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Overview of corporate tax work
Luxembourg continues to be a global leader as a platform for
international business, investment funds, and cross-border
financing. At the outset of COVID-19, Luxembourg quickly reacted by
enacting pragmatic emergency measures, allowing Luxembourg
investment funds and companies to maintain operational efficiency
despite the global lockdown and restrictions on working and travel.
In terms of tax developments, Luxembourg continues to update its
competitive tax laws in harmony with new European Union
(“EU”) and Organisation for Economic Co-operation and
Development (“OECD”) policies principally aimed at
anti-abuse and aggressive tax planning.
Over the past year, Luxembourg transfer pricing has further
increased in importance. Generally, the Luxembourg tax authorities
have increased audits with respect to transfer pricing and this
trend should continue into the future.
Luxembourg tax litigation has continued with a slight increase
over the past 12 months and particular focuses of litigation
included the Luxembourg intellectual property (“IP”) box
regime (prior to the OECD Base Erosion and Profit Shifting
(“BEPS”) reform) and director’s liabilities for
taxes. In early 2020, Luxembourg courts issued a new decision that
addressed transfer-pricing challenges by the Luxembourg tax
authorities.
The importance of robust economic substance in Luxembourg
holding and financing structures continues to grow in the wake of
the 2019 landmark ‘Danish cases’ of the European Court of
Justice (“ECJ”). Already in 2020, EU Member State tax
authorities have started rigorously applying the beneficial
ownership and economic substance tests, as elaborated in these ECJ
cases.
Significant deals and themes
With respect to alternative investment funds (“AIFs”),
the Special Limited Partnership (“SCSp”) continues to be
the favoured investment vehicle, and the reserve alternative
investment fund (“RAIF”) continues as well to be the
most-often chosen regulatory regime, while Luxembourg specialised
investment funds (“SIFs”) and Luxembourg investment
companies in risk capital (commonly referred to as
“SICARs”) are less frequently chosen. Over the past year,
AIFs focused in particular on private equity, nonperforming loans,
and real estate.
For multinational corporate groups, Luxembourg remains a
favoured location for holding and intragroup financing activities,
particularly for investments, operations, and financing into the
EU.
However, over the past 12 months, there has been a noticeable
trend in the unwinding of Luxembourg cross-border financing for US
multinationals using hybrid instruments (i.e., Convertible
Preferred Equity Certificates, or “CPECs”) in light of
the anti-hybrid rules coming into force in both the USA and
Luxembourg (i.e., EU Anti-Tax Avoidance Directive II, or “ATAD
II”).
Regarding the financing sector, Luxembourg tax resident
companies (“Soparfis”) in corporate form continue to be
widely utilised as well as securitisation vehicles. Luxembourg has
continued to be a top choice for cross-border financing for a
variety of industries. To date, COVID-19 has not had a disruptive
effect on Luxembourg financing structures, mainly due to the quick
government responses, which urgently allowed more flexibility with
respect to the management and reporting of these structures.
Nonetheless, certain industries such as real estate and hospitality
have witnessed a dramatic slowdown in activity since the COVID-19
lockdown began.
On the fund finance front, the volume of deals actually
increased through March 2020 and then experienced a gradual
slowdown. However, there continues to be increased financing
activity for enlarging facilities, the expansion of new borrowers,
and the renegotiations of extended terms and higher advance rates.
We highlight that, at the time of writing, there has been no
reported default on financing structures via Luxembourg towards
institutional investors.
Key developments affecting corporate tax law and practice
Domestic cases and litigation
Exceptional corporate governance measures for
Luxembourg companies
The Grand Ducal Decree of 20 March 2020 introduced exceptional
temporary measures in order to maintain and facilitate the
effective ongoing governance of Luxembourg companies as a rapid
reaction to the challenges suddenly brought on by COVID-19.
These new emergency measures overrule the normal requirement for
physical board and shareholder meetings. During COVID-19, the
governing bodies of any Luxembourg company are allowed to hold
board and shareholder meetings without requiring the physical
presence of their members – even if the corporate governance
documents expressly state the contrary. These meetings can be
validly conducted by written circular resolutions, video
conferences or other telecommunication means so long as the
identification of the members of the corporate body participating
in the meeting can be documented.
The emergency measures also authorise electronic signatures for
validating corporate governance documents.
The new emergency measures also include an additional four
months to file the annual accounts of a Luxembourg entity, thus
deferring the filing deadline from 31 July 2020 (for 2019 accounts)
up to 30 November 2020 before incurring a late fee.
Luxembourg tax administration emergency support
measures
On 17 March 2020, the Luxembourg tax administration released a
‘newsletter’ that detailed support measures for Luxembourg
taxpayers who may be impacted by COVID-19. These emergency relief
measures include cancellations and delays for certain Luxembourg
direct tax filing and payment obligations.
Tax and social security measures for Luxembourg
cross-border workers
Many of Luxembourg’s approximate 170,000 cross-border
workers have benefitted from force majeure applying to the extended
lockdown period in which they worked remotely in neighbouring
Belgium, France and Germany. All three neighbouring jurisdictions
have announced that days spent working remotely due to COVID-19
will not impact the percentage threshold tests for determining
social security or personal tax regimes. Prior to COVID-19,
Belgium, France and Germany had begun applying strict limits on
workdays allowed for cross-border workers outside of Luxembourg
before imposing local taxation on salaries. German residents who
work in Luxembourg are allowed a maximum of 19 days, Belgium
residents 24 days, and French residents 29 days per year outside of
Luxembourg. Now, however, due to the application of force majeure,
the maximum workdays outside of Luxembourg will not be exceeded
during COVID-19.
Pre-2015 Luxembourg advance tax agreements no longer
valid
On 14 October 2019, the Luxembourg government presented the 2020
draft budget law, which included as its principal measure that all
advance tax agreements (“ATAs”) issued prior to 1 January
2015 will no longer be valid as from 1 January 2020 onwards. The
cancellations of these pre-2015 tax rulings are consistent with the
updated Luxembourg tax ruling procedure, which limits the validity
of ATAs for a maximum of five years. The new law allows taxpayers,
who may be impacted, to obtain updated rulings under the new
procedures.
New draft law on updating FATCA/CRS reporting
rules
On 9 June 2020, the Luxembourg Parliament approved a new law
aimed at updating Luxembourg rules on automatic exchange of
information (“AEOI”) with the guidelines set out in the
Global Forum on Transparency and Exchange of Information for Tax
Purposes. This new law also contributes to the harmonisation of
AEOI for both the Foreign Account Tax Compliance Act
(“FATCA”) and the Common Reporting Standard
(“CRS”) rules under Luxembourg domestic laws. One of the
highlights of the new law is that, in the absence of reportable
accounts, it will now be mandatory to do a ‘nil reporting’
of such accounts for CRS from 2020 onwards (prior to this, such was
only mandatory for FATCA). Additionally, fines for non-compliance
have been included of up to EUR10,000 for incorrect or incomplete
reporting, as well as up to EUR250,000 for the non-compliance of
due diligence procedures. The law will enter into force by 1
January 2021. The effective date of the updated FATCA/ CRS rules is
anticipated to be postponed by up to three months following an
announcement on 3 June 2020 by the Luxembourg Ministry of Finance
on deferrals of multiple new reporting laws (including the sixth
Directive on Administration Cooperation, 2018/822 (“DAC
6”)).
Luxembourg enacts ATAD II’s expanded anti-hybrid
rules
On 19 December 2019, Luxembourg voted to transpose its law on
ATAD II, which expands the scope of the anti-hybrid rules as found
in the EU’s Anti-Tax Avoidance Directive I (“ATAD I”)
and also extends their application to countries outside the EU
(“ATAD II Law”). All of the provisions of the new law
apply for tax years beginning on or after 1 January 2020 with the
exception of the reverse hybrid rule, which will not apply until 1
January 2022. ATAD II was largely inspired by the OECD BEPS Action
2 Report, and this Report should also be used as guidance for
interpreting the application of the ATAD II Law.
The ATAD II Law’s anti-hybrid rules aim to curtail perceived
‘aggressive tax planning’ by shutting down ‘hybrid
mismatch’ outcomes for related party transactions within
multinational groups. Examples of hybrid mismatch include when an
item of income is deductible for tax purposes in one jurisdiction
but not included in income in any other jurisdiction
(“deduction/ no inclusion” or “D/NI”). Another
example is when there is a double deduction (“D/D”) for
tax purposes in two or more jurisdictions arising from the same
expense. A hybrid mismatch can result from differences of entity or
instrument characterisation between two jurisdictions. A hybrid
entity is generally considered tax transparent in one jurisdiction
but tax opaque in another (e.g., Country A considers the entity a
corporation, but Country B considers the same entity a transparent
partnership). A hybrid instrument is generally considered equity in
one jurisdiction but debt in another (e.g., Country A considers the
instrument debt, thus giving rise to a taxable deduction, but
Country B considers the same payment a dividend, and exempts the
same item of income under its domestic laws).
The ATAD II Law significantly expands the scope of the prior
ATAD I hybrid rules to include hybrid mismatches arising from the
following cross-border scenarios involving at least one EU Member
State:
- Hybrid instruments.
- Reverse hybrid entities.
- Structured arrangements.
- Dual residency or no residency situations.
- Hybrid permanent establishments.
- Imported hybrid mismatches.
A hybrid mismatch can only occur between associated enterprises,
within the same enterprise (i.e., between the head office and/or
one or more permanent establishments), or pursuant to a structured
arrangement. Associated enterprises (entities or individuals) are
defined by a 50% common threshold with respect to voting rights,
capital, and/or rights to profits. The threshold is reduced to 25%
with respect to mismatches involving hybrid financial instruments.
The concept also applies if the entities are part of the same
consolidated group for financial accounting purposes.
Associated enterprise also includes a taxpayer having a
noticeable influence on the management of an enterprise and vice
versa.
The ATAD II Law further expands ‘associated enterprise’
to apply to an individual or entity ‘acting together’ with
another individual or entity in respect of the voting rights or
capital ownership of an entity. In such case, the associated
enterprise or individual should be considered as holding a
participation in all of the aggregated voting rights or capital
ownership that are held by the other individual or entity. However,
the ATAD II Law has a rebuttable presumption that investors who
hold less than 10% of the shares or interests in an investment
fund, and are entitled to less than 10% of profits, are deemed not
to be acting together.
Pursuant to ATAD II, Luxembourg will have an additional
‘reverse hybrid rule’ which comes into force as of 1
January 2022. Luxembourg’s adaptation of this law provides that
a Luxembourg transparent entity (such as an SCS or SCSp) can be
recharacterised as being subject to Luxembourg corporate income tax
if the following conditions are fulfilled:
- one or more associated entities hold in the aggregate a direct
or indirect interest in 50% or more of the voting rights, capital
interests, or rights to profits in the Luxembourg transparent
entity; - these associated entities are located in jurisdictions that
regard the Luxembourg transparent entity as tax opaque; and - to the extent that the profits of the Luxembourg transparent
entity are not subject to tax in any other jurisdiction.
However, there is an exception to this reverse hybrid rule,
which applies when the transparent entity is a ‘collective
investment vehicle’, which is defined as an investment fund
that is widely held, holds a diversified portfolio, and is subject
to investor protection regulation in Luxembourg. The Luxembourg
legislative notes suggest that Luxembourg regulated funds (UCITS,
SIFs) and funds under regulated management (RAIFs), as well as
alternative investment funds within the meaning of the EU
Directive, should all qualify for this exemption.
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Originally published by Global Legal Group Ltd
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