Luxembourg tax challenges for 2020

The year 2019 brought several changes to the Luxembourg tax law environment and therefore we want to set out the changes and main points that could be relevant for corporate taxpayers.

Direct Tax

1. Anti-hybrid rules

The Luxembourg anti-hybrid rules (Article 168ter LIR) were amended as of 1 January 2020. Prior to 1 January 2020, Article 168ter LIR merely covered mismatch situations within EU countries arising from hybrid financial instruments or hybrid entities. The recent amendments to Article 168ter LIR were prompted by the Anti-Tax Avoidance Directive 2 (“ATAD 2”), which extends the territorial scope of the hybrid mismatch rules to non-EU countries and adds additional types of mismatch, such as situations involving a permanent establishment, imported mismatches, hybrid transfers, tax residence mismatches and reverse hybrid mismatches. The changes to Article 168ter LIR took effect from 1 January 2020, with the exception of the reverse hybrid mismatch rule, which will only apply from 1 January 2022.

Application of these anti-hybrid rules will result in a payment being either denied from tax deduction or taxed in order to prevent a double deduction or a deduction without inclusion arising from the hybrid mismatch. In light of the amended anti-hybrid rules, it is important to review and analyse the impact of these rules on both existing and future investment structures.

2. Multilateral Instrument’s entry into effect in Luxembourg

On 14 February 2019, Luxembourg ratified the multilateral convention to implement tax treaty related measures to Prevent Base Erosion and Profit Shifting(“MLI”), but it filed with the OECD on 9 April 2019 its ratification instrument with its list of reservations and notifications made on the MLI. The MLI’s entry into force is different from its entry into effect. The entry into force is used to determine the entry into effect of the MLI and is retained for the application of the mutual agreement procedure provided by Article 16 and Part VI (Arbitration) of the MLI.

The MLI has been in force in Luxembourg since 9 August 2019, but it has been in effect since 1 January 2020 for taxes withheld at source and for other taxes levied with respect to taxable periods beginning on or after 1 February 2020. For taxpayers whose taxable period follows the calendar year, the MLI provisions will apply from 1 January 2021. The above-mentioned dates of effect are the earliest possible dates of effect for the double tax treaties with Luxembourg as the MLI is applicable to a given treaty only once in effect for both parties.

The MLI will be applied alongside existing tax treaties, modifying their application without the need for a bilateral renegotiation. Its main impact on Luxembourg investment structures is identified as the anti-abuse rule materialized by the so-called “principal purposes test” or PPT.

3. New Luxembourg–France treaty enters into effect

The new Luxembourg and France tax treaty (“Treaty”) dated 20 March 2018 entered into effect on 1 January 2020. The Treaty replaces the 1958 Luxembourg–France tax treaty and introduces a number of changes mainly reflecting the amendments to the 2017 OECD Model Tax Convention further to the BEPS Project.

One of the main implications of the Treaty is that dividends distributed by French real estate investment funds (i.e. OPCIs and SIICs) will no longer benefit from a reduced 5% withholding tax rate. Instead, they will be subject to the French ordinary domestic withholding tax rate (currently 30%, to be reduced to 25% by 2022) if the Luxembourg beneficiary holds 10% or more of the share capital of the distributing fund. Distributions could nevertheless still benefit from a 15% withholding tax rate under French domestic law, provided that the beneficiaries are collective investment vehicles (“CIVs”) that can be assimilated into French CIVs.

4. Pre-2015 tax rulings terminated

From 1 January 2020, all tax rulings issued by the Luxembourg tax authorities before 1 January 2015 (“Pre-2015 Rulings”) have been automatically terminated. Taxpayers that are affected by this measure may introduce a new tax ruling request in compliance with the current administrative procedure. If the tax ruling request is approved, it will have a validity of maximum five tax years similar to tax rulings that have been issued since 1 January 2015. Pre-2015 tax rulings apply in principle for the 2019 tax year.

5. DAC6 entry into force and beginning of its reporting

The bill of law implementing the 2018/822 Directive (“DAC6”) has not yet been voted on, but it should nevertheless enter into force as of 1 January 2020. DAC6 introduces a new set of transparency measures by requiring intermediaries or, in the absence of an intermediary, the relevant taxpayer to report to their relevant tax authorities on potentially aggressive cross-border tax-planning arrangements they are involved in and by setting out rules for the subsequent exchange of this information between tax administrations.

As from 1 July 2020, information on the cross-border arrangement treated as reportable must be filed within 30 days beginning on the day after it is ready/available for implementation (or when its implementation has started, whichever occurs first) or the day after the intermediary(ies) provided, directly or by means of other persons, aid, assistance or advice.By 31 August 2020 at the latest, information on the cross-border arrangement treated as reportable initiated during the period between 25 June 2018 and 30 June 2020 must be reported.

6. Amendment of the definition of Permanent Establishment (“PE”)

Taxpayers having a PE abroad should review, for the purpose of their 2019 tax returns, whether they must demonstrate the existence of a PE.

On 1 January 2019, a new paragraph 5 (“New §5") was added to the domestic definition of PE contained in § 16 Tax Adaption Law of 16 October 1934 (“StAnG”). New §5 aims to remove conflicts in interpretation concerning the existence of a PE under an applicable tax treaty that arise from the interaction between provisions of domestic law and those of a tax treaty.

New §5 states that the taxpayer can be requested by the Luxembourg tax authorities to provide it with a confirmation (“Confirmation”) that a PE is recognised by the tax treaty partner. On the other hand, if the relevant tax treaty does not include a provision similar to article 23A (4) of the OECD Model Tax Convention, the taxpayer must provide such Confirmation to the Luxembourg tax authorities. Article 23A (4) of the OECD Model Tax Convention stipulates that the exemption method in a tax treaty shall not apply to income or capital where the tax treaty partner applies the provisions of the tax treaty to exempt such income or capital from tax.

On 22 February 2019, the Luxembourg tax authorities published a circular (Circular L.G. – n° 19 of 22 February 2019) (“Circular”) providing clarifications on New §5. The Circular provides that the Confirmation may consist of any document verifying the existence of a PE (e.g. an income tax assessment or a certificate from the competent authority of the other country). If a Confirmation must be provided, it should be annexed by the taxpayer to its annual tax return. The Circular further states that a taxpayer that does not produce a Confirmation will not be considered to have a PE in the other country.

7. New tax dispute resolution mechanism

Luxembourg has transposed the 2017/1852 Directive on Tax Dispute Resolution Mechanisms in the EU (“Directive”) into Luxembourg law, with effect as from 1 January 2020. The law lays down rules on a mechanism to resolve disputes between Luxembourg and Member States when those disputes arise from the interpretation and application of agreements and conventions that provide for the elimination of double taxation of income and capital. It also lays down the rights and obligations of the affected persons when such disputes arise.

Value Added Tax

1. VAT on director fees

On 13 June 2019, the Court of Justice of the European Union, in case IO v. Inspector van de rijksbelastingdienst, brought clarifications regarding the application of VAT in relation to director fees. The Court held that to be considered as carrying out their activity “independently” – therefore be viewed as VAT taxable persons – administrators must bear the economic risks inherent in their activity. In other words, their compensation must not be fixed and must depend on their participation in meetings or the number of hours worked. Furthermore, the Court added that administrators must act truly independently in the sense that they are not under any supervision and may be held personally liable for their own decisions.

Administrators whose remuneration is fixed or cannot be held personally liable for their own decisions should therefore reconsider their status as a VAT taxable person.

2. Mandatory electronic filing

From January 2020, all VAT returns, whether filed periodically or annually, as well as recapitulative statements, must be submitted electronically via the eCDF platform. This applies to all VAT payers, whether they are legal persons or independent individuals. In this context, each taxpayer should ensure that they have an eCDF account set up to be able to meet this new requirement.

3. VAT recovery of branches

On 24 January 2019, the Court of Justice of the European Union released its judgment in the case of Morgan Stanley International (Morgan Stanley). For the Court, branches must take into account the activity of their head office when calculating the amount of input tax that they may recover on costs linked (at least partially) to the activity carried out by that head office. The right to recover the VAT is however subordinated to the double condition that the cost in question is linked to an activity that enables recovery both in the Member State of the head office and in the Member State of the branch. Specific allocation of costs and partial recovery methods should therefore be carefully considered in a branch/head office scenario.

4. 2020 VAT reform

In the framework of a wider reform applicable in relation to intra-community supplies of goods, the four so-called Quick Fixes introduced by the European Commission were implemented into Luxembourg VAT legislation, effective from 1 January 2020. As a result, the following changes have been introduced into Luxembourg VAT law: simplifications to avoid the VAT registration of certain businesses transferring goods to Luxembourg under call-off stock arrangements; requiring evidence of the shipment of goods outside Luxembourg for the zero-rating of international sales; requiring a valid VAT number of the acquirer for the zero-rating of intra-community supplies of goods; and requiring clear criteria so as to assign the transport to one specific transaction in a supply chain. Conditions affecting the application of these Quick Fixes should be carefully taken into account.