On 18 December 2014, the Luxembourg 2015 Budget (hereinafter the "Law") was voted by Parliament (subject to confirmation by the State Council that no second hearing of the bill is required). The budget contains various tax measures affecting corporations, which were described in detail in a previous newsletter (see newsletter 2014-22). These measures will apply as from 1 January 2015.
Amongst the proposed measures, the most important that are analyzed in the present newsletter are (i) the new rules for the Advance Tax Agreement (i.e. tax ruling) process, (ii) the new transfer pricing rules and (iii) the new VAT rules.
Advance Tax Agreement process
The main objective of the Law is to give an explicit legal basis to the Advance Tax Agreement (“ATA”) process, but it will also bring some important changes to the way the ATA process will be carried out in practice.
Formalization of the ATA process
The ATA process is now expressly included in the Luxembourg Tax Law (new §29a of the General Tax law, the "Abgabenordung"). As stated in the parliamentary documents, the objective of this measure is to formalize and modernize the existing procedure, which was required in the current global economy.
In line with the current practice, the Law provides that ATAs will be valid for a 5 year period and will be binding on the tax authorities, unless:
It has also been added that the ATA cannot lead to a tax exemption or a tax reduction. This must be understood as confirming, in line with the current practice, that an ATA cannot give a tax advantage without any legal basis.
Changes in the ATA process
The Law foresees that a Grand-Ducal decree will be issued to give more details on the ATA process. Based on the draft Grand-Ducal decree that was made public early December, the most important changes expected are as follows:
The exact content of the new process will only be known when the final version of the Grand-Ducal decree will be released.
Finally, and as already announced, corporate taxpayers who wish to obtain an ATA will now have to pay an administrative fee (“redevance”) in order to compensate for the (additional) costs borne by the tax authorities in relation to the ATA process. The fee to be paid will range between € 3,000 and € 10,000 per request, depending on the complexity of the request and the workload of the tax authorities to deal with the request. The amount to be paid will thus have to be determined on a case by case basis, taking into account the above mentioned criteria. It is not yet stated when the fee will have to be paid (i.e. upon filing of the request or a posteriori), but this will be foreseen in the Grand-Ducal decree that will be issued and give more details in respect of the collection of this administrative fee.
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”) has been amended.
The new article now makes explicit reference to the (arm’s length) conditions agreed between independent businesses as a standard for evaluating the conditions agreed between related parties. Based on the new wording of article 56 LITL, profits can be adjusted up- or downwards for transfer pricing purposes. The text does not make a distinction between cross-border and domestic intra-group transactions.
This change is inspired by the transfer pricing legislation applicable in other EU Member States, particularly in the Netherlands. The final text of article 56 LITL is fully in line with the bill of October.
In the bill it was stated that a Grand Ducal decree was to be issued in order to give more details in this respect. This was however deleted in the final text. It is now expected that more details will be given in a new administrative circular (as is already the case for the transfer pricing guidelines on intra-group financing activities).
On a general note, the General Tax Law ("Abgabenordung") has been 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. As a basic principle, it must be remembered that there should be an appropriate balance between the tax authorities’ need for information and the cost for the taxpayer of the providing of the relevant documentation.
Increase of VAT rates
The 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 new standard VAT rate of 17 percent will remain the lowest within the EU.
The super-reduced VAT rate of 3 percent will remain unchanged, except for the following transactions, which will be subject to the standard VAT rate of 17 percent:
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The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.