Tax Update December 2015

The country’s 2016 state budget draft law, which is currently under discussion in the Luxembourg Parliament, includes a certain number of tax measures impacting the taxation of both businesses and individuals.

Besides, a certain number of measures have been introduced in the last couple of months in order to adhere to European law. Please see below a summary of the most important measures that could impact you.

Measures for businesses

1. Repeal of the minimum corporate income tax

The minimum corporate tax regime, introduced in 2011 and further amended in 2013 and again in 2015, will be abolished as from 2016. Indeed, this regime was always controversial for its potential incompatibility with EU legislation, will now be abolished and replaced by a minimum net wealth tax (see below).

As a result, should the draft law be approved in its current shape, article 174 (6) of the Income Tax Law will be deleted.

2. Introduction of a new Net Wealth Tax system

The repeal of the minimum corporate income tax will be compensated by the introduction of a new Net Wealth Tax (“NWT”) system consisting of a digressive-two rates system.

NWT continues to be levied at a rate of 0.5% on an amount of the so-called unitary value (representing the net asset value of the companies being the taxable basis of NWT) up to and including €500 million. When the unitary value exceeds the aforementioned threshold, NWT is calculated as follows:

  • €2.5 million (which corresponds to a rate of 0.5% applied to the amount of €500 million); plus
  • 0.05% calculated on the taxable amount exceeding €500 million

The draft law proposes to amend the provisions of the NWT law by replacing the current minimum taxable NWT (currently 62.5 EUR for joint stock corporations or 25 EUR for limited liability companies) by a minimum annual NWT payable for resident companies as follows:

  • 3,210 EUR if the sum of fixed financial assets, transferable securities, cash, and receivables owed to affiliated companies exceeds 90% of their balance-sheet total (holding companies) plus 350,000 EUR; or
  • For all other companies not being considered "holding companies" as per the above test, the amount of minimum NWT will depend on the balance sheet total at the closing of the preceding financial year. For this purpose seven ranges have been foreseen from a total balance sheet of 350,000 EUR and a minimum NWT liability of 535 EUR through to a balance sheet of more than 30 million EUR with a minimum NWT liability of 32,100 EUR.

The minimum NWT regime also applies to companies applying the tax group regime, whereby the NWT liability of the group is capped at EUR 32,100.

The new minimum NWT regime will be applicable as from January 1, 2016.

The minimum NWT regime also will apply to securitization companies, venture capital companies (société d’investissement en capital à risque, or SICAR), corporate pension funds (société d’ épargnepension à capital variable, or SEPCAV), all incorporated under the form of a capital company, and pension savings associations (association d’épargne-pension, or ASSEP) will be liable to the minimum NWT as of 1 January 2016.

Finally, as it has been already the case in the past, companies still benefit from the possibility to reduce the NWT liability through the creation of a reserve. This mechanism will however no longer allow the reduction of the NWT liability beyond the minimum NWT.

3. Termination of the current IP regime

In order to comply with the "modified nexus approach" as agreed at the level of the Organisation for Economic Co-operation and Development (OECD) in the frame of the working group attached to Action 5 of the Base Erosion and Profit Shifting (BEPS plan) on Countering Harmful Tax Practices More Effectively, the Government has announced the termination of the current IP regime in the Budget law.

As a result, should the budget be approved in its current shape, article 50bis of the Income Tax Law will be abolished as from July 1, 2016 and paragraph 60bis of the Valuation Law, which provides for an exemption from NWT for qualifying IP would be abolished as from January 1, 2017.

The draft law provides however for a five-year transitional period according to which the current IP regime will continue to apply, until June 30, 2021, to any qualifying intellectual property (IP) that has been created or acquired before July 1, 2016, including improvements made to such IP completed before July 1, 2016.