As reported in our previous newsletter (see Luxembourg Tax News 2015-16), the Luxembourg government council approved in July 2015, a bill containing various new corporate tax measures including the transposition of recent amendments made to the EU Parent-Subsidiarity Directive. On 5 August, the text of the bill was finally made public and submitted to the Luxembourg Parliament. The bill is expected to be voted before the end of the year.
The key measures included in this new bill are described below.
Transposition of amendments made to the EU Parent-Subsidiary Directive
The bill includes provisions which aim at modifying the domestic participation exemption regime in order to comply with the new rules recently introduced by the European Commission into the EU Parent-Subsidiary Directive (the “Directive”) in July 2014 and January 2015. As expected, the wording of the bill is a faithful transposition of the Directive.
General anti-abuse rule
Based on the bill, dividends (falling within the scope of the Directive) and which are paid by a Luxembourg company to another EU company (or to an EU Permanent Establishment (“PE”) of another EU company), as listed in article 2 of the Directive, will not benefit from a withholding tax exemption (as provided for by article 147 of Luxembourg Income Tax Law (“LITL”)) if the transaction is characterized as an abuse of law within the meaning of the Directive. In this respect, a transaction may be considered as abusive if it is an arrangement, or a series of arrangements, that:
The same principle will apply to dividends received by a Luxembourg company from another EU company which will no longer be tax exempt (based on article 166 LITL) if the above conditions are met.
In line with the purpose of the Directive to combat intra-EU hybrids, profits deriving from a participation falling within the scope of the Directive will no longer be tax exempt in Luxembourg (based on article 166 LITL) to the extent that such distributions are deductible by the payer located in another EU Member State.
The purpose of this provision is to avoid situations of double non-taxation deriving from mismatches in the tax treatment of profit distributions between Member States.
The bill also amends the list of eligible companies, as listed in article 2 of the Directive, to include new forms of Romanian and Polish companies.
The text of the bill is in line with the wording of the Directive and does neither provide for more stringent rules nor for an extensive transposition to situations which are, per se, not falling within the scope of the Directive. For example, dividends paid to (or received from) a company located outside the EU are not covered by the new rules. Furthermore, no changes are brought to the current domestic participation exemption regime applicable to capital gains and for net wealth tax purposes.
The new provisions will apply to income allocated after 31 December 2015.
Introduction of the “horizontal” fiscal unity
Under the current rules, a tax unity group can only be formed between a Luxembourg parent company (or a Luxembourg PE of a foreign company) and its Luxembourg subsidiaries provided that certain conditions are met (notably with respect to holding thresholds and subject to tax requirements). This is what is usually called the “vertical” fiscal unity as the parent company is also a member of a consolidated tax group.
In order to comply with EU law (and in particular with the ECJ decision of 12 June 2014, “SCA Group Holding”, C-40/13), the bill contains new measures with provide for the possibility to apply for a so-called “horizontal” tax unity, whereby eligible sister companies can form a tax unity group (without having their parent company being part of the tax unity).
The chart below gives an illustration of a horizontal tax unity group.
Based on the bill, the setting-up of a “horizontal” tax unity group will be subject (among others) to the following conditions:
Eligible companies are free to decide to set-up either a vertical or a horizontal group (if all the conditions are met). However, once the initial choice is made, the companies are bound for a 5 year period.
The new provisions will apply as from the year 2015.
Additional adjustments to the tax unity regime
In order to comply with EU law (and in particular with the ECJ decision of 6 September 2012, “Philips Electronics”, C-18/11), the bill foresees that a Luxembourg PE of a foreign company resident in a EEA country can now also be included as a subsidiary in the tax consolidated group. However, foreign subsidiaries remain out of the scope of the regime.
The General Tax Law is modified in order to facilitate the recovery of tax claims within the tax unity group and thus ensure that each member of the tax consolidated group can be held liable for the taxes due by the parent company of the group (in case of default of the latter).
Enlargement of the scope of investment tax credit
The investment tax credit (“bonification d’impôt pour investissement”) is now also available for a lessor for ships used in international traffic (provided that the conditions set forth by the law are met). This change is introduced in order to further enhance the attractiveness of Luxembourg for the maritime sector.
The new provisions will apply as from the year 2015.
Enlargement of the scope of taxpayers eligible for a deferral of payment for taxes
Currently, in case of a migration of a Luxembourg company (or of a transfer of a domestic enterprise / permanent establishment) outside of Luxembourg, a deferral of payment for taxes due on unrealized capital gains (i.e. exit tax) can be granted under certain conditions. One of these conditions is that the host country must be located in the EEA.
Under the bill, this deferral will now be extended to transfers made to any third country having concluded an exchange of information agreement with Luxembourg that is substantially in line with the OECD principles laid down in article 26 §1 of the Model tax convention.
Furthermore, the bill foresees that the deferral of payment is not cancelled when assets (having previously given right to a deferral of payment) are further transferred to another EEA or eligible third country within the frame of a reorganization falling within the scope of the Merger Directive, under certain conditions.
These provisions will apply as from the year 2016.
Extension of the tax credit available for hiring unemployed persons
The benefit of tax credit available for hiring unemployed persons is extended until December 2016.
For further information, please do not hesitate to contact us.
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