ATAD 2 Law adopted

On 19 December 2019, the Luxembourg Parliament adopted the law transposing the Council Directive (EU) 2017/952 of 29 May 2017 (the so-called “ATAD 2”) into Luxembourg law (“ATAD 2 Law”) (first constitutional vote). This legislation had been submitted to the Parliament on 8 August 2019 as Bill n°7466 (the “Bill”). For more information on the content of the Bill, please refer to our Newsflash dated 13 August 2019.

The ATAD 2 Law extends the scope of hybrid mismatch rules introduced by the Law of 21 December 2018 implementing Directive (EU) 2016/1164 (“ATAD 1”) into Luxembourg law to both a wider variety of mismatches and to mismatches between EU Member States and third countries. The aim of those rules is to cope with hybrid mismatches that exploit differences between tax systems in order to achieve double non-taxation: double deduction, deduction without inclusion and non-taxation without inclusion.

The ATAD 2 Law incorporates very limited changes compared to the Bill despite the numerous comments and requests for clarifications that were submitted by the consultative bodies during the legislative process. The most salient change relates to the reverse hybrid rule. Indeed, it has been clarified in the new Article 168 Quater of the Luxembourg Income Tax Law, that a Luxembourg reverse hybrid entity (treated as transparent for Luxembourg tax purposes and opaque in the partner’s jurisdiction) shall be regarded as a resident of Luxembourg and shall be subject to corporate income tax only with respect to the portion of the net income that is not otherwise taxed under the Luxembourg domestic tax law or the laws of any other jurisdiction. Accordingly, this entity shall remain transparent for Luxembourg corporate income tax purposes vis-à-vis other partners that do not produce any reverse hybrid mismatch.

A request for an exemption from the second vote was submitted by the Parliament to the State Council. Such an exemption is generally granted in practice, thus, the ATAD 2 Law should enter into force as of 1 January 2020.