Luxembourg

Corporate - Significant developments

Last reviewed - 01 July 2021

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

On 28 January 2021, the Luxembourg Parliament voted to approve an amendment to the income tax law provisions that triggers non-tax deductibility of some expenses incurred by corporate taxpayers towards recipients resident in non-cooperative jurisdictions. This measure follows guidelines of the Council of the EU, agreed at the Council of 5 December 2019.

It should however be noted that:

  • 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. 

The new provision applies as from 1 March 2021 for jurisdictions that are listed in the most recent version of the "Annex 1" list published in the Official Journal of the EU. The list is by no means a static one: 

  • If a jurisdiction is added to the list, and is still on the latest list to have been published in the Official Journal before the next subsequent 1 January, then the provision applies to expenditure accruing as due, but only as from that 1 January following.
  • If a jurisdiction is removed from the list, then the provision ceases to apply to expenditure accruing as due, as from the date of publication of the version of the list confirming that that the jurisdiction concerned has been removed.
  • It should also be noted that, since the 2018 tax year, Luxembourg companies have already been required to indicate in their tax returns whether they have undertaken any transaction with any related party located in any of the EU “Annex I” jurisdictions. This existing requirement is not affected by the new provision.