The law implementing the Anti-Tax Avoidance Directive 2 as regards hybrid mismatches involving third countries (known as ATAD 2) into Luxembourg tax law was passed by the Luxembourg Parliament on 19 December 2019 (the ATAD 2 Law).
In addition, the law on the budget 2020 (the Budget 2020 Law), which brings an end to old rulings, was passed on the same day.
The ATAD 2 Law and Budget 2020 Law should be published in the Luxembourg Official Journal in the course of next week and will apply from 1 January 2020 (except for the reverse hybrid entity provision which will apply from fiscal year 2022 in accordance with the ATAD 2).
Extension of anti-hybrid rules under ATAD 2 Law
As a reminder, the provisions of ATAD 2 which are transposed into domestic law by the ATAD 2 Law consist of neutralising the tax impacts of hybrid mismatches (defined as double deduction or deduction without inclusion) resulting mainly from the use of hybrid financial instruments and hybrid entities involving third party countries. For this purpose, article 168ter of the Luxembourg income tax law (the ITL) has been amended to extend the scope of the existing antihybrid rules to third party countries as well as to certain transactions (eg double residency and imported hybrid mismatches) and a new article 168quater, applicable as from 2022, has been introduced into the ITL to counter the use of reverse hybrid entities for tax purposes.
Basically, the Law contains no material changes from the initial bill of law.
It is worth noting that, regarding the scope of the anti-hybrid rules, the ATAD 2 Law confirms the 10% de minimis rule mentioned in the bill of law which applies to investors in an investment fund for the purposes of the “acting together” concept. Under this rule, a rebuttable presumption is introduced under which an investor who holds less than 10% in an investment fund is not considered as acting together with the other investors in the fund.
In addition, further to a remark made by the Council of State on article 168quater ITL, the ATAD 2 Law expressly states that the taxation of a Luxembourg reverse hybrid entity will be made up to the income not included by certain investors that consider the entity as a taxable company.
Please refer to our Newsletter of 13 August 2019 for a detailed description of the bill of law.
End of old rulings under Budget 2020 Law
The main tax provision included in the Budget 2020 Law relates to the end of old advance tax agreements (the ATAs). As previously announced, ATAs which have been granted by the Luxembourg tax authorities prior to 1 January 2015 will no longer apply as of 1 January 2020. Taxpayers may however introduce another request for an ATA regarding their existing structure to secure the applicable tax treatment. This request will be subject to the payment of an administrative fee (up to EUR10,000) and the validity of the ATA, where granted, is restricted to five years in conformity with the current tax procedural law.
Please refer to our Newsletter of 16 October 2019 for further information on this topic.