On 14 October 2015, the Luxembourg Government submitted two draft laws to Parliament:
These bills reflect the political will of the Luxembourg Government to both implement BEPS / EU compliant measures and improve the competitiveness of the Luxembourg tax system.
This newsletter gives a first high level insight into the tax measures proposed by the Government.
Repeal of the Luxembourg IP tax regime (Art. 50bis LITL)
As a first step towards compliance with the “nexus” approach as recommended by the OECD for IP regimes in the BEPS action 5 report (issued on 5 October 2015), the Budget Bill’s aim is to repeal, as from 1 July 2016, the existing IP regime. Under the previous regime, a 80% corporate income tax (CIT) exemption on net income and capital gains deriving from qualifying IP rights (and a full NWT exemption) was available.
The Bill however also contains a grandfathering rule whereby taxpayers benefiting from the current regime are allowed to keep such entitlement until 30 June 2021.
Consistent with the OECD guidelines, this grandfathering rule comes with two safeguards:
The Bill does not contain any provisions implementing a new IP regime in line with the “nexus” approach. However, one can expect the release of such a new regime in the coming months.
Introduction of a digressive NWT rate
Bill n.6891 proposes to introduce a digressive NWT rate where the net taxable wealth of corporate taxpayers exceeds a certain threshold. Thus, the NWT rate would be reduced to 0.05% for the part of the unitary value exceeding €500 mio., whereas the part of the unitary value equal or below €500 mio. would remain taxable at the current rate of 0.5%.
Replacement of the minimum CIT by a minimum NWT (and other changes)
In order to comply with EU principles, Bill n.6891 proposes to abolish the current minimum CIT (due by Luxembourg resident corporate taxpayers) and to replace it by a minimum NWT.
Overall, the rules determining the minimum NWT would remain the same as the ones currently in force for the determination of the minimum CIT, except for certain changes.
For non-holding companies (which do not have aggregate financial assets exceeding 90% of their total balance sheet and €350,000), the amount of the higher scale of minimum NWT would now be increased from €21,400 to €32,100 if their total balance sheet exceeds €30 mio.
In addition, the new minimum NWT would not be seen as an advance payment against future NWT liabilities, as was the case for the current minimum CIT.
To avoid an increased tax burden for taxpayers, as a result of the combined effect of the CIT and the minimum NWT, the Bill provides that the minimum NWT can be reduced by the CIT liability of the previous year (save for the minimum 2016 NWT, which can be reduced by the 2016 CIT liability), without however being lower than the effective NWT due by application of the standard NWT rates (i.e. the 0.5% and 0.05% rates).
The Bill also foresees specific rules for companies that are members of a tax consolidated group. For these companies, the minimum NWT remains due by each company member of the group, however the total amount of minimum NWT due by all companies of the group is capped at EUR 31,200.
Securitization vehicles, SICARs, SEPCAV and ASSEPs incorporated as corporations will be subject to the minimum NWT (as they were to the minimum CIT) although they are generally not subject to NWT. Luxembourg permanent establishments of non-resident entities remain excluded from the minimum taxation.
Finally, the Bill introduces a safeguard rule according to which, when a share capital reduction occurs, the NWT reserve previously incorporated into the share capital will be deemed distributed first. Consequently, the NWT due for the year in question will be increased (for one fifth of said reserve), should the amount so distributed have not been previously kept for 5 years.
Introduction of a “step-up” mechanism
Bill n. 6891 introduces a “step-up” system for individuals transferring their tax residency to Luxembourg. In such a case, the acquisition price of shares and convertible loans held by the taxpayers holding substantial shareholdings (i.e. participations of more than 10%) will be deemed to be the estimated realization value of the said assets at the date when the individual becomes a Luxembourg resident taxpayer. The initial acquisition date of the assets transferred is still to be considered in order to calculate the holding period.
Consequently, these taxpayers will not be taxed in Luxembourg on the latent capital gains existing on these assets prior to their transfer of residence.
Improvement of Article 154 alinea 6 LITL
In order to comply with EU principles, Bill n. 6891 introduces an option for all individuals who were not tax residents in Luxembourg for the entire year to be taxed in Luxembourg as if they had been residents for the whole year. This option aims at granting the possibility for these taxpayers to benefit from full year’s tax rates, exemptions, and tax deductions/credits. So far, such an option already existed, but was limited to employees and retired persons who were tax resident for only part of the year.
Introduction of a tax amnesty regime
The Budget Bill introduces a temporary tax amnesty regime for the years 2016 and 2017 for the benefit of Luxembourg resident taxpayers. To benefit from this tax amnesty, Luxembourg resident taxpayers will have to spontaneously file an amended tax return and pay the tax due plus a penalty of 10% if reported in 2016, or of 20% if reported in 2017.
If voted by the Parliament before the end of the year, all measures will generally be applicable as from 2016, except for the “step-up” provision and the change to article 154 al 6 LITL which will apply as from 2015.
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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 endeavour 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.