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Luxembourg New Tax Measures 2015

January 2015 - Tax & Private Client. Legal Developments by Ogier .

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On 19 December 2014 the Luxembourg Parliament enacted Bill n° 6720 (the Budget Law) and Bill n°6722 (the Zukunftspack - Action Plan for the Future) introducing new Luxembourg tax measures applicable for corporations and individuals as of 2015.

Looking back at 2014, and especially the last couple of months during which Luxembourg became the "talk of the town", not least in relation to the so-called "LuxLeaks" and enquiries of the European Commission in relation to several Luxembourg advance tax agreements (ATA), it should not come as a surprise that, the Luxembourg authorities firmly have reacted to demonstrate the jurisdiction's compliance with international standards of transparency and exchange of information.

This has lead to certain reformed tax measures, and in particular the establishment of a formal ATA procedure, which address the questions raised in certain areas and further strengthen the position of Luxembourg as a prime location for international investment structures.

Formal ATA Procedure

A new provision laying down the principles of the ATA procedure has been included in the general tax law (Abgabeordnung). Contrary to the past, individual taxpayers can also obtain an ATA, and applications can only be filed to the extent that the structure has not yet produced any economic effects.

For the remainder, the required application details have not tremendously changed, i.e. applications should be properly motivated, contain the usual details about the taxpayer and related third parties, and be filed in writing with the competent direct tax office, it being understood that the new formal ATA procedure only concerns direct tax matters, and does not cover VAT, registration duties or other indirect taxes.

Obviously, the ATA cannot result in an exemption or reduction of the tax due and is valid for a period of 5 years, unless (i) the situation or transaction has been described in an incomplete or inaccurate way, or (ii) the actual situation or transaction does not coincide with the described situation or transaction or (iii) the ATA is no longer in line with national, EU or international legislation.

In addition, the filing of an ATA application shall be accompanied by a fee to cover the administrative expenses which will be fixed by the tax authorities by reference to the complexity of the case as well as the volume of work it may take. Such fee will vary between EUR 3,000 and EUR 10,000 and is non-refundable, no matter what the outcome of the ATA application may be. Payment of the fee is required within one month.

Where the ATA application concerns business taxation, it will be submitted to the Commission des DĂ©cisions AnticipĂ©es (CDA) who will ensure an equal and harmonised application of the law. The CDA members will be designated by the director of the tax office and the decisions will be published in a summarised way and on an anonymised basis in the annual report of the Luxembourg tax administration.

The new rules are applicable as of 1 January 2015 with applications introduced before this date being automatically treated as set out above, but with no fee levied in relation to those decisions.

Minimum Advance Corporate Income Tax

Article 174 paragraph 6 of the Luxembourg income Tax Code (LIR) regarding the minimum advance corporate income tax (MCIT) has also been amended in order to minimize the impact for dormant and small-sized companies.

The MCIT of EUR 3,000 (EUR 3,210 taking into account the unemployment surcharge) will remain due for companies whose gross assets are predominantly (i.e. more than 90%) composed of financial assets (the so-called Soparfi). However, in case the total of such company's gross assets is less than EUR 350,000, the MCIT will be limited to EUR 500 (EUR 535).

Transfer pricing

As anticipated, Luxembourg has established a legal framework for transfer pricing and introduced a general requirement for transfer pricing documentation.

To that end, paragraph 171 of the general tax law (Abgabeordnung) has been completed to clarify that the current disclosure and documentation for taxpayers to support their tax return positions will also apply to transactions between associated enterprises. Such requirement so far only existed for intra-group financing transactions as set forth by the circular letter n°LIR 164/2 dated 28 January 2011. Concretely, in the absence of proper transfer pricing documentation, the burden of proof will be reversed to the taxpayer.

In addition, article 56 LIR relating to profit adjustments has been amended in order to align the latter with the "at-arm's-length" principle laid down in article 9 of the OECD Model Convention which will make it possible for the Luxembourg tax authorities to impose taxable profit calculations adjustments upwards and downwards. A Grand-Ducal decree will further specify the requirements in terms of documentation.

Temporary Equalisation Tax

In a move to equalise the budget, a temporary equalisation tax of 0.5% will be applicable as of 2015. The latter will be levied on all professional and substitute income and capital gains earned by individual taxpayers. It should be noted that exempt income (e.g. professional income exempt in Luxembourg further to the application of a double tax treaty) will not be included in the taxable base.

The temporary tax will be collected jointly by the direct tax authorities and the social security system. Hence most taxpayers will settle the tax via withholding at the source of the payment.

No longer refund withholding tax on dividends

Unlike resident taxpayers, non-resident taxpayers used to be denied any refund of withholding tax on dividends which constituted a violation of EU Law. Hence following the new article 154(6a) LIR, as of 2015, resident taxpayers are also no longer entitled to a refund when in a loss position.

VAT rates

Luxembourg increased its VAT rates by 2% with effect from 1 January 2015, which results in the following VAT rates being applicable as of 2015:

  • Standard VAT rate increases from 15% to 17%;
  • Intermediate and reduced VAT rates will move from 12% and 6% to respectively 14% and 8%;
  • The super-reduced rate of 3% will remain unchanged except for alcoholic beverages served in restaurants and construction works on houses for rent. In the latter cases the general standard rate of 17% will be applicable. Moreover, clothing, shoes and accessories for children under the age of 14 will also be subject to the 3% VAT rate.

VAT refund procedure

The Budget Law also introduced a new procedure for periodic VAT refunds whereby the indirect tax authorities are bound by deadlines up to which time additional information can be requested from the taxpayers and after which any delayed payment may give rise to interest accruing in favour of the taxpayer. In case of refusal, administrative and judicial proceedings can be initiated by the taxpayer.

Telecommunication and e-commerce services

A definition of telecommunication services in line with the VAT directive has been introduced in the Luxembourg VAT Law. In addition, the place of taxation of such services, as well as electronically supplied services, radio and broadcasting services provided to EU private consumers, has been shifted to the place where the recipient is resident or established.

 

This briefing provides a general summary only of this area based on current law and practice in Luxembourg at January 2015 and is subject to changes therein. It does not purport to be comprehensive and is intended for information only. It does not constitute specific advice issued on a reliance basis. Such specific legal advice should be sought on each occasion.

 

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Author

Caroline Bormans, Partner, Luxembourg