On 5 March 2019, the finance bill n°7450 (“Finance Bill”) was filed by the Luxembourg government with the Luxembourg parliament.
The most important measures foreseen in the Finance Bill from a tax perspective concern the decrease of the maximum corporate income tax (“CIT”) rate from 18% to 17%, the widening of the scope of the application of the reduced 15% CIT rate and the introduction of the option provided by the Anti-Tax Avoidance Directive (“ATAD”)1 regarding the application of the interest limitation rules at the level of a tax consolidated group.
I. Upcoming changes regarding the CIT
For the present, the CIT is established at a rate of 18%, so the aggregate income tax rate for a company established in Luxembourg City amounts to 26.01%.2
The Finance Bill proposes to decrease the CIT rate from 18% to 17%. This rate will be applicable if the net profits exceed EUR 200,000. Consequently, the aggregate income tax rate for a company established in Luxembourg City will amount to 24.94%.
As far as the reduced 15% CIT rate is concerned, the Finance Bill envisages widening the scope of the application of this rate. Indeed, the reduced 15% CIT rate, which for the time being is applicable if the net profits do not exceed EUR 25,000, will then be applicable if the net profits do not exceed EUR 175,000. Accordingly, the aggregate income tax rate for a company established in Luxembourg City whose net profits do not exceed EUR 175,000 will amount to 22.80%.
If the net profits are above EUR 175,000 but do not exceed EUR 200,000, the Finance Bill proposes to tax these profits at an intermediary rate of EUR 26,250 plus 31% of the net profits ranging between EUR 175,000 and EUR 200,000.
These changes are welcomed and should be applicable to the 2019 tax year.
II. Amendment of the tax consolidation regime
The interest limitation rules implemented into Luxembourg domestic tax law by the law of 21 December 20183 provide that exceeding borrowing costs4 are in principle only deductible up to the higher of 30% of the taxpayer’s EBITDA5 or EUR 3 million.
When transposing the ATAD, the Luxembourg government did not use the option provided by the ATAD under which the interest limitation rules could be applied at the tax consolidated group level instead of at the level of each entity belonging to the tax consolidated group.
The Finance Bill proposes to remedy this by modifying the Luxembourg fiscal unity regime foreseen in Article 164bis of the Luxembourg income tax law with retroactive effect from 1 January 2019, in order to give the taxpayer the option to apply the interest limitation rules at the level of the tax consolidated group.
This will be an option for the taxpayer so that the taxpayer will have the choice to apply the interest limitation rules either at the level of the tax consolidated group or at the entity level. Depending on the amount of the exceeding borrowing costs of each entity of the tax consolidated group, the application of the interest limitation rules at the entity level may be the most favourable option for the taxpayer.
Finally, it is worth noting that the chosen option by the taxpayer will be binding until the end of the tax consolidation.
III. Other tax measures
The Finance Bill also contains other tax measures including, in particular, the implementation of the EU Directive 2018/17136 regarding the application of a super-reduced VAT rate of 3% (the current rate being 17%) on books, newspapers and periodicals, either in physical form or electronically supplied or both, as well as certain feminine hygiene products.
1. Council Directive (EU) 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices that directly affect the functioning of the internal market.
2. This includes the CIT rate, the municipal business tax of 6.75% for Luxembourg City and the 7% solidarity surcharge (applicable to the CIT rate).
3. The law implementing the ATAD.
4. Exceeding borrowing costs are defined as the excess of deductible borrowing costs (i.e. interest expenses and equivalents) over taxable interest income and equivalents.
5. Earnings before interest, taxes, depreciation and amortization.
6. Council Directive (EU) 2018/1713 of 6 November 2018 amending Directive 2006/112/EC as regards rates of value added tax applied to books, newspapers and periodicals.