European Union:
Non-Application Of The EU Participation Exemption Regime To Gibraltar Companies: Luxembourg Tax Implications Clarified
03 December 2020
ATOZ Tax Advisers
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On 1 December 2020, the Luxembourg tax authorities issued
Circular L.I.R. n°147/2, 166/2 and Eval. N°63
(“Circular“) related to the application
of the EU Parent Subsidiary Directive
(“PSD“) to companies incorporated in
Gibraltar. The Circular is a response to the decision rendered on 2
April 2020 by the Court of Justice of the European Union
(“CJEU“) in the case of GVC Services
(“Decision“), according to which the PSD
does not apply to Gibraltar companies. The Circular confirms the
conclusions we reached in our ATOZ Reports of 30 November 2020 on the
implications of the Decision for Luxembourg corporate taxpayers. In
addition, it clarifies that the CJEU Decision will not have any
retroactive effect and will only apply as from 1 January 2021,
which is good news.
Background
In the Decision, the CJEU excluded companies incorporated in
Gibraltar from the benefit of the PSD. In practice, it means that
dividends received and capital gains realised by a Luxembourg
company (“LuxCo“) on a qualifying
participation in a Gibraltar company
(“GibCo“) should not be exempt from
corporate income tax (“CIT“) and
municipal business tax (“MBT“) under the
provisions implementing the PSD into Luxembourg law (i.e. Article
166-2 n°1 of the Luxembourg income tax law
“LITL“). In addition, a participation
held by a LuxCo in a GibCo should not benefit from the net wealth
tax (“NWT“) exemption applicable to
participations held in Companies resident in the European Union
(“EU“) within the meaning of the PSD
(i.e. Paragraph 60-2 n°1 of the Luxembourg evaluation law,
“BewG“).
For the same reason, dividends distributed by a LuxCo to a GibCo
(i.e. where a GibCo holds a qualifying participation in a LuxCo)
should not be exempt from Luxembourg withholding tax
(“WHT“) under the provisions
implementing the PSD into Luxembourg law (i.e. Article 147-2-a of
the LITL).
Until the Decision, based on a well-established market practice
set by the Parliament and the Commission of the EU, the PSD applied
to Gibraltar companies. The Decision therefore had a significant
and sudden negative impact on European holding structures involving
Gibraltar companies, in particular in Luxembourg.
Clarifications provided by the Circular
As an administrative tolerance in order to take into account the
concerns of taxpayers who legitimately relied on the approach taken
by the EU Commission and Parliament prior to the CJEU Decision, the
tax authorities clarified in the Circular that the Decision will
not have any retroactive effect and will only apply as from 1
January 2021.
In addition, the tax authorities provided the following
guidance:
- Dividends received and capital gains
realised until 31 December 2020 by a LuxCo from its participation
in a GibCo should continue to benefit from the PSD as implemented
into Luxembourg law (i.e. Article 166-2 n°1 of the LITL). Such
dividends and gains will therefore not be subject to CIT and MBT if
all the other applicable conditions are met (e.g. holding period
and shareholding threshold) as at 31 December 2020. - Dividends distributed by a LuxCo to a
GibCo until 31 December 2020 should continue to benefit from the
Luxembourg provisions implementing the PSD (i.e. Article 147-2-a of
the LITL) until 31 December 2020. Such distributions will therefore
not be subject to WHT if all the other applicable conditions are
met (e.g. holding period and shareholding threshold).
In practice, it means that the Decision will not have any
negative CIT, MBT and WHT effects on dividend distributions and
capital gains realised until 31 December 2020.
However, as from 1 January 2021, the PSD provisions implemented
into the LITL will no longer apply to Gibraltar resident companies.
In the same way, the shares held by a LuxCo in a GibCo as at 1
January 2021 will no longer be exempt from NWT under the provisions
of the Luxembourg law referring to EU Companies within the meaning
of the PSD (i.e. Paragraph 60-2 n°1 of BewG).
Despite the non-application of the Luxembourg provisions
implementing the PSD as from 1 January 2021, the Circular confirms
that the other provisions of the Luxembourg participation exemption
regime (i.e. the provisions regarding the CIT, MBT and NWT
exemption applicable under certain conditions to non-resident
companies other than the ones within the meaning of the PSD) will
continue to apply if the GibCo is a fully taxable company subject
to income tax at a rate comparable to the Luxembourg CIT (a minimum
income tax of 8.5% generally satisfies this requirement), levied on
a basis similar to the Luxembourg one (which could be the case in
certain circumstances).
As far as dividend distributions from a LuxCo to a GibCo are
concerned, these will no longer benefit from any WHT exemption,
since the exemption of dividends arising from non-resident fully
taxable companies only applies to those companies tax resident in a
country with which Luxembourg has signed a double tax treaty (and
Luxembourg does not have a double tax treaty with Gibraltar).
Implications for Luxembourg taxpayers
The Circular of the tax authorities is positive as it provides
some legal certainty to taxpayers and makes sure that the Decision
of the CJEU does not have any negative retroactive effects. Still,
Luxembourg taxpayers with investments into or from Gibraltar should
seek advice from their tax advisers in order to analyse the impact
of the Decision on their investments in further detail and take
action, if necessary. In this respect, as from 1 January 2021,
taxpayers wishing to restructure their investments in/through a
Gibraltar company should also pay attention to the consequences of
the Decision on the Directive 2009/133/EC on the common system of
taxation applicable to mergers, divisions, partial divisions,
transfers of assets and exchanges of shares.
As usual in tax matters, there is no one-fits-all approach and a
careful tailor-made review of any envisaged transactions should be
considered before engaging into any corporate implementation steps
in order to avoid unnecessary costs and wasting time.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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