On 7 May, 2018, the Luxembourg tax authorities issued a new circular “Circular LG – A n.64 relating to the defensive measures in relation to the EU list of non-cooperative jurisdictions for tax purposes” (the Circular).
The Circular follows the adoption by the EU Council of said EU list of non-cooperative jurisdictions for tax purposes (the List) as documented by the conclusions taken on 5 December 2017 (the 2017 Conclusions) and before that in the framework of the Council Conclusions of 8 November 2016 on criteria and process leading to the establishment of the EU list of non-cooperative jurisdictions for tax purposes (the 2016 Conclusions).
These 2017 Conclusions and 2016 Conclusions were the outcome of prior discussions within working groups held at EU level and even broader at the international level, within and/or by the Code of Conduct Group on Business Taxation, the High-level Working Party on Tax Questions, Global Forum on Transparency and Exchange of Information for Tax Purposes, the OECD Inclusive Framework for Tackling Base Erosion and Profit-shifting, and the Forum on Harmful Tax Practices.
The purpose was to tackle tax fraud, evasion, and avoidance schemes used by taxpayers through non-EU arrangements established in the jurisdictions showing little or no cooperation with the EU’s tax transparency tools.
In this respect, the 2017 Conclusions and the 2016 Conclusions set out a list of non-EU cooperative jurisdictions on the grounds of objective criteria, which in a nutshell are the following :
1. compliance with international tax transparency standards
- The jurisdiction must have committed to and started the legislative process to implement or ratify global instruments allowing the exchange of information (mandatory/upon request) such as the common reporting standard and have arrangements in place to proceed with the exchange of information as the case may be (multilateral competent authority agreement, …)
- The jurisdiction should be rated “largely compliant” by the Global Forum
2. the pursuit of a domestic fair taxation policy
- excluding the implementation of preferential tax regimes and facilitating offshore structures which purpose is merely to attract profits that do not reflect any real economic activity in the jurisdiction
3. compliance with minimum BEPS standards
It is on the basis of these criteria, assessed by the Code of Conduct Group on Business Taxation, that a jurisdiction will be placed on the EU List.
Nine jurisdictions are currently blacklisted: American Samoa, the Bahamas, Guam, Namibia, Palau, Saint Kitts and Nevis, Samoa, Trinidad and Tobago, and the US Virgin Islands.
Delisting of a given jurisdiction is of course possible but is subject to a decision from the EU Council on the basis of relevant factual information made available to the EU Council by the Code of Conduct Group on Business Taxation.
Worth mentioning is the fact that this list may not only impact tax matters. First, Member States are invited to take into account such list in their bilateral relations with third countries in the field of foreign policy and development cooperation. Second, Regulation 2017/1601, in its Article 22 establishes a connection with such EU List, therefore prohibiting in principle beneficiaries of EU financial assistance from entering into operations with entities listed as non-cooperative jurisdictions.
In the tax area, the 2017 Conclusions indicated in its Annex III tax defensive measures to be implemented by the Member States. Some of these measures are mere recommendations (Annex III – B.2 and B.3) while the Member States are also expected to apply one of the following administrative measures (Annex III – B.1):
a. reinforced monitoring of certain transactions;
b. increased audit risks for taxpayers benefiting from the disputed regimes; or
c. increased audit risks for taxpayers using structures or arrangements involving blacklisted jurisdictions.
It is in this context that the Circular has been released.
Indeed, the Circular specifically refers to Annex III B.1 and indicates that the Luxembourg tax authorities will enforce two of the three administrative measures listed above, i.e. reinforced monitoring of certain transactions and increased audit risks for taxpayers using structures or arrangements involving blacklisted jurisdictions.
The focus of the monitoring will be put on transactions with related entities within the meaning of Article 56 of Luxembourg Income Tax Law (LITL). As a reminder, pursuant to Article 56 of LITL, two enterprises are considered related enterprises where one of them participates directly or indirectly in the management, control or capital of the other or if the same persons participate directly or indirectly in the management, control or capital of both enterprises.
Said monitoring by the Luxembourg tax authorities will actually be performed through increased reporting obligation for taxpayers: as of fiscal year 2018, companies will be asked to indicate whether they entered into transactions with related companies established in a country placed on the EU List (as it reads at the end of its accounting year).
A list of such transactions (total amount, summary of income and expenses related to the covered transactions) as well as a summary of receivables and debt with the relevant related entities will have to be prepared and kept for further inquiry or audit by the Luxembourg tax authorities, as the case may be.
The Circular also unequivocally states that the use of structures or arrangements involving countries placed on the EU list would lead to reinforced controls.
Taxpayers in Luxembourg should now proceed to a review and listing of transactions involving blacklisted jurisdictions pursuant to the EU List.