On 21 April 2016, Finance Minister Pierre Gramegna presented to the Luxembourg Parliament additional clarifications on the main measures of the foreseen 2017 tax reform.
Reaffirming the announcements made on 29 February 2016 (see our Tax Alert of 1 March 2016), Minister Gramegna explained in more details the gradual reduction of Luxembourg corporate income tax to 18% together with the proposed restrictions to the use of tax losses with some slight amendments compared to the initial announcement. [Main measures of the long-awaited tax reform for 2017 released by the Government].
Furthermore, during the annual state of the Nation Speech on 26 April 2016, Prime Minister Xavier Bettel underlined all the efforts made by Luxembourg to achieve greater transparency from an international tax perspective and distance itself from any grey or black lists. He recalled Luxembourg's willingness to maintain investors' confidence and emphasized on the fact that one of the main goals of the reform is to increase the competitiveness of the country while taking into account the fast evolving international tax environment.
The relevant clarifications on the main measures for international investors are the following:
- Decrease of the corporate income tax rate
- Corporate income tax will be cut gradually as presented in February from its existing rate of 21 percent to 19 percent in 2017 and further reduced to 18 percent in 2018. This cut will result in a maximum aggregate income tax rate of 27.08% in 2017 and 26.01% in 2018, i.e., inclusive of the new corporate income tax rate, the 6.75% municipal business tax rate (for companies established in Luxembourg city) and the 7% solidarity surcharge.
- However, in its recent speech, the Finance Minister stated that Luxembourg will observe very closely the international developments and especially the implementation of BEPS measures within the EU. According to Prime Minister Xavier Bettel, if required, Luxembourg will, after consultation with the industry, adopt further measures that will comply with international and European standards while making certain to have a “level playing field” with other countries.
- Limitation of the use of tax losses
- Along with many other countries, the proposed restrictions to the use of tax losses carried forward over a 10 year period with a maximum offset of 80% of yearly profits should be finally extended over a 17 year period while limiting the offset to 75% of yearly profits. Such limitations should only apply to new tax losses realized as from fiscal year 2017.
- Increase of the tax credit for investments
- In order to promote investments, the Luxembourg tax credits for investments in depreciable tangible assets should be increased. Hence, the 12% tax credit available for additional investments should be increased to 13% and the 7% tax credit available for global investments be increased to 8%. The 2% tax credit applying on the part of the investment exceeding the first EUR 150,000 threshold should however remain unchanged.
- Reform of the criminal tax law
- In order to fight tax fraud and follow international and European requirements, the "simple tax fraud" should be decriminalized as from 2017 onwards. Such an offence should only be punished with an administrative fine. On the other hand, a new offence of "aggravated tax fraud" should be created.
Although the announced future headline tax rate is high compared to other countries, Luxembourg could choose to further reduce these rates. As stated by the Finance Minister, the Luxembourg government may be observing what happens in other countries and which BEPS measures the relevant countries will implement, before making further proposals.
Luxembourg has a reputation for being stable and business-friendly. As many countries, it will have to adapt furthermore to the quickly evolving international tax environment. The above clarifications are already a step forward further to comments from Luxembourg’s business community on the initial proposals and it could be expected that further important changes will come in the near and medium term.