On 19 December 2014, the Luxembourg Parliament adopted the 2015 budget and the first part of the future package (paquet d'avenir). The most relevant tax measures are (i) the formalisation of the advance tax agreement (ruling) practice, (ii) the change of the transfer pricing legislation; (iii) the increase of the VAT rates; and (iv) the introduction of a temporary 0.5% income tax for individuals. These measures will enter into force on 1 January 2015. We will address in more detail in a further publication these measures and additional tax measures entering into force on 1 January 2015.
Advance tax agreements
The new legislation introduces a legal basis for the advance tax agreement ("ATA") process in Luxembourg Tax Law (new §29a of the General Tax law, the "Abgabenordung") and formalises the existing procedure. In line with the current practice, §29a (2) provides that an ATA may not exempt or moderate the tax due. The parliamentary documents confirm in this respect that the ATA may merely give prior written confirmation of the correct application of national and international tax laws.
An ATA is binding for a period of 5 years unless the description of the situation/operations for which the ATA was introduced are incomplete, inexact, have changed, or are no longer in line with domestic, European or international laws.
Furthermore, on 23 December 2014, a Grand Ducal decree was adopted in order to give further details on the procedure and the conditions required to obtain an ATA (the "ATA Decree").
The ATA Decree provides that the ATA request must be introduced in writing to the tax inspector (préposé) of the tax office in charge, must be duly motivated and must contain at least the following details:
1 - precise identification of the applicant;
2 - detailed description of the operation or description of the operation(s) seriously and effectively under consideration and which have not yet produced their effects;
3 - detailed analysis of the tax issues arising from this operation with motivated tax position from the applicant; and
4 - the applicant must confirm that the facts and analysis given are complete and true.
Furthermore, Article 2 of the ATA Decree provides that where the ATA request concerns corporate tax issues, the tax inspector (préposé) submits the ATA request to a commission for advance tax agreements (commission des décisions anticipées; the "Commission").
The ATA Decree states that the purpose of the Commission is to assist the tax office in the uniform execution and implementation of tax laws. ATAs will be published anonymously and in a synthetic manner in the annual report of the Luxembourg Revenue.
Finally, §29a (4) of the Abgabendordung provides that corporate taxpayers will henceforth be subject to a fee ranging from EUR 3,000 to EUR 10,000 in order to obtain an ATA. The fee will depend on the complexity of the request and the amount of work involved. The fee will be set by the director of the Luxembourg Revenue upon filing of the ATA request and is payable within one month from the date on which the fee has been set. Finally, the fee is non-refundable if the ATA request is withdrawn, declined or answered negatively.
This new procedure described above is applicable as from 1 January 2015 and all ATAs under examination will be transmitted without any other formalities to the Commission.
Article 56 of the Luxembourg Income Tax Law ("LITL") is amended to clarify Luxembourg tax legislation on transfer pricing. The existing provision is replaced by a wording very similar to the first paragraph of Article 9 of the OECD model tax Convention dealing with profit adjustments between associated enterprises.
Under the new Article 56 LTIL, conditions agreed between related parties must correspond to arm's length market conditions agreed between independent businesses. If these conditions are not met, taxation will be adjusted (upwards or downwards) to arm's length conditions. No distinction is made between cross-border and domestic transactions. Enterprises are deemed associated if one enterprise takes part directly or indirectly in the management, control or capital of another enterprise or the same persons are directly or indirectly involved in the management control or capital of the two enterprises.
It is expected that the tax administration should also issue a new administrative circular in this respect, dealing inter alia with requirements in terms of transfer pricing documentation.
Value added tax
As from 1 January 2015, the applicable VAT rates will increase by 2 percentage points. The standard VAT rate will thus rise from 15 percent to 17 percent. This still remains the lowest VAT rate within the EU.
The 2% raise increase will also apply to the reduced VAT rates, hence bringing the reduced VAT rates from 6% to 8% and from 12% to 14% respectively. The super-reduced 3% rate remains unchanged, except for the supply of alcoholic beverages consumed in restaurants and construction work made for housing used as a principal residence by a third party (with a transitional period until 31 December 2016).
Temporary 0.5% income tax
As of 1 January 2015, an additional 0.5% (impôt d'équilibrage budgétaire temporaire) income tax is due by individuals on their professional and capital income.
Yves Prussen, Partner, email@example.com
Jean-Luc Fisch, Partner, firstname.lastname@example.org
Dirk Richter, Partner, email@example.com
Olivier Gaston-Braud, Counsel, firstname.lastname@example.org
Elisabeth Adam, Counsel, email@example.com