On 20 January 2022, the Luxembourg tax authorities (the LTA) published the circular PRE_IMM n°1 (the Circular) which clarifies the provision related to the new real estate tax (RET) introduced by the 2021 budget law.
As from fiscal year 2021 certain Luxembourg investment fund vehicles which derive directly or indirectly (through tax transparent entities) income from Luxembourg real estate assets (i.e., rental income and capital gains) are subject to a 20% RET.
The law provides for two types of compliance obligations: (i) one reporting obligation (“Reporting Obligation”) where the relevant investment fund vehicles derive Luxembourg real estate income and (ii) one notification obligation (“Notification Obligation”) related to the holding or absence of holding by the said investment fund vehicles of Luxembourg real estate assets during the calendar years 2020 and 2021.
The first reporting and notification deadlines are 31 May 2022.
In 2018, the Luxembourg government announced its intention to take measures against the abusive use, in the Luxembourg real estate market, of the favorable tax regime applicable to specialized investment funds which enable investors to reach a nil taxation on income derived from Luxembourg real estate assets. It is in this context that the RET has been introduced by the 2021 budget law. The objective of the rule is to align the tax treatment applicable to the taxpayers investing through tax exempt Luxembourg investment vehicles with the one applicable to Luxembourg taxpayers investing in Luxembourg real estate assets directly or indirectly through fully taxable companies. In addition, the measure puts on an equal footing resident and non-resident investment funds investing in Luxembourg real estate assets (the latter being subject to Luxembourg corporate income tax when in investing in Luxembourg real estate assets directly or indirectly through tax transparent entities).
2. Investment vehicles in scope of the RET
The Luxembourg RET applies to the following Luxembourg investment funds (Covered Funds) having a legal personality distinct from those of their shareholders (and not established under the legal form of a common limited partnership (SCS)):
Undertakings for collective investment (UCIs) subject to Part II of the amended law of 17 December 2010 relating to UCIs;
Specialized investment funds (SIFs) referred to in the amended law of 13 February 2007 relating to SIFs; and
Reserved alternative investment funds (RAIFs) referred to in Article 1 of the amended law of 23 July 2016 on RAIFs.
3. Income subject to the RET
Luxembourg RET applies to rental income and capital gains realized upon the disposal of Luxembourg real estate assets and the disposal of interest or units in Luxembourg tax transparent entities or mutual funds holding Luxembourg real estate assets (Covered Income).
In case the Covered Fund holds the real estate asset through layers of tax transparent vehicles or mutual funds, the rental income realized by the tax transparent vehicle or the mutual fund holding the real estate or capital gains realized upon the disposal of the interest in a tax transparent entity or mutual fund holding the real estate assets are allocated prorate to the interest held by the Covered Fund in the entity realizing the income.
The RET is levied at 20% on the gross income (excluding VAT) and the Covered Funds are not entitled to deduct expenses (including the RET) nor deduct depreciation allowances against Covered Income.
4. Reporting and payment obligations
Covered Funds deriving Covered Income in a financial year must declare the said income to the LTA by filing the form “ACD (Prélèvement immobilier): Déclaration pour le prélèvement immobilier” by 31 May of each following calendar year, with a first reporting by 31st May 2022 on Covered Income realized in 2021.
This form contains information regarding (i) the income subject to the RET, (ii) the breakdown of income per asset, (iii) the amount of RET and (iv) the tax identification number (TIN) of the Covered Fund.
An auditor report shall be attached to the return certifying that the Covered Income has been determined in accordance with article 4 of the 2021 budget law.
The return must be filed online and if an amendment is required, it must be sent through a formal letter, setting out the reasons for the adjustments made, to be sent to the withholding tax on interest office, attaching the amended details, calculations, breakdowns, and appendices as required for the declaration.
In case of non-declaration, late declaration, incomplete or incorrect declaration by the Covered Fund, the interest withholding office of the LTA shall determine the amount of the deficiency by means of a tax bulletin and late interest may apply.
Covered Funds must pay the RET to the LTA by 10 June of the calendar year following the year in which the income is received or realized. First real estate tax payment will take place no later than 10 June 2022.
In addition to the Reporting Obligation, and only in 2022, Covered Funds are also subject to a one-off Notification Obligation.
5. One-off Notification Obligations
To enable the LTA to collect the information necessary to verify and evaluate the implementation of the RET measure, Covered Funds must notify the following information to the LTA through a specific notification form:
Whether at any time during the calendar years 2020 and 2021 they have held or have not held (directly or through either Luxembourg tax transparent entities or mutual funds) real estate assets located in Luxembourg; or
Whether during the calendar years 2020 and 2021, they have changed their legal form to that of a Luxembourg tax transparent entity or in the form of a mutual fund and if at the time of the change of legal form, they held at least (either directly or through one or more Luxembourg tax transparent entities or one or more mutual funds) one property located in Luxembourg.
The above-mentioned information must be notified by 31 May 2022 at the latest. A lump sum fine of EUR 10,000 may apply in case of failure.
Covered Funds reporting their Covered Income in due time will be deemed compliant with their Notification Obligation and therefore will be exempt from filing the notification.
Frédéric Feyten - Luxembourg - Managing Partner | Avocat
Aurélien Hollard - LuxembourgPartner | Avocat à la Cour
Benjamin Bada - Luxembourg - Partner | Avocat à la Cour
Ali Ganfoud - Luxembourg - Counsel
Arnaud Marquet - Luxembourg - Associate
Delphine Danhoui - Luxembourg - Knowledge Lawyer