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On 5 March 2019, the Luxembourg government published its budget law for 2019 (“Bill”).
The Bill contains two corporate income tax measures, namely (i) a further reduction in the corporate income tax rate and (ii) an updated fiscal unity provision that provides the option to apply the interest deduction limitation rule (“30% EBITDA Rule”) set out in the Anti-Tax Avoidance Directive (“ATAD”) at fiscal unity level.
The Bill also introduces a new tax credit for workers on the social minimum wage.
Finally, the Bill proposes to reduce VAT on the supply of certain goods from the standard rate of 17% to the reduced and super-reduced rates of 8% and 3% respectively.
It is expected that the Bill will be approved by the Luxembourg parliament before the end of April, as most of the measures in the Bill will take effect on 1 May 2019.
It is good to note that the Bill demonstrates the Luxembourg government’s ongoing commitment to monitoring changes in international and European tax law and making any necessary adjustments in order to maintain Luxembourg's competitiveness.
The corporate income tax rate in Luxembourg has gradually been reduced in recent years (from 21% in 2016 to 19% in 2017 to 18% in 2018). To maintain a competitive business climate in Luxembourg, the Bill proposes to further reduce the corporate income tax rate from 18% to 17%. Including the unemployment fund and the municipal business tax rate of 6.75% (in Luxembourg City), the combined tax rate for companies will be 24.94% (down from 26.01% in 2018).
A Luxembourg company whose annual taxable income does not exceed EUR 25,000 is currently subject to a reduced corporate income tax rate of 15%. The Bill proposes to extend this threshold to EUR 175,000. Hence, a company with an annual taxable income of less than EUR 175,000 will be subject to a corporate income tax rate of 15% (resulting in a combined tax rate of 22.8% in Luxembourg City if the unemployment fund contribution and municipal business tax are added).
If the annual taxable income of a Luxembourg company exceeds EUR 175,000, the reduced corporate income tax rate of 15% will not apply, which in principle means that the full amount of taxable income will be subject to a corporate income tax rate of 17%. Therefore, taxable income of EUR 175,000 would be subject to corporate income tax of EUR 26,250, whereas a taxable income of EUR 175,001 would give rise to a corporate income tax liability of circa EUR 29,750 (i.e. the additional EUR 1 of taxable income results in a tax increase of EUR 3,500). To compensate for this, the Bill introduces an intermediary tax bracket for taxable income between EUR 175,000 and EUR 200,000. Corporate income tax of EUR 26,250 will be due on taxable income within this range, plus 31% of the amount of taxable income exceeding EUR 175,000.
The reduced corporate income tax rates will apply from the 2019 tax year.
Updated fiscal unity provision
Luxembourg transposed into domestic law at the end of last year the measures included in ATAD. The 30% EBITDA Rule is one of those measures. Pursuant to this rule, exceeding borrowing costs (i.e. the amount by which the deductible borrowing costs exceed the taxable interest revenues and other economically equivalent taxable revenues) (“EBC”) of a Luxembourg company are tax deductible up to the higher of (i) 30% of EBITDA and (ii) EUR 3 million. The 30% EBITDA Rule currently only applies to a stand-alone Luxembourg company, as Luxembourg did not initially take up the option under ATAD to apply the 30% EBITDA Rule at fiscal unity level as well. The Bill proposes to introduce this option in the updated fiscal unity provision (i.e. article 164bis CITA). Moreover, the Bill proposes to integrate into the new provision certain key elements of the fiscal unity regime that are currently included in a Grand Ducal Regulation.
The main rule is that the 30% EBITDA Rule is applied at fiscal unity level. It is possible, however, to opt out and apply the 30% EBITDA Rule at stand-alone entity level if all entities that want to be part of the fiscal unity declare in writing that they wish to apply the 30% EBITDA Rule at stand-alone entity level while they are part of the fiscal unity.
The 30% EBITDA Rule for fiscal unities is in essence the same as when applied at stand-alone entity level, except that the EBC and the EBITDA are determined at fiscal unity level. The EBITDA of the fiscal unity is the sum of net revenue (without taking into account the 30% EBITDA Rule) of each entity forming part of the fiscal unity increased by (i) the EBC, (ii) amortisations and (iii) deductions for depreciation. Tax-exempt income and related expenses are excluded from the EBITDA calculation.
Similar to the 30% EBITDA Rule at stand-alone entity level, loans concluded before 17 June 2016 (save for any subsequent modifications) do not fall within the scope of the 30% EBITDA Rule applied at fiscal unity level. The same applies to loans for long-term public infrastructure projects. In addition, entities forming part of the fiscal unity that qualify as financial undertakings are excluded from the scope of the 30% EBITDA Rule.
The Bill provides a carry forward of EBC without time limitation and a carry forward of unused interest capacity (i.e. the difference between 30% of the EBITDA and the EBC) for a maximum of five years. EBC and unused interest capacity which has not been used by an entity before forming part of a fiscal unity cannot be used while the entity is part of the fiscal unity. EBC and unused interest capacity can be used again once these entities have left the fiscal unity. The five-year limitation period for the carry forward of pre-fiscal unity unused interest capacity will be suspended while an entity is part of a fiscal unity.
The new fiscal unity provision will apply from the 2019 tax year.
Tax credit for workers on the social minimum wage
The Luxembourg government announced last December an increase of EUR 100 in the net minimum wage. The social minimum wage was increased on 1 January 2019, resulting in a net increase of around EUR 30. The Bill introduces a tax credit of EUR 70 for people on the social minimum wage. In total, the net earnings of people on the social minimum wage will therefore increase by EUR 100.
The tax credit of EUR 70 applies if the monthly gross salary is between EUR 1,500 and EUR 2,500. If the monthly gross salary is between EUR 2,500 and EUR 3,000, the tax credit is calculated according to the following formula: 70 / 500 x (3,000 -/- monthly gross salary). If the monthly gross salary is less than EUR 1,500 or more than EUR 3,000, the tax credit is not granted. If an employee works part-time, the tax credit amount is calculated on a fictitious monthly gross salary which the employee would have realised under the same conditions if he/she had worked full time (i.e. not on a pro rata basis).
The tax credit is paid by the employer. The employer is entitled to offset the credits granted against the wage tax deducted from the employee’s gross salary or request reimbursement from the tax authorities to the extent the tax credit exceeds the wage tax.
The tax credit will apply from the 2019 tax year.
Luxembourg has four different VAT rates, namely the standard rate of 17%, the intermediary rate of 14%, the reduced rate of 8% and the super-reduced rate of 3%. The Bill proposes to tax certain supplies of goods currently subject to the standard rate at the reduced and super-reduced rates.
Pursuant to the Bill, the supply of plant protection products authorised in organic farming will be subject to the reduced VAT rate of 8%.
Books, newspapers and periodicals in physical form are currently subject to the super-reduced rate, although in electronic form the standard rate applies. The Bill proposes to also tax the supply of these goods in electronic form at the super-reduced rate of 3%. The Bill further proposes to tax the supply of feminine hygiene protection products at the super-reduced rate.
The VAT changes will apply from 1 May 2019.