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What legislative and regulatory initiatives has the government taken to combat tax avoidance in your jurisdiction?
Luxembourg tax law includes several provisions to combat tax avoidance – mainly, a general ‘abuse of law’ provision and a ‘substance over form’ provision.
Recently, Luxembourg has amended its participation exemption regime in order to introduce the general anti-abuse rule (GAAR) and the anti-hybrid provision of the EU Parent Subsidiary Directive.
It has also increased the penalties for tax evasion and tax fraud.
Luxembourg will also implement EU Directive 2016/1164, whose aim is to ensure a coordinated implementation in the European Union of the principles set out by the Base Erossion Profit Shifting Report of the Organisation for Economic Cooperation and Development (OECD) as regards hybrid mismatches (Action 2), controlled foreign corporations rules (Action 3), limitation of interest deductions (Action 4) and GAAR (Action 6).
To what extent does your jurisdiction follow the OECD Action Plan on Base Erosion and Profit Shifting?
Luxembourg has signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting.
Luxembourg has also implemented several measures regarding the automatic exchange of information and, among others, the US Foreign Account Tax Compliance Act Rules, the OECD Common Reporting Standard and the OECD Country-by-Country Reporting Agreement.
Is there a legal distinction between aggressive tax planning and tax avoidance?
Under Luxembourg tax law, a taxpayer remains entirely free to choose the most tax-efficient route (tax planning) for the purpose of carrying on its business. The tax authorities will, however, be entitled to challenge a structure from the moment that it constitutes an abuse of law (tax avoidance) – that is, when the structure is legal but no longer respects the spirit of the law. Case law has identified four cumulative criteria that must be met for a situation to be considered an abuse of law:
- private law forms and institutions are used;
- taxes are reduced;
- an inappropriate path is used; and
- there are no non-tax reasons justifying the use of the chosen path.
Luxembourg tax law differentiates situations of abuse of law (tax avoidance) from situations where there is a breach of law. In the latter case, penalties and, in some cases, criminal penalties are applicable.
What penalties are imposed for non-compliance with anti-avoidance provisions?
There are no specific penalties for an abuse of law, but the tax authorities will adjust the amount of tax to the amount that would have been payable under a ‘non-abusive’ structure.
Tax evasion (Paragraph 396(1) of the General Tax Law – ‘fraude fiscale’) can lead to a tax increase equivalent to 50% of the avoided taxes. Aggravated tax evasion (Paragraph 396(5) of the General Tax Law – ‘fraude fiscale aggravée’) can lead to a fine of at least €25,000 and up to six times the avoided taxes. In cases of tax fraud (Paragraph 396(6) of the General Tax Law – ‘escroquerie fiscale’), the tax increase can amount to 10 times the avoided taxes. In addition to the penalties and increase of the tax amount, aggravated tax evasion and tax fraud are punishable by between one month and three years and one month and five years’ imprisonment, respectively.
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