On 19 December 2014 the Luxembourg Parliament enacted Bill n° 6720 (theBudget Law) and Bill n°6722 (the Zukunftspack - Action Plan for the Future) introducing new Luxembourg tax measures applicable for corporations and individuals as of 2015.
Looking back at 2014, and especially the last couple of months during which Luxembourg became the "talk of the town", not least further to the revelations stemming from "LuxLeaks" and the investigations led by the European Commission to several Luxembourg advance tax agreements (ATA), it should not come as a surprise that Luxembourg firmly wants to demonstrate its willingness to comply with international standards of transparency and exchange of information.
The below described tax measures, and in particular the establishment of a formal ATA procedure, definitely reflect Luxembourg's ability to cope with international pressure, and will further strengthen the position of Luxembourg as a prime location for holding and financing companies.
Formal ATA Procedure
A new provision laying down the principles of the ATA procedure has been included in The General tax Law (Abgabeordnung). Contrary to the past, individual taxpayers can also obtain an ATA, and requests can only be filed to the extent that the structure has not produced any effects yet.
For the remainder, the procedure has not changed tremendously, i.e. requests should be duly motivated, contain the usual details about the taxpayer and third concerned parties, and be filed in writing with the competent direct tax office (or, if the latter is not determined, with the tax direction), it being understood that the new formal ATA procedure only concerns direct tax matters, unlike VAT, registration duties or other indirect taxes.
Obviously, the ATA cannot result in an exemption or reduction of the tax due and is only valid for a period of 5 years, unless (i) the situation or transaction has been described in an incomplete or inaccurate way, or (ii) the actual situation or transaction does not coincide with the described situation or transaction or (iii) the ATA is no longer in line with national, EU or international legislation.
In addition, the filing of an ATA request shall be followed by an invitation to pay a fee to cover the administrative expenses which will be fixed by the tax authorities in function of the complexity of the case as well as the volume of work it may take. Such fee will vary between EUR 3,000 and EUR 10,000 and is in no case refundable, no matter what the outcome of the ATA request will be. Payment of the fee should be done within one month following the invitation to do so.
In case the ATA request concerns business taxation, the latter will be submitted to the Commission des Décisions Anticipées (CDA) who will ensure an equal and harmonized application of the law. The CDA members will be designated by the director and the decisions will be published in a summarised way and on a no-name basis in the annual report of the Luxembourg tax administration.
The new rules will be applicable as of 1 January 2015 but requests introduced before such date will be automatically treated as set out above, it being underlined though that no fee will be due in relation to those decisions.
Minimum Advance Corporate Income Tax
Article 174 paragraph 6 of the Luxembourg income Tax Code (LIR) regarding the minimum advance corporate income tax (MCIT) has been further amended in order to minimize the impact for dormant and small-sized companies.
The MCIT of EUR 3,000 (EUR 3,210 taking into account the unemployment surcharge) will remain due for companies whose gross assets are predominantly (i.e. more than 90%) composed of financial assets (the so-called Soparfi). However, in case the total of such company's gross assets is less than EUR 350,000, the MCIT will be limited to EUR 500 (EUR 535).
As anticipated, Luxembourg has established a legal framework for transfer pricing and introduced a general requirement for transfer pricing documentation.
To that end, paragraph 171 of the General tax Law (Abgabeordnung) has been completed with a third sub-paragraph to clarify that the current disclosure and documentation for taxpayers to support their tax return positions will also apply to transactions between associated enterprises. Such requirement so far only existed for intra-group financing transactions as set forth by the circular letter n°LIR 164/2 dated 28 January 2011. Concretely, in the absence of proper transfer pricing documentation, the burden of proof will be reversed to the taxpayer.
In addition, article 56 LIR relating to profit adjustments has been amended in order to align the latter with the "at-arm's-length" principle laid down in article 9 of the OECD Model Convention which will make it possible for the Luxembourg tax authorities to impose profit adjustments upwards and downwards. A Grand-Ducal decree will further specify the requirements in terms of documentation.
Temporary Equalisation Tax
In a move to equalise the budget, a temporary equalisation tax of 0.5% will be applicable as of 2015. The latter will be levied on all professional and substitute income as well as on any capital income earned by individual taxpayers. It should be noted that exempt income (e.g. professional income exempt in Luxembourg further to the application of a double tax treaty) will not be included in the taxable base.
The temporary tax will be collected jointly by the direct tax authorities and the social security system. Hence most taxpayers will settle the tax via withholding by the debtor of the payment.
No longer refund withholding tax on dividends
Unlike resident taxpayers, non-resident taxpayers used to be denied for a refund of withholding tax on dividends which constituted a violation of EU Law. Hence following the new article 154(6a) LIR, as of 2015, resident taxpayers are also no longer entitled to a refund in case they are in a loss position.
Luxembourg increased its VAT rates by 2% which results in the following VAT rates being applicable as of 2015:
- Standard VAT rate increases from 15% to 17%;
- Intermediate and reduced VAT rates will move from 12% and 6% to respectively 14% and 8%;
- The super-reduced rate of 3% will remain unchanged except for alcoholic beverages served in restaurants and construction works on houses for rent. In the latter cases the general standard rate of 17% will be applicable. Moreover, clothing, shoes and accessories for children under the age of 14 will also be subject to the 3% VAT rate.
VAT refund procedure
The Budget Law also introduced a new procedure for periodical VAT refunds whereby the indirect tax authorities are bound by deadlines until which additional information can be requested from the taxpayers and after which late payment interest may be due in favour of the taxpayer. In case of refusal, administrative and judicial proceedings can be initiated by the taxpayer.
Telecommunication and e-commerce services
A definition of telecommunication services in line with the VAT directive has been introduced in the Luxembourg VAT Law. In addition, the place of taxation of such services, as well as electronically supplied services, radio and broadcasting services provided to EU private consumers, has been shifted to the place where the recipient is established.