PEPP
Tax credit for hiring unemployed persons
Brexit-related adjustments
Consolidated group for financial accounting purposes
CFC and MBT
Tax rates
Comment
On 16 December 2021, Parliament adopted the budget bill for 2022 (No. 7878) (the "Law"). In general, the Law aims at maintaining a stable tax environment considering the current sanitary situation. This article outlines the main tax measures therein.
The Law has introduced a new tax provision to the Luxembourg income tax law (LITL), article 111 ter of the LITL, which relates to contributions made under a pan-European individual pension product (PEPP). This new article defines the conditions of (tax) deductibility and partial exemption (in case of reimbursement) of payments made under a PEPP. The conditions are similar to those applicable to payments made under an individual pension scheme as provided for by article 111 bis of the LITL. The deductibility of payments made under a PEPP and under an individual pension scheme is limited to an annual cumulative cap of €3,200.
Tax credit for hiring unemployed persons
The Law provides that the tax credit for companies that hire unemployed persons will be extended until 31 December 2023.
Since 1 January 2021, the United Kingdom is no longer an EU member state; therefore, UK companies do not benefit from EU tax directives. In this respect, the Law removes UK companies from any tax provisions of the LITL referring to EU member state companies (ie, Annex of article 166(10) of the LITL and section 60 of the Luxembourg valuation law).
Consolidated group for financial accounting purposes
The Law introduces a definition of the concept of "consolidated group for financial accounting purposes" based on the definition provided by Directive (EU) 2017/952 of 29 May 2017 (Anti-Tax Avoidance Directive (ATAD) II). The term is now defined as a group consisting of all entities that are fully included in consolidated financial statements prepared in accordance with the International Financial Reporting Standards or a member state's national financial reporting system. This definition has been introduced for the purpose of article 164 bis of the LITL (tax consolidation) and article 168 bis of the LITL (the interest deduction limitation rule).
The Luxembourg controlled foreign companies (CFC) rules provide that, under certain conditions, undistributed income of foreign subsidiaries or permanent establishments (PE) can be reallocated to a Luxembourg parent company when such foreign subsidiary or the PE qualify as a CFC. During the year the undistributed income is recognised at the level of the Luxembourg company and such income is subject to Luxembourg corporate income tax, but not to municipal business tax (MBT). When the CFC finally distributes its profits or when the Luxembourg company sells the CFC at a gain, the law provides for certain exemptions under corporate income tax and MBT to avoid double taxation. However, given that the income that was initially included under the CFC rules is disregarded for MBT purposes, the Law now provides that the amount exempted for corporate income tax purposes upon effective distribution or disposal of the CFC should be added back for MBT purposes to ensure tax neutrality.
Tax rates for direct or indirect tax purposes remain unchanged.
The Law does not contain any major corporate tax reforms. However, Luxembourg companies are expected to be impacted by future EU rules that will be implemented under domestic law in the coming years, such as ATAD III and Pillars I and II (the "two-pillar solution", which aims to address the tax challenges that are posed by the digitalisation of the economy).
For further information on this topic please contact Frédéric Feyten, Ali Ganfoud, Vicente Chapa and Delphine Danhoui at CMS Luxembourg by telephone (+352 26 27 53-1) or email ([email protected], [email protected], [email protected] and [email protected]). The CMS Luxembourg website can be accessed at www.cms.law.