Luxembourg

DAC 6 Luxembourg Law

On 21 March 2020, the Luxembourg Parliament voted to approve the Bill (n°7465) implementing the Directive (EU) 2018/822 on mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements (commonly referred to as 'DAC 6'). The law dated 25 March 2020 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 EU member states' 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.

During the Luxembourg legislative process, amendments were made to the initial provisions in relation to professional secrecy at the request of the State Council. As a result of these amendments, the benefit of professional secrecy, initially limited to lawyers, has been extended to auditors and qualified accountants. In most cases, and as further explained below, the reporting obligation to the Luxembourg tax authorities will therefore be shifted to other intermediaries or to the taxpayer.

Initially, to the extent that the first step of implementation of a project would happen between 25 June 2018 and 1 July 2020, the exchange of information would have to be made by 31 August 2020 for arrangements falling into the hallmarks (as per DAC 6, different reporting rules have to be respected depending on the status/timing of the restructuring, i.e. advise or implementation).

On 24 June 2020, the European Council formally adopted an amendment to the Directive on the administrative cooperation in the area of taxation (DAC) allowing EU member states to defer by up to six months DAC 6 deadlines. The Law of 24 July 2020 provides therefore a postponement of six months of the various obligations for intermediaries and taxpayers affected, as follows: 

• The final deadline for filing arrangements linked to the transition period (reportable arrangements - the first step of which was implemented between 25 June 2018 and 30 June 2020) is postponed to 28 February 2021;

• The date for the beginning of the period of 30 days for reporting by intermediaries (or taxpayers) on reportable cross-border arrangements for which the first step of implementation occurs between 1 July 2020 and 31 December 2020 (the “post-transition” period) is changed from 1 July 2020 to 1 January 2021. This also applies for the starting of the 10-day period applicable to intermediaries benefiting from legal privilege in relation to their obligation of notification for the post-transition period;

• Exchanges of information between Member States under DAC 6 would first occur at the latest on 30 April 2021 (instead of 31 October 2020).

Finally, the above extensions of deadlines enter into force with retroactive effect as from 30 June 2020.

Controlled Foreign Company (CFC) Circular

On 4 March 2020, the Luxembourg tax authorities issued an administrative circular of 25 pages (the 'CFC Circular'), providing guidance on their interpretation of article 164ter of the LITL relating to CFC taxation. 

The CFC Circular emphasises that its text complements the existing Luxembourg transfer pricing rules. In this sense, the CFC Circular introduces a transfer pricing documentation obligation for Luxembourg taxpayers to prepare, on an annual basis, a functional analysis covering any relationships with foreign entities or permanent establishments (PEs) that the CFC rules deem to be CFCs. Such documentation should be made available upon request to the Luxembourg tax authorities.

This functional analysis should include details of all directly and indirectly owned CFCs, and identify the 'significant people functions' (irrespective of their location) that manage and control the assets and associated risks of each CFC, where these functions are located, and how these functions play an essential role in generating that CFC’s income. 

If some of these functions are carried out by the Luxembourg taxpayer, the relative contribution to the value creation and risk assumption of each of the 'significant people functions' carried out will need to be determined, based on domestic transfer pricing rules, to compute the CFC income attributable to the taxpayer in Luxembourg.

Draft law on non-deductibility of payments to EU 'black-list' non-cooperative jurisdictions

On 30 March 2020, the Luxembourg government tabled a Bill (n°7547) before the Luxembourg Parliament, setting out draft legislation that disallows the tax deduction of interest or royalties paid or due to related parties if these are corporate entities established in countries that are 'black-listed' as being 'non-cooperative' for tax purposes.

The application of the draft legislation is limited in several ways:

• Only interest and royalties expenses paid or due to 'associated enterprises', as defined for the purposes of applying Luxembourg’s transfer pricing regime, are in scope.

• The measure only applies if the recipient is a corporate entity that would be regarded as 'opaque' under Luxembourg tax law. 

• The measure does not apply to operations that can prove that they can satisfy the 'valid commercial reasons that reflect economic reality' requirement. These are not defined in the specific context and will need to be assessed on a case-by-case basis. 

The definitions of interest and royalties for the purposes of this measure are in line with those used in the relevant articles of the OECD Model Tax Convention, and thus with those used in most of Luxembourg’s DTTs. 

This measure is in line with guidelines of the Council of the EU, agreed at the Council of 5 December 2019. Assuming the measure is enacted, it will apply for expenses paid or due as of 1 January 2021.

Administrative Circular on the application of the Participation exemption regime to Gibraltar companies

On 1st December 2020, the Luxembourg tax authorities issued the Circular LIR n°147/2, n°166/2 and Eval. n°63 (the 'Circular') in relation to the treatment of Gibraltar companies as regards their eligibility to the Luxembourg participation exemption resulting from ECJ decision C-458/18 (the 'ECJ decision').

 As a reminder, the ECJ decision dated 2 April 2020 enacted that Gibraltar companies are not enjoying the benefit of the Parent Subsidiary Directive as they do not qualify as companies 'incorporated under United Kingdom law' while they may enjoy fundamental freedoms.

 In the Circular, the Luxembourg tax authorities consider, by administrative tolerance, that Gibraltar companies remain eligible to the Luxembourg participation exemption regime up to 31 December 2020. In other words, the exclusion of Gibraltar companies for the application of the PSD should enter into force solely as from 1st January 2021 in Luxembourg. 

2021 Budget Law

On 17 December 2020, the Luxembourg Parliament voted to approve the 2021 Budget Law, which includes a number of measures that amend or extend the tax legislation. The draft text of the legislation (Bill n°7666) had been submitted to Parliament on 14 October 2020.

For the 2021 tax year, all corporate tax rates are to remain unchanged – the headline overall effective corporate tax rate thus remains 24.94%.

Tax regimes for funds remain stable. Fund vehicles (Part I and II UCIs) investing in sustainable assets will begin to benefit from rates of subscription tax reduced from the standard 0.05% rate. One long-foreseen and sharply-focused anti-avoidance measure targets non-tax transparent Luxembourg fund vehicles investing directly in Luxembourg real estate, with both gross rental income and disposal gains arising as from 1 January 2021 being subject to a new real estate levy ('prélèvement immobilier') applying at a 20% rate. Only a very small number of fund vehicles are expected to be affected, and the levy does not apply to any fully taxable corporate (i.e. non-transparent) entities owning Luxembourg real estate, even when owned by Luxembourg fund vehicles. Nor does the new levy apply to Luxembourg funds holding real estate assets sited outside Luxembourg.

In addition, a possibility to switch from an existing vertical tax unity to a horizontal one without triggering the retroactive cancellation of the existing tax unity is provided for, upon certain conditions. This possibility follows the recent ECJ case-law C-749/18 judgement of 14 May 2020, and is limited to requests submitted before the end of the 2022 tax year.

Finally, the accelerated rate of deprecation for buildings acquired or whose construction is completed after 1 January 2021 for the purposes of generating rental income is reduced, from 6% to 4%. For such buildings, the period from completion during which this accelerated rate of depreciation may apply is also reduced, from 6 to 5 years. Similar amendments to the depreciation rules will also apply to the costs of renovating of an older property, in cases where the investment costs exceed 20% of the acquisition price of the property. Under certain conditions, more generous accelerated depreciation rules will apply to sustainable energy renovation expenses.