On August 5th 2015, a new draft law (draft law N°6847 hereafter referred to as the “Draft Law”) was presented to the Luxembourg Parliament.
The Draft Law introduces (i) the new general anti-abuse rule (“GAAR”) and anti-hybrid rules of the EU Parent-Subsidiary Directive, (ii) horizontal tax consolidation and (iii) various corporate tax measures.
Transposition of new GAAR and anti-hybrid rules of the EU Parent-Subsidiary Directive
The Draft Law proposes to amend both the Luxembourg withholding tax exemption and the Luxembourg dividend exemption regime, in order to include the new anti-hybrid and anti-abuse rules that were added to the Parent-Subsidiary Directive (hereafter the “PSD”) in 2014 and beginning of 2015 respectively. The Draft Law does not amend the grand-ducal Decree providing for capital gains exemption nor article 115 al. 15a of the Luxembourg income tax law which provides for a 50% dividend exemption.
Pursuant to the Draft Law, dividend distributions received by a qualifying Luxembourg resident company and dividend distributions made by a qualifying Luxembourg resident company would not be exempt from corporate income taxes or withholding taxes if the income is received or the dividend is distributed by virtue of “an arrangement or a series of arrangements which, having been put into place for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purpose of this Directive, are not genuine having regard to all relevant facts and circumstances. An arrangement or a series of arrangements shall be regarded as not genuine to the extent that they are not put into place for valid commercial reasons which reflect economic reality". As regards the anti-hybrid rules, the Draft Law provides that the dividend exemption regime (provided that all other requirements are met) should only apply, if the dividend received by the qualifying Luxembourg resident entity was not deductible at the level of the non-resident EU subsidiary.
The new GAAR and anti-hybrid rules would only apply to dividend distributions received from or made to non-Luxembourg resident EU subsidiaries or parent companies, falling within the scope of the EU Parent-Subsidiary Directive. As a result, the existing exemption regime would remain applicable to domestic as well as non-EU structures.
"If adopted, these amendments would apply to any dividend income and distribution taking place after December 31st 2015."
Horizontal tax consolidations
The Draft Law proposes to amend the existing tax consolidation regime, in order to allow for horizontal consolidation of Luxembourg resident entities held by a common parent company established in the European Economic Area (hereafter the “EEA”), provided the latter is subject to a corporate income tax that is comparable to the Luxembourg corporate income tax.
In practice, one could thus form a fiscal unity between Luxembourg sister companies without the need to include the common foreign parent company.
As a consequence, the integrating head of the fiscal unity would not be the parent entity, but one of the Luxembourg sister companies designated in the tax consolidation request.
Given that the proposed horizontal tax consolidation would also include, as integrated entities, Luxembourg permanent establishments of EEA resident parent companies, provided that they are subject to a corporate income tax comparable to the Luxembourg corporate income tax, the same would apply to the current vertical tax consolidation regime.
The Draft Law also extends the right of recovery of tax claims to all the members of a tax consolidation.
If the Draft Law is adopted, the above amendments would apply as of the tax year 2015.
Investment tax credits for vessels / Exit tax / Unemployed individuals tax credit
The Draft Law proposes to extend the Luxembourg investment tax credit regime to the lessor of vessels used in international traffic. This amendment shows the continued commitment of the legislator to strengthen the Luxembourg maritime industry. This amendment would apply as of the tax year 2015.
Additionally, the Draft Law enlarges the exit tax deferral mechanism to migrations to non-European countries, provided that Luxembourg either entered into a double tax treaty including an exchange of information clause that follows the OECD Model or signed a bilateral / multilateral tax information exchange agreement with that country. This amendment should be applicable as of the tax year 2016.
Lastly, the Draft Law proposes to extend the tax credit for the hiring of unemployed individuals for another two years until December 31st 2015.