Reforms include the repeal of the minimum corporate income tax, changes to net wealth tax, to the tax consolidation regime, amendments to implement certain BEPS Actions and adoption of the changes to the Parent-Subsidiary Directive.
1. Repeal of the minimum corporate income tax together with the modification of the minimum net wealth tax
The minimum corporate income tax is repealed with effect from the 2016 taxation year, but the minimum net wealth tax is increased as from 1 January 2016. As a result, the minimum taxable net wealth no longer leads to a minimum net wealth tax of either EUR25 or EUR62.5 (depending on the legal form of the Luxembourg company).
The new minimum net wealth tax amounts are similar to the amounts that applied for the minimum corporate income tax.
As a consequence, the minimum net wealth tax liability will be as follows:
- EUR3,210 (inclusive of the 7 per cent solidarity surcharge)for Luxembourg companies investing more than 90 per cent of their total balance sheet in financial assets (including transferable securities, loans, bank deposits) for an amount of more than EUR350,000; or,
- for other Luxembourg companies, between EUR535 and EUR32,100 (inclusive of the 7 per cent solidarity surcharge in each case).
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2. Specific amendments to the net wealth tax regime
As from 1 January 2016, net wealth tax liability will be as follows:
- 0.5 per cent for net wealth tax basis less than or equal to EUR500 million; and,
- 0.05 per cent rate for the net wealth tax basis exceeding EUR500 million.
3. Amendment to the Luxembourg Tax Consolidation Regime
The scope of companies eligible for the tax consolidation regime is extended and “horizontal” tax consolidation is allowed under specific conditions.
As from the fiscal year 2015:
- Luxembourg permanent establishments of a corporate company resident in an European Economic Area (“EEA”) Member State and subject to a tax comparable to the Luxembourg CIT will be eligible for the tax consolidation regime as integrating companies (to the extent their share capital is held directly or indirectly as to more than 95 per cent by the integrating company);
- it will now be possible to consolidate the taxable results of the integrated companies not only at the level of the common parent company but in the hands of any of the integrated companies which have the closest relation with the non-integrating common parent company (“horizontal” tax consolidation); in this respect:
- the (direct or indirect) non-integrating common parent company could either be (i) a fully taxable Luxembourg corporate company, (ii) the Luxembourg permanent establishment of a non-resident company subject to a tax comparable to the Luxembourg CIT, (iii) a corporate company resident in a EEA Member State and subject to a tax comparable to the Luxembourg CIT or (iv) a Luxembourg permanent establishment of a corporate company situated in a EEA Member State and subject to a tax comparable to the Luxembourg CIT; the non integrating common parent company should hold (directly or indirectly) at least 95 per cent of the share capital of the integrating and integrated companies; and,
- the integrating company should either be (i) a fully taxable Luxembourg parent corporate company or (ii) the Luxembourg permanent establishment of a non resident company subject to a tax comparable to the Luxembourg CIT (as for a "vertical" tax consolidation).
4. Extension of the Exit Tax Rules
Tax payment deferral is extended to the transfer of assets to non-EEA Member States that have negotiated double tax treaties or specific bilateral or multilateral agreement that include substantially OECD compliant exchange of information provisions (under article 26 paragraph 1 of the OECD Model Convention).
Furthermore, tax payment deferral will no longer be terminated where the assets are further transferred in the framework of a contribution of business, merger or demerger falling into the scope of the Merger Directive 2009/133/EC dated 19 October 2009, to the extent that the beneficiary company(ies) is (are) resident in a EEA Member State (or an eligible non-EEA Member State as defined above) and commit(s) to take over the obligations of the contributing company in connection with the tax payment deferral and in particular commit(s) to pay the taxes due upon termination/cancellation of the deferral.
5. Repeal of the Intellectual Property Regime
From a general point of view, the existing Intellectual Property Regime (the "IP Regime") is repealed, i.e., the existing article 50bis LITL is repealed as from 1 July 2016 (for CIT and MBT exemption) and paragraph 60bis BewG as from 1 January 2017 (for NWT exemption). However, the IP Regime is temporarily maintained during a transitional period from 1 July 2016 until 30 June 2021 under specific conditions.
More specifically, access to the existing Luxembourg IP Regime is possible for new beneficiaries, i.e., new taxpayers and new IP rights held by taxpayers already benefiting from the existing IP Regime, until 30 June 2016 (which will then apply until 30 June 2021 at the latest).
Consequently, any taxpayer having created, acquired or improved IP rights before 1 July 2016 will benefit from the existing IP Regime until 30 June 2021 (at the latest).
With respect to the creation and/or improvement of IP rights, the taxpayer will have to evidence that the creation/improvement works have been completed before 1 July 2016.
One restriction is however introduced regarding the length of the transitional period. Indeed, the transitional period no longer applies (i) after 31 December 2016 (for CIT and MBT purposes) and (ii) as from 1 January 2018 (for NWT purposes) in the case where the two following cumulative conditions will be fulfilled:
- the IP rights have been acquired (even in the framework of a tax neutral exchange) after 31 December 2015 directly or indirectly from related parties (in the sense of article 56 of the Luxembourg income tax law, meaning (i) any enterprise that participates directly or indirectly in the management, control or capital of the other enterprise or (ii) the same persons participate directly or indirectly in the management, control or capital of the two enterprises); and
- these IP rights were not eligible to the Luxembourg IP Regime (or a corresponding foreign IP Regime) at the time of the acquisition.
6. Amendments to the participation exemption regime
The changes to the EU Parent-Subsidiary Directive (PSD) have been implemented into Luxembourg legislation with effect from 1 January 2016, consisting of anti-hybrid and anti-abuse measures.
The anti-hybrid measure provides that income from an eligible participation is no longer exempt and must be taxable in the State of the parent company to the extent that the income is deductible in the State of the subsidiary company.
With this new provision, Luxembourg takes an active part in the fight against Base Erosion and Profit Shifting ("BEPS") and puts an end to double non-taxation situations deriving from the mismatch of tax treatment applicable to an income distribution between two Member States, i.e., where a hybrid instrument is qualifying as debt in the State of the subsidiary company and as equity in the State of the parent company and gives rise to an unjustified tax advantage.
This new anti-abuse rule is applicable to income distributed and/or received after 31 December 2015 and technical guidelines from the Luxembourg Tax Authorities are expected for the practical application of these new measures. Under the amended Luxembourg legislation (i) the exemption from Luxembourg dividend withholding tax available for distributions made to qualifying EU parent companies of a Luxembourg company and (ii) the participation exemption available for income from qualifying EU subsidiaries, are not applicable if the transaction is considered abusive.
A transaction is regarded as abusive to the extent income is distributed in the framework of an arrangement or a series of arrangements which, having been put into place for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purpose of PSD, are "not genuine" having regard to all relevant facts and circumstances. An arrangement that comprises more than one step or part or a series of arrangements shall be considered as "not genuine" to the extent that the arrangement or series of arrangements have not been put into place for valid commercial reasons which reflect economic reality.
7. Introduction of the "step up" principle for new resident individuals
The "step up" principle has been introduced for substantial shareholdings held in any company by non-resident individuals immigrating to Luxembourg It provides for the revaluation of the acquisition price of (i) a substantial shareholding within the meaning of the legislation and (ii) convertible loans if the taxpayer holds a substantial shareholding in the company issuing the loan With this new provisions, Luxembourg waives its right to tax the capital gain accrued in the former State of residence.
This may be a very important cornerstone in rendering Luxembourg more attractive for wealthy individuals.
8. Introduction of a Temporary Tax Regularization Regime
A three-year temporary regime of tax regularization of unreported assets or income of Luxembourg residents has been agreed, under which Luxembourg resident taxpayers will be released from sanctions applicable in case of tax fraud or tax scam under specific conditions.