Law of 25 November 2014 on the procedure applicable to the exchange of tax information upon request

The law applies to information requested by another State under a bilateral agreement, relevant European Directives as implemented in Luxembourg or the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, and amends the Law dated 31 March 2010 governing the matter. The purpose of the law is primarily to ensure a more effective exchange of information (including banking information) and to address critics made in this respect at the level of the Global Forum on Transparency and Exchange of Information for Tax purposes.

The first main impact of the law is that the Luxembourg tax administration will have a more passive role than in the past. Pursuant to the new procedure, the tax administration will now only check the formal validity of an information request. Furthermore, if so requested by the foreign State, the Luxembourg tax administration will now forbid the holder of information to inform the taxpayer about the request.

In addition, no legal action will be available anymore in Luxembourg against the Luxembourg tax administration’s order to provide information requested. Under the previous procedure, the exercise of a then available legal action led to a significant number of case law concluding that the information request was - at least in part - not valid, e.g. because the information requested did not appear to be “foreseeably relevant”.

The law applies to information requests handled by the Luxembourg tax administration as from 1 December 2014.

Law of 25 November 2014 amending the laws of 21 June 2005 implementing Directive 2003/48/EC and related bilateral agreement and the law dated 23 December 2005 introducing a withholding tax on certain income from savings.

The law implements the official announcement made in April 2013, whereby Luxembourg is switching to the automatic exchange of information under Directive 2003/48/EC (so-called Savings Directive). As a result, Luxembourg paying agents will now automatically report information on interest and similar income paid to an individual or a residual entity (for the benefit of such individual) resident or established in another EU Member State or certain dependent territories. The reporting is to be made to Luxembourg authorities which will in turn exchange the information with the relevant foreign jurisdictions.

The law applies to interest and similar income paid or credited as from 1 January 2015.

Law of 25 November 2014 amending (notably) the law of 16 October 1934 on valuation and the law of 16 October 1934 on net worth tax.

The law aims at modernising Luxembourg net worth tax. The changes are rather of a technical nature and can be summarised as follows:

  • the taxable base will now always be determined on a yearly basis (until now the taxable base was in principle determined for a three-year period subject to large exceptions);
  • the possibility to reduce the net worth tax liability subject to the maintenance of a special reserve for a five-year period will now be limited to the corporate income tax (reduced by the minimum corporate income tax but including the contribution to the employment fund) due for the period preceding the period for which net worth tax is determined, instead of the corporate income tax due for the same period as the net worth tax; the corporate income tax due for year 2014 will consequently be relevant for both the 2014 and 2015 net worth tax reduction.

These amendments came into force on 1 January 2015.

Administrative Circular LIR n°104/1 of 20 November 2014 regarding benefits in-kind granted to employees (company cars and housing).

The Circular replaces a Circular dated 18 February 2009 in order to take into account recent case law (cases 33654-7C) in the field of company cars taxation in the hands of employees. Specifically, the case law concerned the taxation of the benefit in kind resulting for the possibility offered to the employee to acquire the vehicle after the leasing at a price largely below the fair market value. The tax administration had for a long time accepted in practice that such advantage granted to the employee is not taxable.

In line with this case law, Circular n°104/1 takes the view that the benefit in kind consisting in the possibility offered to the employee to acquire the car at discount is a taxable remuneration. However, the sum of (i) the benefit in kind consisting in the possibility offered to the employee to acquire the car at discount and (ii) the benefit in kind consisting in the private use of the car during the lease may not, in aggregate over the period, exceed the acquisition price of the car. Circular n°104/1 contains a number of numerical examples that illustrates the computation of such ceiling as well as valuation tables that the tax administration will in principle apply.

Budget laws of 19 December 2014 (Parl. doc. 6720, 6721 and 6722).

The budget law 2015, the multi-year budget law and the law on package for the future (Zukunftspak) contain a number of tax measures applicable as from 1 January 2015.

Transfer pricing

The obsolete Article 56 Income Tax Law (“ITL”), dealing with transfer of profit between a Luxembourg undertaking and a non-resident, has been replaced by a new - broader - provision inspired by Article 9 of OECD Model Tax Convention. It remains that the provision should not apply to transactions taking place within the management of private wealth.

Also, a provision has been added in Paragraph 171 Abgabenordnung (“AO”) whereby the taxpayer’s duty to provide information supporting the determination of the taxable result to the tax administration upon request expressly comprise transfer pricing documentation. This was already the view of the tax administration as expressed in Circular 164/2 dated 28 January 2011.

Advance Tax Agreements

Paragraph 29a AO and the Grand-Ducal Decree dated 23 December 2014 have been introduced and provide a more robust legal framework for advance tax agreements (décisions anticipées), which until now were issued based on general principles of administrative law.

The advance tax agreement request will have to contain the taxpayer’s detailed analysis of precise and (seriously) envisioned transaction and it is required that these operations have not yet produced their effects. Furthermore, the advance tax agreement will be valid for a maximum period of five years and will be binding during this period unless:

  • it appears that the situation or the operations have been incompletely or inaccurately described;
  • subsequent situation or operations diverge from those on which the advance tax agreement was based; or
  • the advance tax agreement subsequently appears to be contrary to national, EU or international law.

A Commission for advance tax agreement has been created and requests concerning company taxation will be communicated to the Commission for its advice. Furthermore, a fee will be due upfront to the tax administration if the request concerns company taxation. The fee will be determined on case-by-case basis by the tax administration and will range between € 3,000 and € 10,000 depending on the complexity of the file.

The law however only sets general principles. The Grand-Ducal Decree dated 23 December 2014 sheds some light on practicalities of the new advance tax agreement procedure (notably on the information to be included and the determination and payment of the fee) but some questions raised during the parliamentary process remain unanswered.

Domestic withholding tax on income from capital is not refundable

Domestic withholding tax on income from capital, i.e. mainly dividend distributions absent an exemption, will continue to be creditable against the final Luxembourg income tax liability of the Luxembourg taxpayer pursuant a yearly tax assessment. However any excess of such withholding tax - compared to the tax due pursuant a yearly tax assessment – is not anymore refundable. A refund of the withholding tax remains possible if the withholding tax is levied and the beneficiary subsequently proves that the conditions for a withholding tax exemption are met.

The scope of and the rules applicable to the withholding tax remains unaffected.

Minimum corporate income tax

The rules determining the minimum CIT liability have been amended once again. As a result, “financial” companies having a balance sheet total below € 350,000 will be subject to a € 500 minimum CIT (instead of € 3,000 in 2014), increased by the contribution to the employment fund.

Value added tax

A couple of changes regarding value added tax (VAT) take effect on 1 January 2015.

As mentioned above, the standard VAT rate will be increased from 15% to 17% pursuant to the Budget laws. The reduced and intermediary VAT rates will be increased from 6% to 8% and from 12% to 14% respectively, while the “super-reduced” 3% VAT rate remains unaffected.

Finally, the law dated 26 May 2014 implementing Article 5 of Directive 2008/8/EC and amending VAT law will also enter into force on 1 January 2015. Accordingly, the place of supply of digital services (telecommunication services, broadcasting and electronically supplied services) will now be the place where the consumer is established, has its domicile or is resident in B2C transactions. The so-called “mini one-stop shop” is implemented to enable EU providers of such digital services to report and account for VAT only to the Member State of identification (and not to each Member State where consumers are located). The “mini one-stop shop” is optional.