On 9 March 2022, the Luxembourg Parliament published a draft
law1, which proposes to revoke an exemption available
for EU regulated Luxembourg securitisation vehicles
(“SVs”) from Luxembourg’s interest limitation rules
(“ILRs”). The draft law is expected to enter into force
as of 1 January 2023.
If the draft law is enacted in the form published, these
Luxembourg SVs will be subject to the ILRs and may be at risk of
increasing their Luxembourg corporate tax exposure, in light of
potential deductibility limitations on payments made to SV
investors.
The draft law stems from a formal notice letter sent by the
European Commission (“EC”) in 2020 advising Luxembourg to
remove the ILRs exemption applicable to EU regulated Luxembourg
SVs2.
Interest Limitation Rules and the Luxembourg SV Exemption
Pursuant to ATAD I, Luxembourg implemented its ILRs, which
generally limit tax deductibility of ‘excess borrowing
costs’ to 30% of EBITDA or EUR 3,000,000 (whichever is
higher)3.
Excess borrowing costs are generally defined as the amount of
tax deductible borrowing costs incurred by a taxpayer, which exceed
taxable interest income and other economically equivalent
income.
Both ATAD I and relevant Luxembourg legislation provide for
several exemptions from ILRs for financial undertakings, as
specifically defined and listed including alternative investment
funds (“AIFs”), insurance companies and banking
institutions.
However, Luxembourg’s ILRs also provide for an additional
exemption for financial undertakings for Luxembourg SVs, which
qualify as ‘securitisation special purpose entities’ within
the meaning of Regulation (EU) 2017/2402. This imposes, inter alia,
certain disclosure and transparency obligations, as well as
restrictions regarding retail investors.
This exemption is particularly advantageous for Luxembourg SVs
because under Luxembourg’s securitisation regime all payments
to commitment holders, whether in the form of dividends or
interest, are deemed to be interest expenses for Luxembourg tax
purposes and thus, tax deductible.
Conversely, the EC in its notice letter took the position that
these SVs do not qualify as financial undertakings as defined under
ATAD I, and therefore requested Luxembourg to remove this specific
additional exemption from its legislation.
Impact on Exemptions to AIFs and Other Financial
Undertakings
The eventual removal of the SV exemption from ILRs will not
impact the exemptions available to other financial undertakings
such as AIFs, UCITS, insurance and reinsurance companies and credit
institutions.
Impact on Existing Luxembourg SVs
Luxembourg SVs in corporate form that earn income other than
interest (or its economic equivalent), could be impacted by this
development. The removal of the exemption could result in a
limitation of tax-deductible commitment payments to 30% of EBITDA
or EUR 3,000,000 (whichever is higher). The limitation applies by
entity and not by compartment.
Affected SVs should have until 1 January 2023 (the expected
enforcement date) to amend their operations in anticipation of the
new proposal.
Conversely, Luxembourg securitisation funds and Luxembourg
securitisation undertakings that are formed as limited partnerships
should not be impacted by the removal of the exemption because they
are tax transparent and thus, outside the scope of the ILRs.
In addition, Luxembourg SVs in corporate form with income in the
form of interest (or its economic equivalent) should also generally
not be impacted. The ILRs only apply to such SVs with excess
borrowing costs, i.e. SVs in a negative net interest expense
position.
For more information on Luxembourg’s ILRs, please see our
prior update,Luxembourg Tax Authorities Issue Guidance on EU
Interest Limitation Rules as well as our webinar, The EU Interest Limitation Rules Impact on
Investment and Fund Structures.
Footnotes
1. Projet de loi No 7974 portant modification de la
loi modifiée du 4 décembre 1967 concernant
l’impôt sur le revenu
2. On 4 May 2020, the EC issued a formal notice letter.
For more information on this letter please see our legal update
3. Luxembourg Income Tax Law article 168bis
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.