Decrease of the corporate income tax rate
The corporate income tax applicable on taxable income exceeding, as from 1 January 2017, EUR 30,000 (compared to the current threshold of EUR 15,000) will be progressively decreased from the current general rate of 21% to 19% in 2017 and 18% as from 2018. Therefore, the aggregate corporate income tax rate for a company having its statutory seat in Luxembourg-City will be 27.08% in 2017 and 26.01% as from 2018 (assuming municipal business tax rates and the unemployment fund contribution remain unchanged).
To promote entrepreneurship and favouring start-ups and small enterprises in line with other initiatives adopted earlier this year (e.g. the introduction of a simplified private limited liability company, the SARL-S), the more attractive corporate rate of 20% (applicable until 31 December 2016 to a taxable income not exceeding EUR 15,000) will be reduced to 15% as from 1 January 2017 to a taxable income not exceeding EUR 25,000. An intermediary tranche will be introduced and will be applicable to a taxable income between EUR 25,000 and EUR 30,001. The applicable rate to this new intermediary tranche will be EUR 3,750 (15% of EUR 25,000) plus 39% (33% as of 2018) on the amount exceeding EUR 25,000. In this respect, a recommendation of the Council of State (Conseil d'Etat) suggested to make clear that this intermediary tax rate is applicable for taxable income between EUR 25,001 and EUR 30,000 in order to avoid any confusion. Unfortunately this has not been taken into account.
Even though the highly appreciated decrease in the corporate income tax rate is one of the most important initiatives taken by the Luxembourg Government to face the current competitive environment, this measure is still considered as too little within the business community, if compared to tax rates applied by other jurisdictions.
Corporate tax base unchanged
No change to the legal rules and regulations regarding the computation of the corporate tax base.
Increase of the minimum net wealth tax
The minimum net wealth tax applicable for companies carrying out a holding and/or financing activities (often the so-called SOPARFIs), i.e. companies with fixed financial assets, transferrable securities, cash and receivables owed to affiliated companies exceeding as well 90% of their balance-sheet as EUR 350,000, will be increased from EUR 3,210 to EUR 4,815 (including each time the employment fund contribution). Adopted initially in 2011, increased in 2013, such additional increase of a Luxembourg minimum tax seems in our view rather inappropriate, considering the huge amount of SOPARFIs used in Luxembourg with a mere holding or investment purpose without any major taxable activity or income, and not really in line with the Government's aim to increase Luxembourg's competiveness in the current international environment.
Limitation to the carried forward losses
As from 1 January 2017, losses realized by a Luxembourg company in a given fiscal year and accumulated thereafter, will no longer be carried forward indefinitely but will be limited to 17 years. In this respect, the Council of State made an interesting observation explaining that such limitation in time of carried forward losses may lead to the unfair taxation regarding some revenues that should, in principle, be fully tax exempted. Referring in particular to capital gains resulting from the disposal of an important qualifying participation, which are fully exempted under certain conditions from Luxembourg tax. Those capital gains are, however, subject to the application of the recapture rule providing that charges in economic connection with the exempted income must be added-back to the amount of the exempted income (this rule aims indeed at avoiding a double tax benefit, i.e. the deduction of charges and the full exemption of the revenue). However, these charges, if not used to reduce any other taxable income during the lifetime of the investment in the qualifying participation, create tax losses over the years and may be used to offset any added-back amount under the recapture rule. Thus, any capital gain realised at exit on the qualifying participation remains fully tax exempt notwithstanding the recapture rule in case of no previous utilization of the tax losses (as the added-back amount is offset by the available tax losses). With the introduction of the limitation in time of the carried forward losses, there is a possibility that, at least a portion of the capital gains becomes taxable since the tax losses created by the economic charges in connection with the asset being disposed, may no longer be fully available. Notwithstanding the above, two important points need to be highlighted:
- losses realised prior to 1 January 2017 can still be carried forward with no limit of time, it being noted that the oldest losses will be deemed to be used (or lost) first; and
- contrary to initial proposals, neither a limitation of the carried forward losses to 10 years nor a percentage limitation by means of which taxable income may be set-off by tax losses only up to a certain limit, has been retained by the Government.
Considering that this measure will only be applicable as from 2034, the impacts due to the introduction of a limitation of the carried forward losses should in our view be remote. Thus, the Luxembourg legal framework of the carried forward losses will remain highly attractive.
Increase of the investment tax credits
To enhance dynamic investment policies, the investment tax credit rates will be increased. The credit rate granted for complementary investments will increase from 12% to 13% whilst for global investments and for investments in assets subject to a specific depreciation regime, the credit rate will increase from 7% to 8% for the tranche not exceeding EUR 150,000 (the respective credit rate applicable to the tranche exceeding this threshold stays unchanged for these two types of investments).
As a consequence of the Tankreederei I S.A. case (C-287/10) of the European Court of Justice, rules regarding the investment tax credits will also be amended. Indeed, those rules become available for eligible assets indistinctively whether the investment is physically made in Luxembourg or in another state part of the European Economic Area.
Deferral of annual depreciation
To promote flexibility to investors facing structural tax losses as a consequence of the depreciation mechanism of their fixed assets, the Tax Reform provides, as foreseen by other EU Member States, for the possibility (except in some limited circumstances) to defer the linear depreciation of the asset until, at the latest, the end of the useful depreciation life of such asset. A corporate taxpayer will thus have the choice, upon request, to not account for the depreciation amount in a given year and only account for it in another subsequent fiscal year.
This option has, as a consequence, to potentially increase the corporate income tax and municipal business tax liability of the taxpayer, whilst providing the possibility to reduce its net worth tax by the creation of the special reserve according to the provisions of §8 of the law of 16 October 1934, as amended, on the net wealth tax.
In our view, the benefits of the implementation of this option is twofold: (i) for companies being in a loss situation, the option might help to stop worsen their accounting loss position providing at the same time a positive commercial impact, and (ii) the option might be useful in cash trap situations, especially in cases of high depreciation values (e.g. real estate investments).
Deferral of capital gains on immovable property in case of business transfers
To promote the continuity of local businesses, the Tax Reform introduces a deferral of capital gains realised on the transfer of an immovable property used in a business, in case of cessation or transfer of such a business, into the private wealth of the business owner. Indeed, this measure counterbalances the negative effects of article 39 of the Luxembourg income tax law (LITL), according to which, in case of cessation or transfer of a business, the valuation of the assets not transferred (and thus incorporated into the private wealth of the business owner, i.e. the transferor) should be done at their estimated realisation value, resulting thus in a taxation event for the transferor in the presence of capital gains.
This deferral should facilitate the transmission of an individual business to the next family generation or to third parties such as the employees. However, certain conditions need to be met: the deferral is only available provided that the transferee, who has taken over the business, uses the immovable property as a continuity of the previous business. The gain is then deferred until (i) the disposal of the immovable property by the owner, or (ii) the moment when the activity previously transferred has ceased, or (iii) the business changes its activity.
As correctly pointed out in our view by the Council of State, the conditions to benefit from this deferral seem a bit restrictive, even though the goal of this measure is appreciated. Indeed, in view of the moving market environment in which enterprises need to constantly adapt, a change in the business activity may occur rather easily. This might trigger the immediate taxation of the deferred gain. Moreover, an additional layer of uncertainty exists as no definition or clarification has been provided in respect of the concept of "change", which can be understood rather broadly or restrictively. Thus, a clarification regarding the conditions to be met to benefit from the above mentioned deferral, would in our view be appropriate.
Deferral of forex exchange gains
The Tax Reform provides for the extension to any taxpayer in any kind of business (and not only to a specific business community i.e. banks, insurance companies and companies trading in financial assets) of the deferral, under certain conditions, of the taxation of exchange gains and resulting from the conversion of assets denominated in a currency other than Euro and representing the share capital of a company.
According to the amended article 54bis (7) LITL (former article 54bis (8) LITL), the exchange gain is to be reversed only in the year of the transfer, termination or liquidation of the company. However, the LITL also provides for the conditions and limits of how the exchange gain may be neutralised. Therefore, the impact of such reversal can be mitigated.
This deferral, which will be applicable as of 1 January 2016, is of particular interest for taxpayers that have not requested the application of the functional currency for tax purposes.
Extension of the credit granted for the hiring of unemployed persons
The temporary measure consisting in the granting of a special tax credit corresponding to 15% of the gross income of the hired unemployed person, and which was about to expire on 31 December 2016, has been extended until 31 December 2019.
Electronic filing of tax returns
Conscious of its environmental responsibility, Luxembourg will require corporations to file their tax returns electronically.
Reversal of the technical provisions made under the AGDL scheme
The deductibility of the deposit guarantee provisions constituted by banks under the private system of deposit guarantee (Association pour la Garantie des Dépôts, Luxembourg, AGDL) will be abolished. However, a tax neutral reversal of those provisions will be introduced during a transitional period starting in 2016 and ending 2026. Each year the reversal should at least be equal to the cumulated annual contribution to the existing Luxembourg Deposit Guarantee Fund and to the Single Resolution Fund. Any amount not being reversed during this transitional period will be eventually added to the taxable income of the last year, i.e. 2026.