Repeal of the IP regime and transitional measures
The Luxembourg IP regime, which provides for an 80% exemption on income of certain intellectual property (“IP”) rights, is repealed as from 1 July 2016 for corporate income tax/municipal business tax, and as from 1 January 2017 for net wealth tax.
However, taxpayers owning IP assets that currently benefit from the IP regime and, under certain conditions, for IP assets newly acquired after 1 January 2016, the IP regime will continue to be effective during a transitional period starting on 1 July 2016 and ending on 30 June 2021.
In the future, it is intended to implement a new IP regime in Luxembourg which should be based on the modified “nexus” approach set out in the final report of BEPS Action 5, under which the main criteria will be a substantial activity requirement (meaning that there must be a direct connection between the income receiving benefits and the activity contributing to that income).
Introduction of a digressive scale of rates for net wealth tax
Currently, Luxembourg companies are subject to a uniform net wealth tax levied at a rate of 0.5% on the company’s net wealth after exemptions, exclusions and adjustments.
From 2016, a reduced rate of 0.05% is introduced for the portion of the net wealth exceeding EUR 500 million. There is no cap, however.
Abolition of the corporate minimum tax and introduction of a minimum wealth tax
The corporate minimum tax is abolished and replaced by a minimum wealth tax (“Minimum Wealth Tax”) as from tax year 2016, which will also apply to securitisation vehicles and SICARs(1) which otherwise remain exempt from net wealth tax.
For entities with financial assets, receivables on related entities, transferable securities and cash at bank exceeding 90% of their total gross assets and EUR 350,000, the Minimum Wealth Tax will be set at EUR 3,210.
For all other companies which are subject to net wealth tax, the Minimum Wealth Tax will range between EUR 535 and EUR 32,100 determined according to a progressive tax scale in accordance with their balance sheet.
Total gross assets
Minimum Wealth Tax (including solidarity surcharge)
>EUR 350,000 and <=EUR 2,000,000
>EUR 2,000,000 and <=EUR 10,000,000
>EUR 10,000,000 and <=EUR 15,000,000
>EUR 15,000,000 and <=EUR 20,000,000
>EUR 20,000,000 and <=EUR 30,000,000
Participation exemption regime: Introduction of the EU anti-hybrid and anti-abuse provisions
The Law of 18 December 2015 implements into domestic tax law Directive 2014/86/EU on anti-hybrid instruments and Directive 2015/121/EU on the European general anti-abuse rule (“GAAR”) amending the parent-subsidiary Directive 2011/96/EU (the “Parent Subsidiary Directive”), respectively, and Articles 147 and 166 of the Luxembourg Income Tax Law (“LITL”).
These new measures, applicable since 1 January 2016, focus on two aspects:
(i) Introduction of measures putting an end to double non-taxation situations that result from the mismatch of tax treatment applicable to an income distribution between two Member States. This is the case whenever a hybrid arrangement is treated as debt in the source state and thus generating deductible interest and as equity in the recipient state.
Under the new provisions, profits received by an eligible Luxembourg entity which have been deducted from the taxable basis of the Member State subsidiary which distributes the profit (anti-hybrid instrument measure) will no longer be exempt in Luxembourg.
(ii) Introduction of a GAAR in order to prevent any abuse of the Parent Subsidiary Directive.
The Law of 18 December 2015 implements the GAAR under Articles 147 and 166 of the LITL. The wording of the Law corresponds to the wording under the Directive. In substance, an abuse of law may be characterised when an arrangement or a series of arrangements is/are (i) put in place for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purposes of this Directive and (ii) is/are not genuine having regard to all relevant facts and circumstances. The Directive furthermore provides that the arrangement or a series of arrangements shall be regarded as not genuine to the extent that they have not been put in place for valid commercial reasons reflecting economic reality.
These new provisions do not affect (i) the participation exemption on capital gains, (ii) the participation exemption on net wealth, and (iii) distributions made by or to eligible companies located outside the EU.
Introduction of a horizontal tax unity
Article 164bis LITL provides for a vertical tax unity regime, which means that under certain conditions a Luxembourg parent company or a Luxembourg permanent establishment of a foreign company may form a tax unity with its controlled Luxembourg subsidiaries in order to aggregate their taxable income.
In order to comply with the ECJ decision of 12 June 2014 in the SCA Holding case - (C-39/13) , the tax unity regime has been extended by a law of 18 December 2015 to allow a horizontal tax unity between Luxembourg sister companies. As such, Luxembourg qualifying companies are allowed to be part of a tax unity group if they are held directly or indirectly for 95% (or 75%, subject to certain conditions) at least by a common parent company resident in another European Economic Area (“EEA”) jurisdiction and if the latter is subject to corporate taxation similar to the Luxembourg corporate income tax.
In addition, the vertical tax unity is extended also to include, as head of the fiscal unity, a Luxembourg permanent establishment of a corporation (société de capitaux) that is a tax resident in another EEA Member State in which it is subject to corporate taxation comparable to Luxembourg corporate income tax.
Extension of Luxembourg exit tax deferral
The scope of the exit tax deferral is extended. Until now, a tax deferral was only available for migrations of a Luxembourg company or permanent establishments to a host country located in the EU or the EEA.
As of 1 January 2016, migrations under a tax deferral are extended to any host countries having concluded a double tax treaty with Luxembourg which includes an exchange of information provision in line with the OECD model convention (Article 26§1).
(1) SICARs refer to investment companies in risk capital, regulated by the Law of 15 June 2004, as amended.