On 26 July 2016, the bill of law no 7020, detailing the measures of the long-awaited 2017 tax reform, was deposited with the Luxembourg Parliament, further to its recent adoption by the Luxembourg Government (the "Bill").
Reaffirming most of the announcements made by the Luxembourg Government on 29 February 2016 and 21 April 2016 (see our Tax Alerts of 1 March 2016 and 27 April 2016), the Bill contains, in particular, one major deviation from the initially announced measures, and further clarifications alongside with new additional proposals.
The amendments and clarifications related to the main measures, as well as the additional proposals, that are relevant for international investors are the following:
- Carry forward of tax losses
The former proposed restrictions, regarding the use of tax losses carried forward, initially envisaging amongst others to introduce a maximum yearly use of tax losses, have not been maintained. The Bill only contains reference to a 17-year period, over which the losses could be carried forward, while continuing to permit an offset of 100% of yearly profits. Such time limitation should only apply to new tax losses realized as of fiscal year 2017. Hence, the tax losses carry forward incurred until 31 December 2016 will remain unlimited in time. The use of the tax losses will have to follow the first in, first out principle.
- Progressive reduction of the tax rate
The Bill reaffirms the reduction of the corporate tax rate from 21% to 19% effective in 2017 and then to 18% effective in 2018. This reduction will lead to a maximum aggregate income tax rate of 27,08% in 2017 and 26,01% in 2018, i.e., including the new corporate income tax rate, the 6.75% municipal business tax rate (for companies established in Luxembourg city) and the 7% solidarity surcharge.
- Additional incentives for investments in depreciable tangible assets
In order to promote investments, the Luxembourg tax credits for investments in depreciable tangible assets will be increased. Hence, the 12% tax credit available for additional investments will be increased to 13% and the 7% tax credit available for global investments to 8%.
- Electronic filing of corporate tax returns
In order to speed up and render administrative processing of tax returns and tax assessment notices more effective, electronic filing of corporate income tax, municipal business tax and net worth tax returns will become mandatory for corporate taxpayers.
- Increase of the minimum net worth tax
The minimum net worth tax for Luxembourg companies investing more than 90% of their total balance sheet in financial assets (including transferable securities, loans, bank deposits) for an amount of more than EUR 350,000, will be increased from currently EUR 3,210 to EUR 4,815 (inclusive of the 7% solidarity surcharge).
- Option to differ deductions in relation to amortization
The Bill introduces the possibility of a deferral of the deductibility of amortizations on assets. Such measure will permit taxpayers to have more flexibility, especially with respect to the reduction of the net worth tax liability.
- Extension of the scope of eligible taxpayers for the roll-over relief on foreign exchange gains
The Bill extends the scope of eligible entities that could opt for the temporary immunization of foreign exchange gains on certain assets. Formerly, the regime was exclusively available to certain taxpayers i.e. credit institutions, insurance and reinsurance undertakings.
- Amendments to the criminal tax law
The aim of such proposed amendments is to distinguish three different kinds of tax offences: (i) the simple tax fraud, (ii) the aggravated tax fraud, and (iii) the tax swindle. While simple tax fraud will be handled by the competent tax administration, under judicial control, both the aggravated tax fraud and tax swindle will constitute criminal offences handled by the criminal court. The Bill introduces thresholds to distinguish simple tax fraud from aggravated tax fraud.
- Amendments to the Luxembourg RELIBI law
The flat and final withholding tax, levied on qualifying interest payments under the RELIBI law to Luxembourg individual resident taxpayers, will be increased from 10% to 20%.
- Amendements to the Luxembourg VAT law
The Bill introduces new articles in the Luxembourg VAT law, with respect to ipso jure or de facto managers, and foresees that such managers are liable to ensure that the companies they manage meet their legal obligations, in particular the payment of the VAT due. The Bill introduces a joint liability with regard to the payment of the VAT for managers of companies which have not met their VAT obligations. The same joint liability is introduced for beneficial owners, liquidators and curators.
The Bill also increases the penalties that may be fixed by the VAT authorities in case of non-compliance with the VAT obligations. The current maximum fixed penalty of EUR 5,000 is increased to EUR 25,000. In addition the Bill increases the penalty, due in case a taxable person evades the payment of the VAT or obtains a refund of the VAT in a non regular manner, from 10% to 50%.
- Repeal of the 0.24% proportional registration duty on certain deeds
The 0.24% proportional registration duty applicable on notarial deeds referring to a transfer of debt will be repealed.
Finally, the Bill also reaffirms the main announcements made in March and April concerning individuals taxpayers, to support household purchasing power, provide additional tax advantages to employees, pensioners and single-parent families, facilitate the access to housing and encourage sustainable private transport. It also includes the possibility for married couples to opt for separate taxation, as well as the alignment of treatment for non-resident and resident married couples.
While most of the early announcements have been included, together with certain interesting incentives, we note that the controversial measure regarding the yearly limitation of the use of tax losses carried forward has been taken out of the Bill. In principle, the above should now be discussed and potentially modified by the Luxembourg Parliament before its final approval and entry into force.