Update 2016 of the Luxembourgish Tax Law

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In order to comply with EU rules, the minimum corporate income tax is repealed as from 2016 tax year, and replaced by a new minimum net wealth tax of the same amount, under similar conditions and with some exceptions.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of Conduct for Business Taxation Group and the conclusions set out in the OECD/G20 BEPS Project the existing regime is repealed as from 1 July 2016 for corporate income tax and municipal business tax, and as from 1 January 2017 for net wealth tax.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.

Update 2016 of the Luxembourgish Commercial and Accounting Law

Law of 9 December 2015 modifying Luxembourgish accounting standards

On 9 December 2015 the Luxembourgish Parliament adopted the draft bill 6718 which transposes the Directive 2013/34/EU of the European Parliament and the Council on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings into national law.

Amongst other things the new law introduces the materiality principle and modifies various provisions relating to the presentation of the annual accounts and the notes to the annual accounts.

Balance sheet and profit and loss account are harmonized to the EU Directive. The presentation of the profit and loss account has been changed from account form to staggered form (list).

The thresholds to determine large sized entities have been increased to EUR 20 million (currently EUR 17.5 million) for the total balance sheet and EUR 40 million for the turnover (currently EUR 35 million).

The main changes related to the notes to the annual accounts are the following:

  • Introduction and definition of the materiality concept;
  • Obligation to present the notes to the annual accounts in a specific order;
  • Obligation to describe the accounting policies in addition to the valuation rules;
  • Disclosure of gross amounts in case of compensation/netting;
  • Nature and financial impact on post balance sheet events for medium and large entities;
  • Disclosure requirement of exceptional items;
  • Additional disclosure requirement for small-sized entities related to the average number of staff by category;
  • New disclosures exemptions for small-sized entities relate to:
    • information regarding the investments in which they hold at least 20% of the share capital, except when this information is so important that it could alter the true and fair view of the annual accounts;
    • information on the fair value of financial fixed assets in case the latter is below the book value of the asset.

Furthermore Goodwill and developments costs which useful life are not reliably estimated cannot be depreciated over more than 10 years

The New Law shall apply for the first time to the annual accounts for financial years beginning 1 January 2016 or during the calendar year 2016.

Greater Region Business Days from 17-18 June 2015

We are proud to welcome you at our stand at GR Business Days in Luxembourg. 

Should you have any questions relating to incorporation of a company in Luxembourg, accounting or tax we are at your disposal during the fair.

Go to www.gr-business.com for more information about the fair.

 

Tax changes 2015 adopted by the Luxembourg Parliament

On 18 December 2014 the Luxembourg Parliament adopted bills no. 6720 and 6722 with a majority vote of the parties DP, LSAP and déi gréng. The wording of the tax law of 19 December 2014 was published on 24 December 2014 in the Luxembourg gazette Mémorial A no. 255.

 

The main changes have already been outlined under tax changes in 2015.

 

Luxembourg tax changes 2015

Draft legislation introduced to the Luxembourg Parliament

In mid-October, two draft laws were presented to the Luxembourg Parliament:

  • On 14 October, bill no. 6722, which contains measures to secure the future of Luxembourg for the years 2015-2018 and which was presented under the name "Zukunftspak" by Prime Minister Xavier Bettel
  • On 15 October, bill no. 6720, the draft budget for 2015 submitted by Finance Minister Pierre Gramegna.

The major changes that were announced are explained below.

 

Amendmends to indirect taxes

VAT rates are going to rise by 2%, only the lowest tax rate of 3% will remain unchanged, resulting in the following increases

  • the standard rate will be increased from 15% to 17%
  • the reduced rate of VAT will rise from 12% to 14%
  • the super reduced tax rate will go up from 6% to 8%.

In addition, the following changes relating to certain categories of goods and services are announced:

  • The import of antiques and collectibles, which is currently subject to a VAT rate of 15%, will be taxed with 8% when the changes take effect
  • VAT on construction services for owner-occupied properties remains unchanged at 3%. The VAT rate for real estate intended for rent, however, will rise from 3% to 17%. There will be a transitional arrangement permitting a VAT rate of 3% until the end of 2016 if an application is made before 1 January 2015 with the responsible authority.
  • A VAT rate of 3% is applied to shoes, accessories and clothes for children under 14 years of age.
  • The VAT rate for restaurants remains unchanged at 3%, but will no longer apply to alcoholic beverages. Here the tax rate of 3% will be increased to 17%. 

Regarding VAT refund claims, time limits will be imposed on the tax and revenue authorities within which claims for reimbursement are due. Failure to meet these deadlines will trigger interest payments on the refund claim.

 

Amendments to direct taxes

The corporate income tax rate remains unchanged. But the minimum corporate income tax rules are changed with a view to relieving the burden on small companies and companies without substantial activities. Currently Luxembourg imposes a minimum amount of EUR 3,210 for corporation tax on companies that have not applied for trading authorization but have financial assets (participations, transferable securities, loans to participations, investments in real estate partnerships, cash and cash equivalents) exceeding more than 90% of the total assets. The minimum taxation typically affects holding and financing companies. From 2015 on, this minimum taxation of EUR 3,210 will only take effect if, in addition, total assets exceed an amount of EUR 350,000. If this additional amount is not exceeded, the lower minimum tax amount for non-financial companies in the amount of EUR 535 will apply.

Moreover, new tax rules will be introduced regarding transfer pricing, which will be modeled more closely on the third comparison (arm's length principle) and also on the OECD Model Convention. In particular, there will be a reversal of the burden of proof in the absence of proper transfer pricing documentation.

Rules governing advance tax confirmations from the tax authorities will be laid down in detail in the tax code with a view to unifying and streamlining the currently existing procedures and to increasing the transparency of the Luxembourg tax system. As of 2015, tax authorities may impose a fee of up to EUR 10,000 for mandatory preliminary information which is supposed to cover administrative  costs.

If you would like any further information, please don't hesitate to contact us.

 

Fiscal plans of prospective German government on tax evasion and tax avoidance

After election to the German Parliament on 22 September 2013 the conservative (CDU/CSU) and social democrat (SPD) parties have strived to form a grand coalition. On 27 November 2013 the coalition agreement was published.

It includes explanations on the fiscal plans to contain tax evasion and tax avoidance such as:

  • Support of the OECD-BEPS initiative (Base Erosion and Profit Shifting). National measures if applicable in anticipation of international regulations and in case, that objectives of the BEPS -initiative have not been reached;
  • Limitation on the deduction of business expenses for license expenditure and for payments to letterbox companies;
  • Prevention of double non-taxation through relevant DTT-clauses and, where applicable, through national regulations;
  • Introduction of a “country by – country reporting” between tax administrations.

Furthermore the agreement of the grand coalition comprises amongst others the following subjects:

  • Introduction of a financial transaction tax;
  • Examination of the tax treatment of capital gains on portfolio investments;
  • Examination with regard to the reorganization tax law, how the ‘exchange of shares’ and reorganizations with financial rewards can be carried out in future without adverse effects;
  • Change of the legal and fiscal framework conditions for venture capital in an internationally competitive way to make Germany an attractive location for funds;
  • Examination of a profit retention provision for small and medium sized enterprises;
  • Modernization of real estate tax.

Double Tax Treaty between Germany and Luxembourg enters into force

The new Double Tax Treaty (DTT) for the avoidance of double taxation and the prevention of fiscal evasion with the respect to taxes on income and on capital between Germany and Luxembourg signed on 23 April 2012 entered into force on 30 September 2013 after the exchange of the instruments ratification had taken place.

The new DTT Luxembourg-Germany is applicable as of 1 January 2014 in order to directly follow the Treaty of 1958.

The new DTT corresponds in the main to the OECD Model Tax Convention.

It fixes the withholding tax rate for dividends at 15%. In case of direct shareholdings in a company (with the exception of partnerships and investment companies) of at least 10%, the withholding tax rate is reduced to 5%. In addition, a reduction of withholding tax rate according to EU Parent Subsidiary Directive has to be reviewed on a case to case basis. The withholding tax rates for interest and for licenses remain unchained at 0% and 5% respectively.

Extension of Luxembourg Foundation Law

On 22 July 2013 the Luxembourg Minister of Finance has submitted the draft law No. 6595 to the Parliament aiming at a fundamental reform of Foundation Law in Luxembourg (Law of 21 April 1928).

The foundation according to the current legal situation is basically restricted to philantrophic, religious, social, scientific, artistic or educational purposes, or must have its mission on the areas of sport or tourism. In general the foundation must be a non-profit organization (Article 27 of the Law of 21 April 1928, as amended).

Family foundations, foundations serving private interest or company-affilated foundations known from foundation regimes in other countries such as the Dutch Stichting are not yet permitted under Luxembourg law. The foundation according to current Luxembourg law was therefore not suitable for private wealth management.

With the new foundation law the attractiveness of Luxembourg as a location for family offices and private wealth management vehicles will increase and the influx of wealthy individuals to Luxembourg will further be stimulated.

Overview of the new legal and fiscal framework

Setting up a family foundation requires a notarial deed that is to be published in the Luxembourg Register of Commerce and Companies. Founding members, beneficial owners and the amount contributed do not have to be disclosed.

The family foundation may be represented by one or several managers who can be natural and legal persons.

The foundation may issue registered certificates linked to predetermined assets and liabilities and representing rights defined in the incorporation act.

The family foundation is subject to general obligations to keep accounts in Luxembourg and has to prepare financial statements. However these need not be published in the Luxembourg Register of Commerce and Companies.

The family foundation is subject to general corporate income and business tax. It is, however, exempt from net wealth tax. It also benefits from an exemption for dividends, interest payments and capital gains on securities. Payments to non-resident beneficiaries are not subject to withholding tax and should not be taxable in Luxembourg.

At the death of a Luxembourg foundation member the transfer of net assets (total of all assets minus debts) to the beneficiaries is subject to a registration tax depending on the degree of relationship to deceased´s heir. For spouses of the founder, his/her partner, and his/her direct ascendant or descendant the transfer of net assets is tax exempt.

The present draft law further strengthens Luxembourg´s competitiveness as an attractive location for family offices and high net worth individuals.

German Annual Tax Act 2013 aiming at combatting RETT-Blocker structures

On 5 June 2013 the Conciliation Committe of the German Bundestag and Bundesrat settled the differences about the Annual Tax Act 2013. On 6 June 2013 the law passed the Bundestag and on 7 June 2013 the Bundesrat. The law aimed at combatting undesirable tax planning.

In this context the possibility for real estate companies using RETT-Blocker structures in case of share deals should be restricted.

RETT-Blocker structures aim at avoiding real estate transfer tax in case of an exchange of a legal entity holding German real estate property through an interim holding company in which a third party has a minority interest.

According to the new real estate transfer tax law RETT will be triggered if an acquirer directly and indirectly holds at least 95% share capital in a German real estate property owning entity. By considering also indirect ownership - which was not the case in the past - the new RETT Act receives a more realistic economic view. Technically, all pro rata participations are multiplied when determining the relevant ownership percentage.

The provision particularily affects RETT-Blocker limited partnership structures (KG structures) like illustrated below. These are structures where typically a German KG directly or indirectly holds more than 5% of the shares in a real estate owning company and a third party partner holds more than 5% (in case of the example below with 6% resulting in a minority economic ownership of only 0,36%).

As a result, under the current law, existing RETT-Blocker structures like illustrated below could reach the 95% threshold for RETT purposes.

Financial Holding Company - SOPARFI

The SOPARFI (Société de participation financière) is the standard Luxemburg holding company. It is a fully taxable, Luxemburg-resident company that can be set up by any type of investor without restrictions and usually takes the form of a public limited company (Société Anonyme) or a private limited liability company (Socété à responsabilité limité).

A SOPARFI can benefit from the double tax treaties concluded by Luxemburg and from EU directives such as the Parent-Subsidiary Directive.

The main purpose of using a SOPARFI is to ensure the tax efficiency of the group´s repatriation of profits to investors and its intra-group operations.

Family Wealth Management Company - SPF

The Family Wealth Management Company "SPF" (Société de Gestion de Patrimoine Familiale) is an investment vehicle designed for the management of individuals´private wealth.

For the purpose of an SPF, the term "family wealth" ("patrimoine familiale") is understood to mean "the wealth of individuals" ("patrimoine privé de personnes physiques") as no family relationship is required between the different shareholders.

SPFs have no special legal status. They must be set up in the legal form of a capital company. The annex SPF has to be added to the company name.

SPFs are exonerated from corporate income tax, communal business tax and wealth tax. They are subject to an annual subscription tax at a rate of 0,25% applicable on its share capital.

Greater Region Business Days from 18 -19 June 2014

We are proud to welcome you at our stand at GR Business Days in Luxembourg. 

Should you have any questions relating to incorporation of a company in Luxembourg, accounting or tax we are at your disposal during the fair.

Go to www.gr-business.com for more information about the fair.

 

Introducing automatic exchange of information in Luxembourg

Financial institutions (mostly banks) in Luxembourg will transmit the information foreseen in the EU Savings Directive 2003/48/EC to the Administration des Contributions Directes which is the Luxembourg Revenue Service for direct taxation.

This administration will then confidentially transmit the information to the corresponding revenue service in the EU Member State in which the beneficial owner is a resident.

Automatic exchange of information in tax matters is limited to an exchange of information among competent government tax authorities. Professional secrecy will continue to be applicable.

However, and although the Luxembourg Government still considers the withholding tax to be a most effective instrument to guarantee effective taxation and client privacy, dialogue with its partners has shown that international developments, such as FATCA and the failure of the Rubik agreement between Germany and Switzerland, point to a broader use of automatic exchange of information in tax matters.

Hence, ten years after the adoption of the EU Savings Directive and given these developments in tax transparency, the Luxembourg Government has therefore decided to end the transitional period foreseen in the EU Savings Directive and to introduce automatic exchange of information on 1 January 2015.

Luxembourg will effectively apply the following mechanisms as of fiscal year 2015:

  • Automatic exchange of information as defined in EU the Savings Directive within the EU and applicable to interest paid to individuals resident in an EU Member State other than the one where interest is paid;
  • Exchange of information upon request as agreed in double-tax treaties with third countries;
  • Other bilateral arrangements with third countries, i.e. as currently negotiated with the US with respect to the implementation of FATCA;
  • Withholding tax for Luxembourg residents as currently applicable.

The date of 1 January 2015 coincides with the date of entry into force of the Council Directive 2011/16/EU on administrative cooperation in the field of taxation and Council Directive 2010/24/EU concerning mutual assistance for the recovery of claims relating to taxes, duties and other measures.

The information to be exchanged is defined in article 6 of the EU Savings Directive and is limited to information regarding savings income in the form of interest payments on debt claims.

Considering these impending strengthening of the Luxemburg Law especially individuals residing in Germany should carefully consider whether or not they take the opportunity to make their way into tax honesty by making a subsequent tax declaration (Nacherklärung) , so called “Selbstanzeige”.

We would be pleased to explain our approach and conduct of such a subsequent tax declaration in an initial consultation.

In this context we would also like to draw your attention to our news about the Family Wealth Management Company - SPF on our website.

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IFRS in Luxembourg

Luxembourg lawmakers took a significant step to modernizing accounting in the Grand Duchy by passing a respective law on 10 December 2010.

The law amends several items of the balance sheet and the profit and loss account and redefines criteria for the determination of company size. One of the main changes, however, is the introduction of the fair value option in the Luxembourg accounting framework. The law confirms the fair value accounting option for financial instruments under Luxembourg GAAP and introduces the possibility of applying international financial reporting standards for the preparation of annual financial statements.

The following table shows the situation before and after the enactment of the law:

  Before enactment     After enactment  
 
IFRS
Lux GAAP +Fair Value
Lux GAAP
 
IFRS
Lux GAAP +Fair Value
Lux GAAP
Annual Accounts              
Listed companies Possible derogation   Obligation   Option Option Benchmark
Credit institutions, insurance and
re-insurance companies
Option Option Benchmark   Option Option Benchmark
Unlisted companies Possible derogation   Obligation   Option Option Benchmark
               
Consolidated accounts              
Listed companies Obligation       Obligation    
Credit institutions, insurance and
re-insurance companies
Option Option Option   Option Option Option
Unlisted companies Possible derogation Option Benchmark   Option Option Benchmark

We would be happy to assist you with the implementation of the fair value option or the introduction of International Financial Reporting Standards respectively.

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