The cryptic heading above says it all – yet more legislation. Andrew Knight, Partner, and Evi Koutsioumpa, Associate, examine the Luxembourg response to the continued relentless pursuit of level playing fields and tax transparency.
Readers will long since be aware of the OECD base erosion and profit shifting (BEPS) initiatives and of the determination of the EU Commission to ensure that those initiatives are implemented in as uniform a way as possible across the EU.
The list of BEPS initiatives is long. This article focuses only on those that have recently been the subject of legislative measures in Luxembourg or that have recently been published at an EU level with a clear timeline for implementation throughout the EU.
As was the case with the introduction of formal transfer pricing rules in certain areas, the upcoming changes will need to be considered in the context of existing structures involving Luxembourg.
As regards the future, it is likely that Luxembourg will remain one of the jurisdictions of choice for raising and channelling capital bearing in mind that it:
- is proposing to implement the latest measures by taking advantage of the areas of flexibility that exist;
- will thereby be considered to be in compliance with EU rules; and
- continues to have a number of other attributes that are unaffected by these measures.
- Anti-tax avoidance directive (ATAD)
On 19 June 2018 Luxembourg introduced a draft Bill implementing the first phase of ATAD, known as ATAD 1, for the most part as from 1 January 2019. By way of brief reminder, the ATAD 1 measures comprise the following:
- General anti-abuse rule – it is to be noted that Luxembourg already has an anti-abuse rule. The effect of ATAD 1 will be to expand on the current statutory rule in Luxembourg. However, taking account of how that rule has been developed and interpreted through relevant jurisprudence, the new statutory rule may not have a significant impact on the current position.
- Controlled foreign company (CFC) rules – the following are the principal requirements for an application of the rules, which would result in the undistributed income of a CFC being attributed to a Luxembourg parent:
- The entity must be a controlled entity (including through associated enterprises of the Luxembourg taxpayer), meaning a direct or indirect participation of more than 50% (tested by reference to control or economic interest).
- The effective tax rate of the CFC must be lower than 50% of the effective rate of corporate income tax (and not including municipal business tax) that would have been payable in Luxembourg in equivalent conditions, thus currently an effective rate of 9%.
- The CFC must have been put in place under a non-genuine arrangement with the essential purpose of obtaining a tax advantage.
- Interest limitation rules – in essence, these rules serve to disallow a deduction of borrowing costs to the extent that they exceed the higher of 30% EBITDA or EUR 3 million. These rules need to be considered in the context of the already existing thin capitalisation rules relating to the financing of participations and real estate, and the transfer pricing rules that apply to back-to-back financing.
- Anti-hybrid rules – it has become clear for some time that the use of instruments that give rise to an exemption of income in one country and a deduction of payments in another, or to a double deduction, is unlikely to survive. As from 1 January 2019, any double dips arising from hybrid instruments between EU entities will be denied. And under ATAD 2 the use of such instruments (whose features will be expanded) as between the EU and non-EU entities will receive similar treatment as from 1 January 2020.
- Exit tax rules (effective as from 2020) – currently the migration of a Luxembourg taxpayer or a transfer of its assets to another EU country gives rise to an indefinite postponement of any tax charge until such point that the taxpayer or the assets are transferred outside of the EU. For migrations from 1 January 2020 this will no longer apply and will be replaced by the possibility to pay any exit tax over a five-year period.
Suggested action: Any structure that involves any of the features affected by the above measures should be reviewed in the coming months to determine their impact.
- Multilateral instrument (MLI)
Luxembourg signed the MLI to implement tax treaty-related measures under the BEPS project on 7 June 2017 and is anticipated to ratify the MLI by the end of 2018. Once ratified by both parties to a tax treaty, the MLI will be treated as amending any provision of the treaty that is not consistent with the MLI. Up to now only five countries have ratified the MLI (Slovakia, Austria, the Isle of Man, Jersey and Poland). However, it is expected that ratifications will accelerate over the coming months.
Suggested action: Where any reliance was placed on the terms of a tax treaty when putting in place any particular structure, it will be important for that structure to be reviewed so as to understand what, if any, impact the MLI will have.
- Sixth Directive on Administrative Co-operation (DAC 6)
Once implemented in Luxembourg, which must be done by 31 December 2019, DAC 6 will require mandatory reporting by intermediaries, and subsequent exchange of information between governments, of cross-border arrangements which have certain hallmarks associated with aggressive tax planning. It is likely that these hallmarks will catch a large number of transactions between not only EU entities but also an EU and non-EU entity.
Although the date of application of DAC 6 is 1 July 2020 and first filings will be due by 31 August 2020, any cross-border arrangement whose first step of implementation occurred on or after 25 June 2018 may be subject to mandatory disclosure.
Suggested action: All cross-border transactions whose first step of implementation occurred on or after 25 June 2018 should be monitored and tested against the DAC 6 criteria so that the necessary reporting can be done by 31 August 2020.
As the above examples clearly testify, all corporate entities used in the structuring of international affairs of whatever nature need to remain vigilant to ensure that they anticipate the additional disclosure and compliance burdens that continue to be imposed on them and their advisers and service providers.