On 15 October 2014, Finance Minister Pierre Gramegna presented Luxembourg's 2015 draft Budget to the Luxembourg Parliament.
On the day before the budget announcement, Prime Minister Xavier Bettel delivered a statement, highlighting the Luxembourg Government’s major political priorities for 2015 to 2018 and outlining what is being referred to as the Zukunftspak or Package for the Future.
A total of € 15.6 billion in spending and € 14.8 billion in revenue will result in a public deficit of € 817 million, amounting to 1.6% of Luxembourg's gross domestic product (GDP). By 2015, Luxembourg's public debt will have risen to 25% of GDP. The Government aims to bring this public debt down to 21.8% by 2018. More key figures are summarized in the following factsheet (PDF, 466KB).
Minister Bettel stressed that – now more than ever – the Government will need to take corrective measures if they are to balance the budget and open new opportunities for the country. 258 measures focusing on transparency, efficiency and austerity are being proposed and should be implemented progressively between 2015 and 2018.
The impact on corporate taxpayers should be fairly limited, as only a small fraction of the measures will directly affect the current corporate income tax rules. In this regard, Minister Bettel did, however, confirm that a major tax reform is in the pipeline (probably for 2017) and that it will be concerned with “the fair taxation of individuals and the competitiveness of companies”.
The main tax-related measures affecting corporations, as included in the two draft laws, are summarized below. Subject to enactment by Parliament by the end of the year, they should apply as from 1 January 2015.
Formalization of the tax clearance process
The advance tax clearance process will be given an explicit legal basis in the Luxembourg tax law (Abgabenordung). As stated in the parliamentary documents, the objective of this measure is only to formalize and modernize the existing procedure. A Grand Ducal decree will be issued, giving more details in this respect.
However, what is new is that taxpayers who wish to obtain an advance tax clearance from the tax administration may now have to pay an administrative fee, in order to compensate the tax authorities for the additional costs borne in relation to the advance tax clearance process. The fee to be paid could amount to anywhere up to € 10,000 per request – a development which is already current practice in some other European countries.
In order to enhance the clarity of the Luxembourg tax legislation in terms of transfer pricing, article 56 of the Luxembourg Income Tax Law (“LITL”) will be amended. The new article will make explicit reference to the (arm’s length) conditions agreed between independent businesses as a standard for evaluating the conditions agreed between related parties. This standard will be applied for both resident and non-resident related parties (contrary to the current wording of article 56 LITL). Based on the new wording of article 56 LITL, profits can be adjusted up- or downwards for transfer pricing purposes. This change is inspired by the transfer pricing legislation applicable in other EU Member States, particularly in the Netherlands.
A Grand Ducal decree will provide further details with regard to the application of this new article.
On a general note, the Abgabenordung will be adjusted so that the general information and documentation obligations of taxpayers are expressly extended to transactions between related parties. Currently, the Luxembourg tax legislation does not dispose of specific guidelines in terms of transfer pricing documentation. Based on this new provision and on the related comments made in the parliamentary documents, it is clear that particular attention is given to transfer pricing documentation.
A more detailed newsletter on these new rules will follow.
Increase of VAT rates
The expected increase in the main Luxembourg VAT rates (by 2 percentage points) – which will come into effect on 1 January 2015 - is now officially confirmed.
From the beginning of next year, the standard VAT rate will thus rise from 15 percent to 17 percent. The 2 percentage point increase will also apply to reduced VAT rates, from 12 percent and 6 percent, to 14 percent and 8 percent respectively.
The super-reduced VAT rate of 3 percent will remain unchanged, except for the following transactions:
(please refer to the attached factsheet (PDF, 339 KB).
Other corporate tax measures
Minimum tax – Article 174 LITL
In order to favor small and medium sized enterprises, companies mainly involved in financing activities for which the sum of their financial assets is less than or equal to € 350,000 (but represents more than 90% of the total balance sheet), will no longer be subject to the minimum corporate income tax of € 3,000 (amendment to article 174, al. 6, n° 1 LITL), but they will be subject to a minimum corporate income tax of € 500.
Refund of withholding tax – Article 154 LITL
Article 154 LIR is modified in order to put an end to a possible discrimination (based on European law) of non-resident taxpayers receiving dividend income subject to withholding tax in Luxembourg. Currently, Luxembourg resident taxpayers are able to offset withholding tax on dividends against their income tax liabilities and claim a refund for the excess, whereas this is not possible for non-resident taxpayers for which the withholding tax constitutes a final tax.
With this amendment, withholding tax on income from capital will no longer be refundable unless article 149, al. 4a LITL is applicable, i.e. in case dividends have been paid before the 12 month holding period under the Luxembourg participation exemption regime.
The proposed amendment will thus bring the Luxembourg legislation in line with the recent case law of the European Court of Justice
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