Council Directive (EU) 2016/1164, the “Anti Tax Avoidance Directive” or «ATAD 1 » published on 12 July 2016, implements the OECD’s recommendations set out in the Base Erosion and Profit Shifting (“BEPS”). ATAD 1 must be transposed by EU Member States into their national laws by 31 December 2018.
On 20 June 2018 the Luxembourg Government has filed the bill of law no. 7318 with the Luxembourg Parliament (Chambre des Députés) to implement ATAD 1 into their respective national laws (the “Bill”).
ATAD 1 mainly contains the following specific areas :
- Interest limitation rules
- Controlled foreign company (“CFC”) rules
- Hybrid mismatch rules
- General anti-abuse rules (“GAAR”)
- Exit taxation rules
The interest limitation rules, CFC rules, hybrid mismatch provisions and GAAR will enter into force as of 1 January 2019 while exit taxation rules will come into effect a year later i.e. as of 1 January 2020.
Interest limitation rules
It follows from the Bill that Luxembourg has taken over almost all of the relieving options offered by ATAD 1. The interest limitation rules apply to Luxembourg resident taxpayers subject to corporate income tax (“impôt sur le revenu des collectivités”) and to permanent establishment of companies resident in another EU Member State or in a third country. Such entities will be subject to a limitation of deductibility of interest and some other similar costs i.e. the borrowing costs.
Borrowing costs are defined as interest expenses on all forms of debt and other costs economically equivalent to interest and expenses incurred in connection with the raising of finance. The Bill includes the non-limitative list of items considered as borrowing costs as set out in ATAD 1.
In a nutshell as per this provision, the deduction of “exceeding borrowing costs” (i.e. borrowing costs exceeding the taxable interest revenues and other economically equivalent taxable income) will be limited as follows:
Luxembourg has opted for option B of ATAD 1 targeting non-distributed income of CFC arising from non-genuine arrangements which have been put in place for the essential purpose of obtaining a tax advantage. It means that non-distributed income of a CFC of the taxpayer will be included in the taxable basis of the latter. This provision applies to Luxembourg resident taxpayers subject to corporate income tax and to Luxembourg permanent establishment of non-resident companies (resident in another EU Member State or in a third country).
Hybrid mismatch rules
The ATAD 1 foresees rules to avoid mismatches between domestic laws by hybrid instruments or entities allowing for double non-taxation.
The Luxembourg bill of law covers the anti-hybrid provisions only for intra-EU hybrid instruments and hybrid mismatches. Another law will be subsequently drafted for the hybrid mismatches with third countries as per Council Directive (EU) 2017/952 of 29 May 2017 (“ATAD 2”).
General anti-abuse rules “GAAR”
The existing Luxembourg “GAAR” as provided by §6 of the Tax Adaptation Law (“Steueranpassungsgesetzt” or “StAnpG”) is up-dated in the Bill to define more precisely the “abuse of law” concept. In this respect, an abuse of law or artificial arrangement is characterised when an arrangement or series of arrangements, having been put in place for the main purpose of obtaining a tax advantage that defeats the object or purpose of the applicable tax law, are not veritable with respect to all relevant facts and circumstances. An arrangement may be comprised of more than one step or part. An arrangement or a series of arrangements are regarded as not veritable to the extent that they are not put in place for valid commercial reasons which reflect economic reality.
Exit taxation rules
The payment of Luxembourg tax on capital gains earned on a transfer of assets in another EU Member State or in an EEA State with which Luxembourg has concluded a double tax treaty, in any of the circumstances listed in ATAD 1 may be deferred in annual instalments over a period of 5 years.
Other points of attention
Lastly, it should be noted that the Bill contains additional measures not directly linked with ATAD 1, in relation with tax neutral exchanges and domestic definitions of permanent establishment. Also, the text as currently drafted does not contain any measures related to hybrid mismatches with third countries (ATAD 2), which will be provided in a law subsequently drafted to come into effect by 1 January 2020.
- The deduction will be granted in any tax period only up to the higher of (i) 30% of EBITDA or (ii) EUR 3 million;
- The deduction will apply to corporate tax resident in Luxembourg subject to corporate income tax, except to “financial undertakings” and “stand-alone entities”;
- It will be permitted to carry forward the deduction, with or without a time limitation period;
- The existing “recapture” rules would remain in place;
- This will apply to loans issued on or after 17 June 2016.
Current structures involving Luxembourg companies may not all be impacted by the provisions of the Bill, which may be amended during the parliamentary process. However, special attention should be given to interest rules and the concrete appreciation of the GAAR.