Luxembourg has actively participated in the OECD-BEPS project since its beginning and has already implemented most of the BEPS minimum standards. The next step will be the transposition of the Anti-Tax Avoidance Directives (ATAD 1 & 2) into domestic law by December 31, 2018, (for ATAD 1) and December 31, 2019, (for ATAD 2). The expected ratification of the Multilateral Instrument (BEPS Action 15) in 2018 will also represent a significant step in the implementation of the BEPS measures in Luxembourg.
While Luxembourg is adapting its tax framework to these changes, it also wants to maintain its level of attractiveness. Thus, several measures have been taken to remain competitive, such as a decrease in the corporate tax rate, leading to a global income tax rate of circa 26% from 2018.
In June 2018, the Luxembourg government issued a bill for the transposition of ATAD 1 into domestic tax law. In line with the directive, the bill includes provisions related to five main topics: interest limitation, exit taxation, a general anti-abuse rule (GAAR), controlled foreign companies (CFC) and intra-EU hybrid mismatches. Luxembourg has chosen most of the favourable options made available to Member States upon the transposition of ATAD 1 into their domestic law. The bill foresees the application of the new measures to financial years starting as of January 1, 2019, except for the provisions on exit taxation, which will apply to financial years starting as of January 1, 2020. The rules on hybrid mismatches with third countries (ATAD 2) are not included in the bill and will thus only be transposed next year (and will apply from 2020) as foreseen by ATAD 2.
In June 2018, the Luxembourg government council approved a bill for the ratification of the MLI that incorporates BEPS-related measures into the country’s double tax treaties. It was signed by the government in June 2017. Once Luxembourg has ratified the MLI, its application per covered tax agreement will depend on what the other contracting state has ratified and on the type of tax concerned, e.g. withholding tax or other taxes. The first applications of the MLI to Luxembourg-covered tax agreements are not expected before 2019 or 2020.
Luxembourg has implemented numerous measures over the past years to reinforce tax transparency, and will continue to do so. In December 2017, Luxembourg issued two bills (in line with EU Directive 2015/849 on anti-money laundering) that implement registers of ultimate beneficial owners, one for legal entities and one for trusts and fiduciaries.
Furthermore, Luxembourg will have to transpose, into domestic law, the provisions of the amended directive on administrative cooperation in the field of taxation (DAC 6) by December 31, 2019, in order for it to be applicable from July 2020. This directive introduces new mandatory disclosure rules for intermediaries (or taxpayers) who will have to disclose information on certain cross-border arrangements. The directive has a retrospective effect, based on which intermediaries (or taxpayers) must keep track of arrangements whose first step happened, or will happen, between the directive’s entry into force (June 25, 2018) and its date of application (July 1, 2020). Information on these reportable arrangements will have to be reported by August 31, 2020.
In order to reinforce Luxembourg’s tax competitiveness, the corporate income tax rate has been decreased to 18% leading to an aggregate income tax rate for companies with a registered office in Luxembourg City of circa 26% from 2018.
To stimulate corporate investments in Luxembourg, in particular in the innovative sector, the benefit of the investment tax credit has been extended to zero-emission cars and to software acquisitions.
Luxembourg has also implemented a new intellectual property (IP) regime effective from January 2018 that is in line with the modified nexus approach of the OECD-BEPS Action 5 report. The new regime provides for an 80% tax exemption on income derived from qualifying IPs and a full net wealth tax exemption of these assets.
The Luxembourg tax authorities issued a circular in November 2017 that provides for changes in the taxation of transferable stock options/warrants (increase of the lump sum valuation from 17.5% to 30%) as well as in the reporting obligations of all stock option schemes (stricter reporting obligations and deadlines for employers).
Luxembourg has recently implemented several favourable measures for individuals, including inter alia the issuance of new guidance in October 2017 on the options open to taxpayers for joint taxation, full individual taxation or individual taxation with reallocation of income for resident and non-resident taxpayers.
The budget law for 2018 has extended, by one year, the favourable tax regime (taxation at one quarter of the taxpayer’s overall effective tax rate) applicable to gains on sales of certain real estate assets (secondary homes held for more than two years): it now lasts until December 31, 2018. Furthermore, the exemption from inheritance tax has been extended to married couples and registered partners without children (under certain conditions).
As of January 2018, the management of internal funds’ underlying collective insurance contracts can benefit from a VAT exemption, provided that the subscribers bear the financial risk and that the fund is subject to the supervision of the Luxembourg Insurance Commission. This measure puts these insurance funds on par with specialised investment funds.
In April 2018, the government released a bill introducing a VAT group regime in Luxembourg, according to which transactions (supply of goods and services) within the Luxembourg group will be disregarded for VAT purposes. VAT groups can also be formed with companies active in the financial and insurance sector.
Finally, the Luxembourg VAT authorities also clarified several points in the following areas:
Sébastien Labbé (email@example.com), Partner and Head of Tax at KPMG Luxembourg; and Flora Castellani (firstname.lastname@example.org), Executive Director and Head of the Tax Technical Team at KPMG Luxembourg