of the measures in DAC 6 into their domestic laws, and must apply those provisions from 1 July 2020.

As of 31 December 2019, the final text was not yet voted.

The Draft Law follows the text of DAC 6 rather closely.

DAC 6 makes it mandatory for intermediaries (or taxpayers, if there is no intermediary or intermediaries subject to professional secrecy as defined by MS’ s domestic laws) to report some cross-border transactions and arrangements to the domestic tax authorities, and will trigger the subsequent automatic exchange of information to tax authorities of all EU Member States through access to a central directory.

In the Draft Law, the Luxembourg government chose to limit itself to a mere transposition of the Directive, i.e. the scope of the reporting obligation is not extended beyond what is required by the Directive. As a matter of example, no reporting will therefore be applicable in relation to purely domestic arrangements or arrangements in indirect tax matters.