The year 2019 was marked by significant changes in the Luxembourg tax arena. These changes include:

  • The creation of the UBO Register, which allows public to access the information on UBOs of Luxembourg registered entities.
  • Relevant CJEU decisions have clarified the concepts of beneficial ownership and tax avoidance.
  • The Multilateral Instrument (MLI) was ratified by the Luxembourg Parliament and was deposited with the OECD. The MLI has entered into force as regards Luxembourg on 1 August 2019.
  • The amended Directive on Administrative Cooperation on tax matters (DAC 6), which requires intermediaries to report certain cross-border arrangements is expected to enter into force on 1 July 2020.
  • The provisions of the amended Anti Tax Avoidance Directive (ATAD 2) have been implemented into Luxembourg law with effect as from 1 January 2020 (except for the reverse hybrid rules, which would enter into force on 1 January 2022).
  • As per the 2020 Budget law, tax rulings issued by the Luxembourg tax administration prior to 1 January 2015 have ceased to be valid as from 1 January 2020.

We have been informing you about these tax developments during the course of 2019. In this news alert we inform you about certain updates, practical experience and further developments.

The Luxembourg UBO Register

The Luxembourg law of 13 January 2019 implemented the UBO Register (as provided for by the 4th AML Directive) into Luxembourg law. Entities registered with the Luxembourg Trade and Companies Register were due to register their UBOs by 31 August 2019; however, a 3-month extension period was granted. The final deadline to register UBOs information in the UBO Register was 1 December 2019.

From a practical standpoint, we have seen interest from UBOs to restrict access to their information for safety reasons (notably UBOs from the Latin American region). For UBOs who request limited access to their information, their information is restricted to Luxembourg national authorities as from the date of the request (i.e., while the request is processed); if the request is accepted, the information will be limited for a period of (up to) 3 years, which may be renewed.

For more information about the UBO Register see our news alert of 8 January 2019.

Relevant ECJ Decisions

On 26 February 2019, the Court of Justice of the European Union (CJEU) issued its judgments in six cases (the Danish cases T Danmark (C-116/16) and Y Denmark Aps (C-117/16), N Luxembourg 1 (C-115/16), X Denmark A/S (C-118/16), C Danmark I (C-119/16) and Z Denmark (C-299/16)).

In these cases, the CJEU answered various questions and clarified the concept of beneficial ownership for purposes of the application of the Interest and Royalties Directive (the IRD) and the concept of tax avoidance (pursuant to the IRD and the Parent-Subsidiary Directive).

In these cases, EU entities receiving interest / dividend payments partially or fully on-paid the funds received to non-EU entities as, respectively, interest / dividend. The decisions of the CJEU are therefore particularly relevant for non-EU investors who invest in the EU through EU intermediate holding and/or financing companies.

Luxembourg has not taken specific action further to these ECJ decisions (which was the case in the Netherlands); however, these clarifications are certainly useful for the interpretation of the concepts of beneficial owner and tax avoidance.

See more information in our news alert of 6 May 2019.

MLI

Luxembourg parliament ratified the MLI through the law of 7 March 2019. Further, Luxembourg deposited the MLI with the OECD on 9 April 2019. The provisions of the MLI, therefore, entered into force as regards Luxembourg on 1 August 2019.

DAC 6

The EU Directive 2018/822 (so-called DAC 6) imposes the obligation on intermediaries (including notably accountants, tax and financial advisors, banks and consultants) or, in their absence, on the relevant taxpayer to disclose cross-border tax planning arrangements. This information will be subsequently automatically exchanged with EU tax authorities.

A tax planning arrangement is reportable if (i) it is cross-border and (ii) it meets at least one of the hallmarks set out in the Annex to DAC 6. The hallmarks are classified in generic hallmarks and specific hallmarks; in the case of the latter, some of them are subject to the ‘main benefit test’.

Reportable cross-border arrangements implemented between 25 June 2018 and 30 June 2020 should be reported by 31 August 2020; the first automatic exchange of information will take place by 31 October 2020.

DAC 6 provides the option for Member States to waive the reporting obligation in cases where the reporting would breach a legal professional privilege. In this respect, the Luxembourg bill of law implementing the provisions of the DAC 6 (in its current version) foresees an obligation for lawyers to report aggressive tax structures but on a no-name basis.

On 14 January 2020, the State Council (Conseil d’État) issued its opinion / comments on the bill of law implementing DAC 6.

The State Council agrees with the provisions which aim to respect the professional secrecy of lawyers and notes that other Member States have implemented similar provisions (e.g., Belgium, France, Germany and Austria). The State Council also proposes extending the disclosure restriction to other regulated professions such as chartered accountants and registered auditors.

Further, the State Council is of the opinion that, in order to truly respect the professional secrecy, lawyers should not be required to report the ‘anonymized information’.

The provisions of the bill of law should be implemented into Luxembourg law by 1 July 2020.

See more information about the Luxembourg implementation of DAC 6 in our news alert of 11 January 2019.

ATAD 2

Introduction

The amended Anti-Tax Avoidance Directive (ATAD 2) requires EU Member States to include certain provisions combating hybrid structures and instruments. The provisions of the ATAD 2 have been implemented into Luxembourg law with effect as from 1 January 2020, except for the reverse hybrid rules which should apply from as 1 January 2022.

Summary of the ATAD 2

Under the ATAD 2 rules, hybrid mismatches between associated enterprises, head offices and their permanent establishment (PE), between two or more PEs of an entity and mismatches under a so-called ‘structured arrangement’ are neutralized.

  • A hybrid mismatch is generally present if there is double deduction of costs or a deduction of costs without inclusion of the corresponding benefit.
  • Under the ATAD 2, hybrid mismatches are first neutralized by disallowing the deduction of a payment in the source state (Primary Rule); thereafter a secondary rule may apply based on which the payment would have to be included in the taxable income of the state of the recipient (Secondary Rule).
  • The ATAD 2 rules apply to the following hybrid mismatches:
    • Hybrid entity mismatches An entity is treated as non-transparent in one jurisdiction and as transparent in another jurisdiction.
    • Hybrid financial instruments An instrument, which includes debt and equity features is treated as debt in one jurisdiction and as equity in another jurisdiction.
    • Hybrid financial transfers An arrangement to transfer a financial instrument that causes a hybrid mismatch.
    • Imported hybrid mismatches A hybrid mismatch situation between parties in non-EU jurisdictions that is shifted to an EU Member State through the use of a non-hybrid instrument.
    • Hybrid PEs A PE is treated as such in one jurisdiction and as non-existing in another jurisdiction.
    • Dual resident mismatch A payment made by a dual resident company may be deductible in multiple jurisdictions.
  • Separate anti-mismatch rules will apply to ‘reverse hybrid situations’ which concern entities which are treated as transparent in the jurisdiction of incorporation or registration and as non-transparent in the jurisdiction(s) of their participants. For example, a Luxembourg special limited partnership (SCSp) may be part of a reverse hybrid situation. Under the application of the reverse hybrid rules, the tax transparent entities will become subject to Luxembourg corporate income tax. The rules regarding reverse hybrid situations will enter into force on 1 January 2022.
  • Upon request from the tax administration, taxpayers are required to provide confirmations from the issuer of the financial instrument or any other relevant information such as tax returns, tax certificates or documents issued by tax authorities of the other State(s) concerned.

Validity of tax rulings issued prior to 1 January 2015

Effective as from 1 January 2015, Luxembourg tax law regulates the issuance of tax rulings by the Luxembourg tax administration. As part of the conditions imposed by law, tax rulings are valid for a maximum period of five years.

With the aim to ensure consistency between the new and the old procedure, the 2020 Budget law provides that tax rulings issued before 1 January 2015 will be valid up to the fiscal year 2019; in other words, Luxembourg tax rulings issued before 1 January 2015 cease to be valid with effect as from 1 January 2020.