On 25 April 2019, the Luxembourg Parliament approved the budget law for 2019, which has been filed by the Luxembourg Government with the Luxembourg Parliament as bill n°7450 (the ‘2019 Budget Law’). The 2019 Budget Law will be applicable from 1 May 2019, with some provisions applicable from 1 January 2019.
The most important measures foreseen in the 2019 Budget Law, 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 to apply the interest limitation rules at the level of a tax consolidated group, as provided by the Anti-Tax Avoidance Directive (‘ATAD’)1.
Upcoming changes regarding the CIT
Prior to the 2019 Budget Law, the CIT rate was 18%, so the aggregate income tax rate for a company established in Luxembourg City amounted to 26.01%2.
The 2019 Budget Law provides for a decrease of the CIT rate from 18% to 17%. This rate is applicable if net profits exceed EUR 200,000. Consequently, from the 2019 fiscal year, the aggregate income tax rate for a company established in Luxembourg City amounts to 24.94%.
As far as the reduced 15% CIT rate is concerned, the 2019 Budget Law provides for widening the scope of application of this rate. Indeed, the reduced 15% CIT rate, which was, prior to the 2019 Budget Law, applicable if net profits did not exceed EUR 25,000, is now applicable if 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 amounts to 22.80%.
If net profits are above EUR 175,000 but do not exceed EUR 200,000, the 2019 Budget Law introduces an intermediate rate of EUR 26,250 plus 31% of the net profits between EUR 175,000 and EUR 200,000.
These changes are welcomed and are applicable to the 2019 tax year.
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 2019 Budget Law remedies 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, to give the taxpayer the option to apply the interest limitation rules at the level of the tax consolidated group.
This is an option for the taxpayer, such that the taxpayer can choose 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 taxpayer’s chosen option is binding until the end of the tax consolidation.
Other tax measures
The 2019 Budget Law also contains other tax measures, including, in particular, the implementation of EU Directive 2018/17136 regarding the application of a super-reduced VAT rate of 3% on books, newspapers and periodicals, in physical form, electronically supplied or both, as well as certain feminine hygiene products. These VAT changes are applicable from 1 May 2019.
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 regarding rates of value added tax applied to books, newspapers and periodicals.