Step-up for new resident individuals
The law introduces the “step-up” on important participation within the meaning of Article 100 Income Tax Law (i.e. broadly a participation exceeding 10%) for individuals transferring their residence in Luxembourg. While long-term capital gains on movable properties are generally exempt from Luxembourg taxes in the frame of the management of the private wealth, capital gains on important participation are taxable. The objective of this step-up is thus to prevent double taxation and to limit the Luxembourg taxation on the capital gain accruing during the Luxembourg residence of the taxpayer.
Minimum net worth tax
The law also abolishes the minimum corporate income tax as from tax year 2016 and replaces it by a minimum net worth tax which will be calculated as follows:
- for resident companies whose financial assets exceed 90% of their total balance sheet and the amount of EUR 350,000, the amount of minimum net worth tax will be EUR 3,210; and
- for other resident companies which do not fulfil the above criteria, the amount of net worth tax will range between EUR 535 and EUR 32,100 depending on their total balance sheet.
BALANCE SHEET AMOUNT
MINIMUM CIT (EUR)up to EUR 350,000 535 up to EUR 2,000,000 1,605 up to EUR 10,000,000 5,350 up to EUR 15,000,000 10,700 up to EUR 20,000,000 16,050 up to EUR 30,000,000 21,400 above EUR 30,000,000 32,100
SEPCAV, ASSEP, securitisation vehicles and SICARs (organised as tax opaque companies) are now subject to net worth tax up to the amount of the minimum net worth tax described above.
Furthermore, a 0.05% rate of net worth tax has been introduced, which applies to the taxable base in excess of EUR 500 million. The current 0.5% net worth tax rate still applies to the taxable base of up to this EUR 500 million threshold. Finally, specific rules are set regarding the interaction between the minimum net worth tax and (i) the tax consolidation, and (ii) the net worth tax reserve.
BUDGET LAW OF 18 DECEMBER 2015.
The budget law 2016 contains a few tax provisions including the abolishment of IP tax regime with grandfathering period.
Following the consensus reached at the OECD on the taxation of income and gain from certain intellectual property (“IP”) rights (so-called “modified nexus approach”) in early 2015, the existing regime has been abolished. With respect to income taxes, Article 50bis Income Tax Law (providing for the 80% exemption on net income and gains from qualifying IP rights) is abolished with effect as from 1 July 2016. With respect to net worth tax, para. 60 Bewertunggesetz (exempting qualifying IP rights from net worth tax) is abolished with effect as from the key date for the determination of the taxable base for year 2017.
A grand-fathering period in line with the consensus has been implemented as follows for IP rights constituted or acquired before 1 July 2016 only :
- Article 50bis ITL will continue to apply until 31 December 2016 (and para. 60 Bewertunggesetz will not apply as from the key date for the determination of the taxable base for year 2018) if the relevant IP right (i) has been acquired from a related party after 31 December 2015 and (ii) was previously not eligible to the Luxembourg IP tax regime or a corresponding foreign IP tax regime,
- in all other cases, Article 50bis ITL will continue to apply until 30 June 2021 (and para. 60 Bewertunggesetz will continue to apply until the key date for the determination of the taxable base for year 2021).
In addition, an automatic exchange of information with other States is foreseen regarding taxpayers benefiting from the Luxembourg IP tax regime on IP rights constituted or acquired after 6 February 2015.The budget law thus organises the phasing-out from the existing IP tax regime and does not (yet) envisage the implementation of the tax regime compliant with the modified nexus approach.
LAW OF 18 DECEMBER 2015 REGARDING THE COMMON REPORTING STANDARD (“CRS”).
The law implements Council Directive 2014/107/EU of 9 December 2014, which aligned the European legislation on exchange of information in tax matters with the CRS developed by the OECD. As one of the early adopters of the CRS, Luxembourg will exchange as from year 2017 information pertaining to year 2016. The law foresees the automatic exchange of information on reportable accounts and organises related due diligence procedures for financial institutions.
The law entered into force on 1 January 2016.
LAW OF 7 DECEMBER 2015 RATIFYING THE FOURTH PROTOCOL TO THE TAX TREATY BETWEEN FRANCE AND LUXEMBOURG
On 5 September 2014, French and Luxembourg Finance Ministers signed a Protocol amending Article 3 (the “Protocol”) of the France-Luxembourg treaty for the avoidance of double taxation and the establishment of rules of reciprocal administrative assistance with respect to taxes on income and worth (the “Tax Treaty”).
The Protocol aims at introducing a new provision in Article 3 of the Tax Treaty relating to the taxation of capital gain on participation in real estate companies (sociétés à prépondérance immobilière).
Pursuant to the paragraph introduced in the Tax Treaty by the Protocol, the right to tax capital gains derived by a resident of a Contracting State from the alienation of stocks, shares or similar rights in a company, a trust or any other institution or entity whose assets or property constitute more than 50 per cent of their value, or which derive more than 50 per cent of their value – directly or indirectly via the interposition of one or more companies, trusts, institutions or entities – from immovable property situated in another Contracting State is attributed to that other State.
The Protocol has a significant impact on Luxembourg investment structures that invest predominantly in French real estate. Existing structures were indeed very often implemented with the anticipation that - at least - an indirect disposal would not suffer any capital gain taxation.
Ratification and entry into force
The Protocol has been ratified by Luxembourg through the law dated 7 December 2015, which also approved other new bilateral tax treaties and amendments to existing tax treaties. France’s ratifying law is dated 22 December 2015.
The taxation rules described above were for a long time expected to apply to capital gains realised as from 1 January 2016. Eventually, it results from Article 2 of the Protocol that these will apply to capital gains realised as from 1 January 2017 taking into account the ratification dates, as confirmed in the report to the French Senate.
ADMINISTRATIVE CIRCULAR LIR N°104/2BIS OF 28 DECEMBER 2015 REGARDING THE TAXATION REGIME OF THE STOCK OPTION PLANS.
Luxembourg direct tax authorities published on 28 December 2015 Circular n°104/2bis on stock option plans. Pursuant to this Circular, any stock option plan (within the meaning of the Circular LIR 104/2 dated 20 December 2012) implemented as from 1 January 2016 shall be notified by the employer to the Luxembourg direct tax authorities at least 2 months before the implementation. A copy of the said plan as well as a list of the beneficiaries must be annexed to the notification.
On this topic, it results from the Finance Minister’s answer dated 13 January 2016 to a parliamentary question (n°1651) relating to the taxation of stock option plan that this reporting requirement will enable the tax administration to control more effectively the stock option plans. The Finance Minister also recalled that an advantage (including stock options) granted by a company to its shareholder because of this shareholding relationship is to be considered as a hidden dividend distribution, even if such shareholder also exercises a salary activity within the company.
LAW OF 18 DECEMBER 2015 IMPLEMENTING THE AMENDMENTS TO THE PARENT-SUBSIDIARY DIRECTIVE.
The law most notably implements Council Directive 2014/86/EU and Council Directive 2015/121/EU, both amending Directive 2011/96/EU (so-called Parent-Subsidiary Directive).
As a result, the exemption on income from participation will not apply anymore if (i) the distributing entity is covered by the Parent-Subsidiary Directive and (ii) either the distribution is tax deductible in the State of the distributing entity or the profit allocation is made in the frame of an arrangement or a series of arrangement subject to the general anti-abuse rule (“GAAR”). The GAAR is drafted broadly in line with the wording of the EU Directive.
Conversely, withholding tax exemption on dividend distribution by Luxembourg resident companies to entities covered by the Parent-Subsidiary Directive will now in addition be subject to the GAAR.
The law also amends the tax consolidation regime in order to comply with EU case law on horizontal consolidation and enlarges the scope of the deferral of the tax payment on deemed gains upon the transfer of an enterprise, a permanent establishment or a transfer of seat.