The Luxembourg Minister of Finance presented a tax bill to Luxembourg parliament on 13 October 2015 and the draft state budget for the year 2016 on 14 October 2015. For corporate taxpayers, the most notable proposals are the abolishment of the Luxembourg IP regime with a grandfathering period of 5 years and the introduction of a reduced net wealth tax rate for net wealth in excess of EUR 500 million. In addition, the corporate minimum tax rules will change. In his speech, the Minister of Finance also mentioned again the planned tax reform for 2017, that should result in lower tax rates and a broadening of the tax base. No further details for the tax reform 2017 are available at the moment.
Abolishment and grandfathering of the Luxembourg IP regime
Following up on BEPS action plan 5 of the OECD which sets out the modified nexus approach to be applied for IP regimes, the draft state budget proposes to abolish the Luxembourg IP regime as per 1 July 2016. The Luxembourg IP regime provides for an income tax exemption of 80% of the income and capital gains derived by a Luxembourg taxpayer from its qualifying IP, and a 100% net wealth tax exemption for such IP.
The draft state budget foresees a 5 year grandfathering period for qualifying IP that was created or acquired before 1 July 2016. This grandfathering period starts as per 1 July 2016 and ends on 30 June 2021. As an anti-anticipation rule, the grandfathering is reduced for qualifying IP that is acquired from a related entity after 31 December 2015, unless the qualifying IP was already eligible for the Luxembourg IP regime or a corresponding foreign IP regime prior to such acquisition. The reduced grandfathering for the 80% corporate income tax exemption ends on 31 December 2016, and for the net wealth tax exemption as from 1 January 2018.
To enhance transparency, the draft state budget introduces the mandatory spontaneous exchange of information of the identity of Luxembourg taxpayers that benefit from the Luxembourg IP regime with respect to qualifying IP created or acquired after 6 February 2015 (which is the date of the publication by the OECD of the compromise on the modified nexus approach for IP regimes). The Luxembourg direct tax authorities will need to exchange such information with the competent authority of the other country at the earlier of (i) 3 months after the date they become aware of it, and (ii) 1 year after filing of the tax return for the relevant tax year by the Luxembourg taxpayer.
Reduced net wealth tax rate for high net wealth tax bases Luxembourg levies an annual net wealth tax from corporate taxpayers at a rate of 0.5%. The tax bill foresees the introduction of a reduced rate for net wealth in excess of EUR 500 million. Such taxable net wealth will be taxed with an amount of EUR 2.5 million increased with 0.05% on the taxable wealth exceeding EUR 500 million. The reduced net wealth tax would apply as from 1 January 2016.
Other corporate tax measures
The tax bill abolishes the minimum corporate income tax and replaces it with a minimum net wealth tax in order to address criticism from the European Commission that the minimum corporate income tax might infringe on the EU Parent Subsidiary Directive (2011/96/EU). Currently, Luxembourg resident corporate taxpayers are subject to either contingent or fixed minimum corporate income tax. The fixed minimum tax of EUR 3,210 applies if the financial assets of the resident corporate taxpayer in a given year exceed 90% of its total balance sheet and such assets exceed EUR 350,000, which is the case for most holding and financing companies. In all other cases the minimum tax is contingent on the balance sheet total of the resident corporate taxpayer and varies from EUR 535 to EUR 21,400 for a balance sheet total exceeding EUR 20 million.
As per the tax bill, both the fixed and the contingent minimum corporate income tax will become a minimum net wealth tax, and the existing minimum net wealth taxes of EUR 25 and EUR 62.5 respectively, will be abolished. The tax bill also increases the range for the contingent minimum tax to EUR 32,100 for a balance sheet total exceeding EUR 30 million. In contrast to the current minimum corporate income tax, the minimum net wealth tax will not be an advance tax and therefore not be creditable to future net wealth tax.
The specific investment vehicles SICAR, Securitisation Vehicle and SEPCAV/ASSEP, which currently are exempt from net wealth tax, will become subject to minimum net wealth tax (whether contingent or fixed) only.
In addition the tax bill closes a loophole in relation to the net wealth tax reduction that is available under certain conditions if a so called net wealth tax reserve is created and maintained for at least five years. If the reserve is used for purposes other than increasing the share capital, the reduction is added to the net wealth tax of the year of such use. The tax bill introduces a same addition to the net wealth tax if such a net wealth tax reserve was converted into share capital, and share capital is reduced within five years after creation of the reserve.
These other corporate tax measures are to come into force as from 1 January 2016.