To comply with the OECD's BEPS reports and more specifically its action plan n° 5 regarding harmful tax practices, the Luxembourg intellectual property ("IP") regime under article 50bis of the Luxembourg income tax law ("ITL") will be repealed as from 1 July 2016. As such, the Luxembourg 80% exemption on royalties deriving from eligible IP rights, respectively on capital gains realized by the sale of such rights, will be abolished. Further, the related net wealth tax provision under paragraph §60bis of the Luxembourg net wealth tax ("NWT") law in relation to a full exemption of NWT of eligible IP assets will be repealed as from 1 January 2017.
Notwithstanding the above, grandfarther provisions will be available where Luxembourg taxpayers created, acquired or definitely improved before 1 July 2016 IP rights under the current IP regime. Indeed, in these situations, such taxpayers will continue to benefit from the current IP regime during a transitional period of 5 years (i.e., from 1 July 2016 till 30 June 2021). This transitional period also applies to the NWT on IP assets, which will run until 1 January 2021.
Such grandfarther provisions are however limited to 31 December 2016 regarding the 80% corporate income taxation, respectively to 1 January 2018 regarding the 100% NWT exemption, if :
- the IP is acquired by a related party within the meaning of article 56 ITL (i.e., either an undertaking directly or indirectly participating in the board, control or capital of another undertaking or where the same persons directly or indirectly participate in the board, control or capital of two undertakings) after 31 December 2015; and
- such IP was not eligible, at the moment of its acquisition, for the current IP regime or any other similar foreign IP regime.
Finally, to enhance Luxembourg's current commitment for more transparency, the Luxembourg tax authorities will have to communicate, within 3 months after obtaining the information or within 1 year after the submission of the tax return, to foreign tax authorities the identity of the taxpayers acquiring or creating IP as from 6 February 2015.
As a temporary mechanism, a tax amnesty will be introduced as from 1 January 2016 until 31 December 2017, whereby a Luxembourg tax resident can submit amended past tax returns without any sanctions except a 10% increase of the amount of tax due on the unreported assets or income when such rectification is done in 2016, respectively a 20% increase when such rectification is done in 2017.This tax amnesty is not available for taxpayers who are already subject to administrative or judicial proceedings, before the date of submission of the tax rectification, in relation to undeclared taxes.
New Tax Measures
Reduction of the net wealth tax rate
To encourage taxpayers to a strong and increasing capitalisation, a new 0.05% NWT rate will be applied on any net wealth amount over EUR 500 million, whilst the current 0.5% NWT rate will remain applicable on any net wealth amount under such threshold.
As a consequence, as from 1 January 2016, for any net wealth exceeding the threshold of EUR 500 million, (i) a 0.5% NWT rate will apply on the first bracket up to EUR 500 million and (ii) a 0.05% NWT rate will apply on the second bracket regarding the net wealth amount above the 500 million threshold.
Switch from the minimum corporate income tax to a minimum net wealth tax
To comply with the EU Commission's concern that the Luxembourg minimum corporate income tax is not compliant with EU law, a new minimum NWT will be introduced as from 1 January 2016 which will replace the current existing minimum corporate income tax.
The minimum NWT will amount to EUR 3,210 if the amount of the financial assets of the company represents more than 90% of its total balance sheet and exceeds in addition a threshold of EUR 350,000. In all other cases, the minimum NWT will differ, from EUR 535 to EUR 32,100 (opposed to the maximum amount of 21.400 under the current minimum corporate income tax) depending on the level of the balance sheet.
Finally, Luxembourg securitisation vehicles, venture capital companies, pension-saving companies and pension-saving associations, which are until now subject to the minimum corporate income tax, will see their tax regimes amended so as to make them subject to the minimum NWT as from 1 January 2016.
A step-up in value, applicable as from the taxation year 2015, will be introduced for the benefit of non-residents individuals transferring their residence to Luxembourg to avoid potential double taxation issues. Henceforth, substantial holdings within the meaning of article 100 ITL (i.e., a threshold participation of over 10%) as well as convertible loans, where additionally a substantial holding within the meaning of article 100 ITL is held in the company having issued such loans, owned by non-resident individuals may indeed be valuated at their fair market value at the moment the non-resident individual becomes a Luxembourg resident.
Whilst the acquisition date of the eligible assets will not be affected by this mechanism, the initial acquisition price will be replaced by its fair market value valuated at the residence transfer date, achieving by this means a step-up in value, which will result in a non-Luxembourg taxation on any latent capital gains generated during the period preceding the residence transfer to Luxembourg.
However, this step-up will not be available for non-resident individuals, who had been a Luxembourg resident for more than 15 years and a non-resident for less than 5 years.
Taxpayers resident in Luxembourg for only part of the year
To comply with EU law, any taxpayer who was a Luxembourg resident for only a part of the year can as from taxation year 2015 request to be considered for Luxembourg tax purposes as a Luxembourg resident for the whole year. In this way, any excess of withholding taxes can be reclaimed and certain benefits such as flat rates, tax allowances and tax credits will not be lost. These benefits have until now only been available to employees and pensioners.
Amendment of Several Tax Regimes
Limitation to the Luxembourg participation exemption regime
In the general context of international and European efforts to fight against tax evasion, tax avoidance and aggressive tax planning such as the BEPS initiative, two amending EU directives 2014/86/EU and 2015/121/EU have been adopted to amend and limit the benefits of the parent-subsidiary directive 2011/96/EU, as amended (the "PS Directive"). To align the Luxembourg participation exemption regime with these recent restrictions included in the PS Directive, Luxembourg has amended its participation exemption regime under articles 147 and 166 of the ITL by introducing in respect of income allocated after 31 December 2015 an anti-hybrid provision and an anti-abuse rule.
Henceforth, hybrid instruments will no longer be able to benefit from the Luxembourg participation exemption regime, meaning that the access of the Luxembourg participation exemption regime under article 166 ITL will be refused to dividend distributions received from EU companies if such distributions are tax deductible from the distributing entity’s tax basis. The aim is to eliminate double non-taxation whereby hybrid financial instruments would be considered as (i) debt in the State of the subsidiary with a corresponding deduction possibility and (ii) equity in the State of the parent company with corresponding exemption possibility, in relation to each time payments received under such hybrid instruments.
Further, an anti-abuse rule, next to the general anti-abuse rule included under paragraph 6 of the tax adaption law, as amended, has been included in articles 147 and 166 ITL, which denies henceforth the benefit of the Luxembourg participation exemption where the distributions are allocated to a sham arrangement with no commercial or economical reasons but implemented solely or in particular to obtain a tax advantage, which isn't in line with the aim of the PS Directive.
Whilst the impacts of the newly introduced limitations as regards to the Luxembourg participation exemption regime may have only a limited impact in our view, considering that the anti-hybrid provision only applies to distributions from EU companies that are deductible from the distributing entity’s tax basis and that the anti-abuse rule shouldn't have a completely new or different impact compared to the use of the already available general anti-abuse rule, the insertion of such new specific anti-abuse rule in the Luxembourg tax provisions dealing with the local participation exemption regime may encourage the Luxembourg tax authorities to scrutinize in more detail the commercial ratione of certain structures and verify the presence of genuine substance and economic grounds. Thus, substance and business justification may henceforth become even more crucial, and we encourage clients to review their existing or future investment or holding structures in light of these new provisions.
Enlargement of the Luxembourg tax consolidation regime
The Luxembourg tax consolidation regime under article 164bis ITL will be enlarged by introducing the feasibility of the so-called horizontal tax consolidation as from the taxation year 2015. Indeed, up until now, only the vertical integration was possible, i.e. a tax consolidation between a Luxembourg parent company or a Luxembourg permanent establishment of a foreign fully taxable company subject to a tax rate comparable to the Luxembourg income tax rate and its Luxembourg subsidiaries.
In view of the recent decision by the European Court of Justice (C-40/13), whereby a tax consolidation regime, which was available for local sister companies and their local parent company but unavailable for local sister companies held by a parent company of another Member State, was considered in violation with EU law, Luxembourg has broadened the scope of the Luxembourg tax consolidation regime to parent companies, or permanent establishments, of another State of the European Economic Area ("EEA"), provided that such parent company, respectively permanent establishment, is fully taxable to a tax comparable to the Luxembourg income tax. The company, which will consolidate the tax unity group, will have to rank in terms of hierarchy at least equally with the other entities of the tax unity group.
The enlargement of the current scope of the Luxembourg tax consolidation regime provides for more flexibility and hence, strengthens the attractiveness of the Luxembourg tax regime generally.
Whilst currently a deferral is available regarding the taxation of latent capital gains triggered by a migration outside Luxembourg provided that the transfer is made to a State which is part of the EEA, such tax deferral will as from taxation year 2016 also be available in relation to transfers of resident enterprises or permanent establishments to non-EEA States, if (i) Luxembourg has signed a double tax treaty with such State and (ii) such treaty contains the exchange of information provision as set forth in the OECD model convention or, in the absence of such provision, the exchange of information provision of the OECD model convention is ensured by means of a bilateral or multilateral convention containing a similar exchange of information on fiscal matter.
Further, the tax deferral will not be disallowed where assets, which initially benefitted from a tax deferral, are transferred within the framework of a contribution of an enterprise or an autonomous part of an enterprise or a merger or demerger as set out in the EU Directive 2009/133EC with respect to mergers, demergers, partial demergers, contribution of assets, exchange of shares, transfer of the seat of an SE (societas europaea) or an SCE (societas cooperativa europaea) from one EU Member State to another, provided that the company, resident within an EEA State or an eligible non-EEA State, benefitting from such transfer asserts to take over the rights and obligations of the contributor in relation to the tax deferral.
The broadening of the scope of the exit tax deferral sets now the transfer of resident enterprises or permanent establishments to an EEA State or to a non-EEA State on a level playing field, provided that the latter has with Luxembourg any kind of convention containing a provision of exchange of information on fiscal matter.
Tax credit on investments
Considering the strong development in the Luxembourg maritime sector with corresponding significant contribution to the Luxembourg economy, a lessor of ships used in international trade will as from the taxation year 2016 be able to benefit from Luxembourg available incentives on investments (i.e., tax credits), provided that certain conditions are fulfilled.