Law of 18 December 2015 modifying the Luxembourgish Tax Law
On 17 December 2015 the Luxembourg Parliament adopted a number of direct tax modifications impacting individual and corporate taxpayers (draft laws no. 6847, 6891 and 6900) published in the Law of 18 December 2015.
The most important corporate tax changes are
- Repeal of the current Luxembourg Intellectual Property regime;
- Amendment of the Luxembourg participation exemption regime;
- Extension of the Luxembourg fiscal unity regime
- Extension of the deferred tax payment upon exit to countries outside the European Economic Area
- Abolition of minimum corporate income tax and revision of net wealth tax;
The most important individual tax changes are
- Specification of the law relating to voluntary disclosures of false or incomplete tax declarations
- Step up basis mechanism for individual taxpayers transferring their tax residence to Luxembourg
- Option for individuals who are not Luxembourg residents for the entire year to be taxed in Luxembourg as if they had been residents for the entire year
Corporate tax changes
Abolition of minimum corporate income tax and revision of net wealth tax
In order to comply with EU rules, the minimum corporate income tax is repealed as from 2016 tax year, and replaced by a new minimum net wealth tax of the same amount, under similar conditions and with some exceptions.
Compared to the minimum corporate income tax, the new minimum net wealth tax is not considered an advance payment against future net wealth tax liabilities.
Entities for which the sum of fixed financial assets, transferable securities and cash at bank exceeds 90% of total gross assets and the amount of EUR 350.000 are subject to a minimum net wealth tax of EUR 3.210. All other corporations are subject to a minimum net wealth tax from EUR 535 to a maximum of EUR 32.100 dependent on total gross assets.
Repeal of the current IP regime
The existing IP regime regulated by article 50bis Luxembourg Income Tax Law (“LITL”)grants 80% exemption from tax on net income and capital gains derived from several types of intellectual property. In conformity with the EU’s Code of Conduct for Business Taxation Group and the conclusions set out in the OECD/G20 BEPS Project the existing regime is repealed as from 1 July 2016 for corporate income tax and municipal business tax, and as from 1 January 2017 for net wealth tax.
Taxpayers holding IP assets that currently benefit from the Luxembourg IP tax regime will continue to benefit from the regime until 30 June 2021. Furthermore, IP assets acquired from any “related party” between 1 January 2016 and 30 June 2016 and that have not previously benefited from an IP tax regime, will not be entitled to the Luxembourg IP tax regime after 31 December 2016 for corporate income tax and municipal business tax, and as from 1 January 2018 for net wealth tax.
A new IP regime approach will be introduced at a later stage.
Amendment of the Luxembourg participation exemption regime
By adopting the draft law 6847 the Directive 2014/86/EU on anti-hybrid instruments and Directive 2015/121/EU on the European General Anti Abuse Rule (“GAAR”) amending the parent subsidiary 2011/96/EU, respectively the articles 147 and 166 of Luxembourg Income Tax Law were transposed to Luxembourg domestic tax law.
The new provisions implementing the Directives apply to income distributed or received after 31 December 2015, and do not impact the Luxembourg domestic participation exemption regime as regards i) capital gains realized by Luxembourg companies or ii) net wealth tax.
Article 166 of the LITL is amended insofar as dividend income received by a qualifying Luxembourg company from a qualifying subsidiary company is no longer tax exempt in Luxembourg, where said income is deductible at the level of the EU resident corporate payer, or where the transaction is characterized as “not genuine” in the meaning of the GAAR. However, the GAAR does not apply to transactions where dividends are received from a non-resident (including EU) corporate entity that is fully subject to an income tax comparable to the Luxembourg corporate income tax (Article 166 (2) No. 3 LITL).
Article 147 LITL on the withholding tax exemption on dividends is also amended, in particular to implement the GAAR. Where a qualifying Luxembourg company distributes dividends to a qualifying EU company, the withholding tax exemption under the domestic participation exemption regime will not apply if the transaction is characterized as “not genuine” in the meaning of the GAAR. However, the GAAR does not apply to transactions where dividends are distributed to a non-resident (including EU) corporate entity that is resident in a tax treaty partner country and fully subject to an income tax comparable to the Luxembourg corporate income tax (Article 147 (2) Sub e) LITL).
Extension of the Luxembourg fiscal unity regime
The Luxembourg fiscal unity regime has extended the scope of the vertical tax consolidation (already permitted) and has introduced a horizontal tax consolidation.
A vertical fiscal unity can now include, as an integrated entity, a Luxembourg permanent establishment of a non-resident company that is fully subject to an income tax comparable to the Luxembourg corporate income tax
The purpose of the extension of the tax unity regime to horizontal tax consolidation expands the law to Luxembourg resident fully taxable sister companies held directly or indirectly by a common EEA-resident parent company (or a common EEA-resident PE of a fully taxable non-resident company) that is fully subject to an income tax comparable to the Luxembourg corporate income tax.
The conditions for the fiscal unity to apply remain substantially unchanged.
Extension of the deferred tax payment upon exit to countries outside the European Economic Area
In 2014, Luxembourg introduced a regime for cases where a Luxembourg company migrates to another EEA Member State. Upon request, tax payments on unrealized gains are deferred until said gains are realized (exit taxation).
In order to benefit from this regime, two conditions must be met: the corporate taxpayer should (i) remain resident in an EEA Member State following the migration out of Luxembourg and (ii) continue to own the transferred assets.
This regime is also applicable to any taxpayer resident in an EEA Member State who transfers, subject to the above conditions, a Luxembourg enterprise or permanent establishment to another EEA Member State.
The scope of the deferred tax payment regime has now been expanded. From 2016 on the tax deferral isalso permitted for transfers to the non-EEA Member States under the same requirements as the existing regime, provided that an international agreement (bilateral or multilateral) including a clause on the exchange of information on request is in force between Luxembourg and the concerned State.
Individual tax changes
Specification of the law relating to voluntary disclosures of false or incomplete tax declarations
The law relating to voluntary disclosures of false or incomplete tax declarations is set out in the General Tax Code from 22 May 1931 (“Abgabenordnung”/”AO”). This law however defined no degree of penalty. A temporary tax amnesty regime is introduced for the period starting on 1 January 2016 and ending on 31 December 2017, under certain specific conditions to concretize the fines for filing false or incomplete tax declarations
To benefit from this measure, Luxembourg individual taxpayers need to spontaneously file a rectifying tax return and pay the taxes due plus a penalty fee of 10% or 20% if the rectifying tax return is filed in 2016 or 2017 respectively.
Step up basis mechanism for individual taxpayers transferring their tax residence to Luxembourg
A “step up” in basis mechanism is introduced as from 2015 for individual taxpayers transferring their tax residence to Luxembourg. Shares insubstantial participationsand convertible loans issued by substantial participations (holding of shares of more than10%) held by a non-resident individual taxpayer, are valued at their fair market value upon the transfer of residence of said taxpayer to Luxembourg.
Option for individuals who are not Luxembourg residents for the entire year to be taxed in Luxembourg as if they had been residents for the entire year
The main objective of this option is to allow any excess wage tax levied at source to be refunded by individual tax payers.