Category: Press Release

Apr 24, 2025 – On 17 April 2025, the Luxembourg Higher Administrative Court (Cour administrative), delivered its long awaited decision on case n° 50.602C pertaining to the qualification of interest free loans under Luxembourg tax law and the existence of a permanent establishment in a treaty jurisdiction.

With its decision, the Higher Administrative Court brings further clarity in the process to be used when assessing the tax qualification of financial instruments as well as the existence of permanent establishments.

Background to the case law

A Luxembourg company (“LuxCo”) held two participations that it allocated to its Malaysian branch after the acquisition given that they could not benefit from a tax exemption and funded these investments through two interest free loans from its indirect shareholder (“IFLs”). LuxCo applied for a tax ruling seeking confirmation that the branch would qualify as a permanent establishment (“PE”) under the Luxembourg-Malaysia double tax treaty (“DTT”) and that as a result the right to tax the assets and income of the branch would be allocated to Malaysia rather than Luxembourg. The Luxembourg tax authorities (“LTA”) denied the request based on the abuse of law.

Despite the refusal, in its 2015 tax returns, LuxCo considered the branch as a PE, allocated the two participations to said PE and sought to treat the assets and related income as tax exempt in Luxembourg in accordance with the DTT. Additionally, the LuxCo treated the IFLs as debt instruments.

The LTA rejected the position taken in the tax return and considered that the branch did not qualify as a PE and was in fact an abusive legal construction. In addition, the LTA requalified the IFLs as equity instruments. As a result, LuxCo was considered as holding two participations not meeting the requirements of the participation exemption and could not deduct the IFLs, considered as equity, from its net wealth tax basis.

The Lower Administrative Tribunal followed the LTA (see our previous newsflash) in these conclusions, leading the taxpayer to file an appeal.

Decision of the Higher Administrative Court

The Higher Administrative Court (the “Court”) confirmed the judgment of the Lower Administrative Tribunal (the “Tribunal”) on both points, denying the debt qualification of the IFLs based on the substance over form principle and the permanent establishment qualification of the branch under the Luxembourg-Malaysia DTT.

1. Qualification of the IFLs for tax purposes

Preliminary to its analysis, the Court put aside the two arguments raised in the case at hand to assess the qualification of a financial instrument and recalled the process required to assess financial instruments:

• The principle set by article 40 of the Luxembourg income tax (“LITL”) that the tax balance sheet follows the commercial balance sheet unless specific tax rules provide otherwise, is relevant only for valuation of assets and liabilities.
• The substance-over-form approach whereby economic ownership primes over legal ownership mentioned in paragraph 11 of the Luxembourg adaptation law (Steueranpassungsgesetz), is merely a specific application of the substance-over-form principle and not its source, said principle being rather intrinsically existing in our tax law. As a result, paragraph 11 is only used to guide the allocation of income and assets to the relevant taxpayer and is not the legal source of the substance-over-form principle.

The Court then engaged in the assessment process by relying on its previous decisions and guidance from the parliamentary work of the LITL. The process relies on the review of the loans’ characteristics and the economic circumstances surrounding the operation, the Court putting heavy emphasis on the fact that the economic circumstances surrounding the operation weigh as heavily in the determination as the loans’ characteristics.

Use of borrowed funds 

As the Tribunal considered that the use of borrowed funds helped sustain an equity qualification of the IFL, the taxpayer tried to challenge the conclusions of the Tribunal that the IFLs were fundings long-term assets (i.e., shares in subsidiaries) by putting forward several arguments:

• that despite the fact that the parliamentary comments used the words “long term assets” (immobilisations de longue durée) those are not defined in the LITL;
• that the Tribunal took into consideration the assets ultimately held by the subsidiaries (gas pipelines) and not just the direct holdings of LuxCo; and
• that LuxCo ultimately sold the shares in the subsidiaries after a 6 year investment period and the fact that the shares were funded a 10 years maturity debt.

The Court dismissed these arguments on the grounds that:

• The term long term assets as used under the LITL aims necessarily to long term assets given that they would have been qualified as short-term assets (actifs circulants) if they weren’t and several indicators point to the fact that the investment was necessarily long term, such as the accounting treatment of the shares, the details provided in the notes to the financial statements, the use of the same corporate designation throughout the group and the fact that the underlying investments required approval by local authorities before being disposed (foreign direct investments clearances, etc…).
• The underlying investment by the subsidiary must be considered especially given its complexity in the case at hand. This does however not mean that the direct subsidiary is disregarded.
• The fact that the IFLs’ agreements provided for a 10-year maturity is not relevant as in fact the maturity was extended by granting additional loans throughout the ownership period.

Disproportion between debt and equity

The taxpayer challenged the conclusion of the Tribunal that the taxpayer’s debt-to-equity ratio is disproportionate and considered that the proportionate character should be analysed in light of the administrative practice requiring a 85/15 ratio. The taxpayer attempted to justify the 85/15 debt-to-equity ratio by providing a transfer pricing study reviewing the debt structures of peers in the same industry during fiscal year 2015. In addition, LuxCo claimed that such analysis should be done at the time it acquired the assets rather than at year-end as done by the Tribunal (despite previous case laws providing that the analysis should be done upon transfer of the funds).

The Court considered that:

• On the timing of the review, the taxpayer invested progressively during the year 2015 without providing interim accounts to analyse his position upon each investment and the taxpayer did not demonstrate that his capitalization was different before year end, entailing an absence of prejudice and the appropriateness of referring to the year-end accounts, those being the only ones available.
• Administrative practice requiring a 85/15 ratio for holding companies is not legally binding and thus has to be disregarded when assessing the situation at hand.
• Beyond the typographical error in the taxpayer’s designation, the Court held that the relevant issue is not whether other groups adopted an 85/15 debt-to-equity ratio, but rather which ratio would have been applied had the transaction occurred between unrelated parties. It seems that the Court placed emphasis on debt-to-equity ratio observed among independent entities. Notwithstanding the foregoing, the Court rejected the transfer pricing study finding that the section intended to provide an analysis of the accurate delineation of the covered transaction, including the commercial rationale behind as well as the other options realistically available was incomplete and lacked accurate explanation. Apart from a vague explanation of the business purpose, the study failed to offer a robust justification of the chosen structure or an analysis of viable alternatives.

On the amount of debt to be requalified 

The taxpayer argued that the outcome of the requalification should be to restate an arm’s length debt-to-equity ratio.

• As mentioned above, the Court dismissed the transfer pricing study and the legal value of the administrative practice. The judges took the view that in the context of qualifying a financial instrument, the assessment process can only result in one qualification, either disguised capital or debt, for the entirety of the instrument without the possibility to reach a hybrid qualification. In other words, the appropriateness of the indebtedness needs to be factored in during the qualification phase of the financial instrument in order to reach a conclusion whether it is effectively a debt instrument.

Absence of guarantee

The taxpayer argued that in the absence of a limited recourse clause, there is no need for a guarantee and in an intra-group context, especially in presence of a shareholder loan (here an indirect shareholder), such guarantees are less frequent in practice.

• The Court found that despite the absence of a limited recourse clause in the loans agreement, the notes to the LuxCo’s financial statements explaining that the lender will not request repayment if the borrower does not have sufficient funds, resulted in the existence of a de facto limited recourse.
• In an intra-group context, the Court agreed with the statement that intra-group relationships imply a level of trust and control not comparable to relationships with third parties. However, the Court considered that where the lender is the indirect shareholder controlling 100% of the borrower, the possibility of granting guarantee or pledges on the borrower’ shares are not excluded. This criterion thus, amongst others, points to an equity qualification of the IFL.

Assessment process

The taxpayer further argued that the majority of the characteristics pointed to a debt qualification and that the judges thus couldn’t conclude otherwise. The Court again sided with the Tribunal, the judges recalling that the assessment process relies on two parts, a review of the characteristics and a review of the overall operations in which the transaction takes place. Thus, meeting a majority of debt characteristics, especially when it results from the absence of dedicated clauses in the agreement, does not automatically result in a debt qualification, when a review of the overall operation leads to a different result.

2. Non recognition of the foreign branch as a permanent establishment 

Lastly, the Court analysed whether the Malaysian branch could qualify as a PE under the DTT, by looking at the wording of the DTT and the OCED commentary to the OCED model convention. The judges analysed (i) the existence of a place of business, i.e. a physical place of business of any kind, in particular, a branch or an office, (ii) the fixed nature of that place of business, i.e. it must be established in a specific place and be characterized by a certain degree of permanence, and (iii) the carrying on of all or part of the business of the undertaking in question through that place of business in the sense that persons carry on the business in the State in which the fixed place of business is situated, in this case in Malaysia and (iv) the absence of any preparatory or auxiliary character of that business.

The taxpayer was not able to provide coherent, non-contradictory and substantial evidence as to the existence and the exact place of the leased offices of the branch, the existence of an activity at the level of the branch, as it had no employee or the carrying out (part) of the business of the LuxCo through it, leading the judges to deny the qualification of PE to the Malaysian branch.

Finally, the Court did not analyse the abuse of law aspects of the appeal as it would not change the above conclusions.

Conclusion

On the qualification of financial instruments for Luxembourg tax purposes, this case further clarifies on the relevant characteristics to be analysed and sets aside arguments often invoked but not relevant in this context such as the principle of attachment of the tax and commercial balance sheet. On the method, the Court recalls that the assessment is not an “arithmetical computation” based on a listing of the characteristics but a balance of characteristics and context.

Incidentally, the Court tackles the subject of the right balance between debt and equity for a holding company. First, it confirms once again that the administrative practice requiring a 85/15 debt-to-equity ratio is not legally binding and thus should be disregarded and secondly provides insight on how the Court analyses a debt capacity analysis and at which stage this debt capacity becomes relevant, i.e. during the qualification of the financial instrument stage.

The major contribution of this “landmark” decision is that the debt-to-equity ratio has now been clearly reframed as being one of the major components assessed during the process of qualification of a financial instrument (within the second limb where one should assess the overall operations the financial instrument is financing) rather than a stand-alone concept applied after the fact.

Authors: Daniel Riedel, Partner, Ali Ganfoud, Senior Counsel, Harun Cekici, Associate

Jan 30, 2025 – Significant changes have taken place in the Luxembourg tax landscape in the course of the year 2024, as demonstrated by the intense legislative activity until the last days of 2024, with several measures taking effect as from fiscal year 2025, as summarised below.

Corporate taxpayers

• Corporate income tax reduction by 1% bringing the standard rate from 17% to 16% resulting in an aggregate tax rate of up to 23.87% (incl. municipal business tax and solidarity surcharge) instead of 24.94% for a company with its registered seat in Luxembourg-City (see our July 2024 newsflash).
• Minimum net wealth tax is simplified as from 2025 with only three brackets (EUR 535, EUR 1,605 and EUR 4,815) and reliance only on the total balance sheet size (see our May 2024 newsflash).
• Share redemption tax regime is clarified on the basis of previous case law with specific conditions now set out in the law (see our May 2024 newsflash).
• Opt-out mechanism for dividends and capital gains exemption: as from fiscal year 2025, where an exemption of dividends/capital gains is available under the participation exemption regime solely relying on the minimum acquisition price threshold or where the requirements to obtain a 50% exemption on dividends are met, the taxpayer can opt out of the exemption annually and per participation (see our May 2024 newsflash).
• The rules limiting the deduction of interest expenses are amended as from fiscal year 2025 for entities forming a single entity group.
• Tax credit for investment, applicable to corporate taxpayers and entrepreneurs, is amended as from fiscal year 2024, reaching up to 18% of eligible investments or expenses with specific rules for digital transformation, ecological and energetic transition (see our dedicated newsflash).
• Simplified liquidation and its related tax regime has now been clarified by the Luxembourg direct tax administration by way of a circular (see our dedicated newsflash).
• Mandatory digital filing for tax returns is extended as from fiscal year 2025 to include several withholding tax returns and most notably the withholding tax returns for directors’ fees (see our May 2024 newsflash).

Actively managed ETFs and Private wealth management companies (“SPF”)

• Actively managed ETFs now benefit from a full subscription tax exemption.
• SPFs: the minimum subscription tax is increased from EUR 100 to EUR 1,000 and audit measures are reinforced.

Pillar Two

Luxembourg legislator continued the update of the Luxembourg domestic Pillar Two legislation introduced in 2023 (see our July 2024 newsflash). Amendments include several measures from subsequent OECD administrative guidance issued until July 2024 and have been reflected in the Law of 20 December 2024 (Official Gazette N° 576 of 23 December 2024) with retroactive effect to fiscal years starting 31 December 2023.

The Government aims at maintaining the Luxembourg Pillar Two legislation compliant with OECD requirements and to provide in-scope taxpayers with the highest amount of legal certainty, thus further updates can be expected depending on future developments at OECD level.

Tax measures enhancing the employment market

The following measures apply, unless mentioned otherwise, as from fiscal year 2025 (see our July 2024 newsflash):

• Impatriate tax regime is simplified with a 50% exemption of the salary up to an annual gross salary of EUR 400,000.
• The participative bonus regime providing for a 50% exemption of the bonus paid to employees in connection with the employer’s profits is enhanced with the increase of applicable thresholds.
• Employees entering the workforce can benefit from a 75% tax exemption for the bonus paid by the first Luxembourg employer under a permanent contract for a 5-year period. The employee must be below 30 at the beginning of the year and the annual salary below EUR 100,000.
• A tax credit for cross border workers’ overtime hours subject to taxation in their country of residence is introduced subject to certain conditions which, in practice, should mainly apply to German residents.
• A partially tax-exempt (25%) rent subsidy that can be paid by the employer to its employee below 30 since 1 June 2024, subject to certain conditions (see our dedicated newsflash).
• The tax credit for the hiring of unemployed persons is extended until 31 December 2026.

Tax measures targeting the real estate sectors

The Government adopted several measures to ease existing tensions on the real estate sector (see our February 2024 newsflash):

• Short term targeted measures only for 2024 include (i) an increase by EUR 10,000 of the allowance for registration and transcription duties for the acquisition of the main residence, (ii) a EUR 20,000 allowance for registration and transcription duties for investment in rental properties (sold in future state of completion, “VEFA”) by individuals, (iii) a reduced tax rate for capital gains on Luxembourg real estate held for more than 2 years, (iv) a roll-over of real estate capital gains and (v) a special deduction which adds to the usual amortisation for rented real estate acquired in 2024 in future state of completion.
• Long term measures include (i) an increase of the holding period from 2 to 5 years to benefit from the more favourable long term real estate capital gains regime, (ii) the extension of the favorable regime for disposals and rentals through organism in charge of social housing and (iii) an increase in the tax deductibility of interest expenses in relation with the acquisition of the main residence.

Draft Law No. 8470 has been submitted to the Luxembourg Parliament (Chambre des Députés) on 18 December 2024, in order to extend the short-term measures of 2024 to the first semester of 2025, but it has not been voted yet.

In addition, the 2025 budget law reduced by 50% the taxable basis for registration and transcription duties applicable to real estate acquisitions between 1 October 2024 and 30 June 2025, subject to certain conditions (see our dedicated newsflash).

Tax measures for individuals

As from fiscal year 2025, an adjustment to the tax scale with 2.5 indexation tranches has taken effect together with targeted measures alleviating the tax burden for taxpayers within Class 1a, for single parents, taxpayers with children outside the household and taxpayers paid the minimum tax wage (see our July 2024 newsflash).

Looking forward, the Government is working towards the implementation of a single tax class for individuals with a first project to be issued in 2026.

Tax administration and procedure

In March 2023, the Government had submitted to the Luxembourg Parliament Draft Law No. 8186 aiming at implementing an ambitious reform of Luxembourg tax procedures. Pursuant to initial backlash on the erosion of taxpayer rights foreseen in the draft law, the project has been split in two, and while the first significant part of the reform is still undergoing legislative process, the second part has been introduced through the Law of 20 December 2024 (Official Gazette N° 571 of 23 December 2024), with the following notable measures for taxpayers:

• Payment of the tax liability in instalments: corporate and individual taxpayers can request a payment through instalments of their tax liability directly to the officer in charge of tax collection (receveur). Taxes concerned are corporate income tax, municipal business tax and net wealth tax for corporate entities and income tax for individuals (excluding withholding taxes and tax advance payments). Several conditions apply:
  • a specific and motivated requested should be addressed to the tax collector,
  • the payment of the initial tax liability must result in considerable difficulties for the taxpayer and
  • the tax claim must not be jeopardised by the granting of the additional deadline (the tax authorities can request guarantees). The payment in instalments does not prevent the application of interests for late payments. The relevance of this additional procedure compared to the pre-existing request for a deferred payment, is that the new procedure can take place after the due date for payment.
• Statute of limitations and exit tax: amendments clarify that in case a deferred payment of the tax liability is obtained in the context of the application of an exit tax, the statute of limitation is suspended, thus ensuring that the exit tax liability is not extinguished by the statute of limitation prior to its payment within the standard statute of limitation period.

Other relevant measures notably include the implementation of exchange of information possibilities between the tax authorities and the CSSF as well as the Commissariat aux assurances to enhance their cooperation within their respective fields of supervision.

Author: Daniel Riedel, Partner, Ali Ganfoud, Senior Counsel

Apr 16, 2025 – Background

On 26 February 2025 the European Commission published a new package of proposals to simplify and reduce the reporting requirements under Corporate Sustainability Reporting Directive (CSRD), the EU Taxonomy (EUT), and the Corporate Sustainability Due Diligence Directive (CSDDD), the Omnibus package.

This proposal marks an effort to enhance competitiveness and investment capacity, by decreasing administrative burdens and compliance stringency under the applicable overlapping directives and distinct regimes.

This article provides an overview of the proposed changes to the EUT and CSRD regimes. For more details on the CSDDD proposed amendments, please consult our separate newsletter article on Omnibus Package regarding CSDDD.

EU Taxonomy

The EU Taxonomy Regulation is a classification system that defines environmentally sustainable economic activities to guide investments toward the EU’s climate and environmental goals. It provides detailed technical screening criteria, established through delegated acts. The EU Taxonomy Regulation became applicable in phases starting from January 2022, from which time in-scope entities were required to report the proportion of their turnover, capital expenditures (CapEx), and operational expenditures (OpEx) that were aligned with the taxonomy’s criteria for environmentally sustainable activities. For more details on the regime, please consult our previous EU Taxonomy article.

Some of the key substantive changes to the EUT framework include:

• Amendments to delegated acts regarding the content and form of taxonomy reporting, including the following:
  • Financial materiality threshold – companies would be exempted from assessing taxonomy-eligibility and alignment of economic activities that are not financially material for their business (i.e. accounting for less than 10% of their total revenue, capital expenditure or assets). This change is expected to lead to approximately a 70% reduction in data points.
  • Simplification of reporting templates – eliminating redundant or overly complex disclosure requirements
• Introduction of an “opt-in” regime

For companies with more than 1,000 employees and net turnover below EUR 450 million taxonomy reporting will not be required. These would have the benefit of a voluntary “opt-in” taxonomy reporting with lighter disclosure requirements.

• Adjustment of the green asset ratio 

The green asset ratio (GAR) represents the proportion of assets invested in taxonomy-aligned economic activities as a share of total covered assets. To make the GAR more representative of a financial institution’s sustainable activities, it is proposed to exclude reporting assets that relate to companies falling outside the revised scope of the CSRD, excluding SMEs and large companies with fewer than 1,000 employees (see CSRD Section below).

• “Do no significant harm” criteria 

Simplifications to the “Do no significant harm” (DNSH) criteria for pollution prevention and control related to the use and presence of chemicals that apply horizontally to all economic sectors under the EU Taxonomy would be introduced.

• “Stop-the clock”: Implementation delay 

The Commission plans to adopt the final amendments in the second quarter of 2025. If the proposal is adopted, large EU undertakings falling under the voluntary “opt-in” exception, as well as listed SMEs would benefit from a two-year delay in the effective date.

CSRD

The CSRD strengthens and standardises corporate sustainability reporting across the EU, replacing the Non-Financial Reporting Directive. Effective from January 2023, it expands reporting requirements under the European Sustainability Reporting Standards (ESRS). Entities in scope must disclose audited ESG data, including sustainability risks, impacts, and performance.

The Omnibus Package proposes significant changes to the CSRD reporting scope. Among the key amendments, we note the following:

Reduction in scope

The CSRD would apply only to large undertakings with more than 1,000 employees (an increase from the previous threshold of 250 employees) and either a turnover exceeding EUR 50 million or a balance sheet total above EUR 25 million. For companies with fewer than 1,000 employees that are no longer in scope of the CSRD, the Commission would, through a delegated, introduce a voluntary reporting standard. This standard would be based on the standard for SMEs (VSME) developed by the European Financial Reporting Advisory Group (EFRAG) – a private association established to work with the European Commission, in charge of drafting and amending European Sustainability Reporting Standards.

According to the Explanatory Memorandum of the Omnibus Package Proposal, this change is expected to exempt around 80% of previously covered companies, including listed SMEs, unless they meet the new thresholds. Non-EU parent companies would be subject to CSRD only if they generate EU-derived turnover of EUR 450 million, up from EUR 150 million.

Simplification of reporting standards

The ESRS will be revised to:

• reduce mandatory data points by focusing on key quantitative metrics,
  • eliminate sector-specific standards and prioritise interoperability with global frameworks, and,
  • provide clearer guidance on materiality assessments.

Postponement of reporting deadlines

Similarly to the EUT regime, the large entities with opt-in exemptions and listed SMEs, would begin reporting for financial years 2 years after the initial set date.

The CSRD has not yet been implemented in Luxembourg law. However Draft Law No. 8370 has been submitted on 29 March 2024 before the Luxembourg Parliament to transpose the CSRD and the Commission Delegated Directive (EU) 2023/2775 into national legislation, and the legislative process to adopt that draft law is currently underway.

Authors: Isabel Høg-Jensen, Partner and Alexandra Vizitiu, Junior Associate

Apr 16, 2025 – Introductory notes

The entry into force, on 2 March 2025, of the law of 17 February 2025 (the “Law”) transposing in the Grand Duchy of Luxembourg Directive (EU) 2019/2121 of the European Parliament and the Council of 27 November 2019 on cross-border conversions, mergers and divisions (the “Mobility Directive”) entails important changes in the Luxembourg legal system (see BSP’s Newsflash). The adoption of dedicated European restructuring regimes under the Mobility Directive forms part of a broader trend to enhance the mobility of companies within the EU internal market, based on the freedom of establishment enshrined in Article 49(2) and 54 of the Treaty on the Functioning of the European Union (TFEU).

Such evolution has been driven by a series of directives in the field of company law, now codified in Directive (EU) 2017/1132 of the European Parliament and of the Council of 14 June 2017 relating to certain aspects of company law. A limited but influential line of judgments from the Court of Justice of the European Union (CJEU) has also played a catalytic role in this liberalisation process. Notably, the Sevic and Polbud directly address the removal of obstacles to cross-border corporate transformations within the internal market.

In this framework, the main innovation of the Mobility Directive is the introduction of European cross-border mergers, divisions and conversions, falling within the scope of the European rules of the Mobility Directive (the “European Regime” or together the “European Regimes”). Besides the introduction of European Regimes, the Luxembourg law of 1915 on commercial companies (the “Company Law”) now provides for a general regime applying to internal and cross-border restructurings other than the European cross-border mergers, divisions and conversions introduced by the Mobility Directive (the “General Regime” or together the “General Regimes”).

This contribution on the Mobility Directive is divided in three parts, the first of which being dedicated to exploring the General Regimes, the second to the European Regimes. A third part exploring the practical approach to the new Luxembourg mobility law concludes this contribution.

Author: Cécile Jager, Partner, Alessandro Morini, Senior Associate

Apr 19, 2024 – Following the entry into force of the Luxembourg law of 7 August 2023 on business continuation and modernisation of bankruptcy law (the “Law”) on 1 November 2023, the Luxembourg courts have handed down several decisions clarifying the scope of application of judicial reorganisation proceedings, the new debtor-in-possession restructuring proceedings introduced by the Law.

Opening of judicial reorganisation proceedings

Judicial reorganisation proceedings are a new debtor-in-possession tool aiming to preserve continuity of businesses under control of a court. Judicial reorganisation proceedings can be initiated when the continuity of the business is threatened in the short term or in the long term. The courts have already assessed this condition on several occasions and have found the relevant applications to be admissible notwithstanding the fact that the relevant debtor might not be acting in good faith. In most cases, the debtors stress their future prospects to justify why bankruptcy proceedings should be avoided, even though the fact that a company meets the substantive criteria for bankruptcy per se does not prevent the opening of judicial reorganisation proceedings under the Law.

The courts have accepted an application for the opening of judicial reorganisation proceedings from a company that was non-compliant with the legal requirements for publishing its annual accounts with the Luxembourg Register of Commerce and Companies within the legally prescribed period.

Transfer by court order of all or part of debtor’s business

Under the Law, the opening of judicial reorganisation proceedings can have more than one objective: to reach a mutual agreement with creditors, to agree on a restructuring plan or to transfer all or part of the company or its activities. The parliamentary discussions which led to the adoption of the Law, emphasize that transferring a company or its activities (i.e. production lines, clientele, or personnel) often serves as the most effective method to ensure its continuation.

Since the Law does not explicitly define what “activities” can be transferred, this remains open to court interpretation. Indeed, in a recent judgment the court ruled that the ownership of shares by a non-operational, purely holding company does not constitute a transferable economic activity within the meaning of the Law and rejected the relevant application for putting a holding company into judicial reorganisation proceedings by ordering the transfer of its assets. In doing so, the court made reference to other activities that would fall under the scope of the Law by way of example (e.g.  producing goods, providing services, or generally engaging in activities that fall under the VAT regime). Furthermore, the court stated that the Law only refers to the activity of the debtor and not the activity of its subsidiaries; consequently, it is not possible for a holding company to request the transfer of all or part of its subsidiaries’ assets (in case these are operational companies).

The judgement was subsequently appealed, one of the arguments presented to the court of second instance being a recent Belgian jurisprudence that would allow for the judicial reorganization of holding companies. However, the Luxembourg court maintained the decision from the lower court that the judicial reorganisation procedure by transfer of the debtor’s activity applies primarily to operational companies the preservation of which should be ensured, while the holding of shares does in general not constitute such an activity.

Author: Nicolas Widung, Partner

Jul 10, 2024 – On 19 June 2024, the European Parliament and Council published the new anti-money laundering and countering the financing of terrorism (“AML/CFT”) package – an extensive reformative legislative package – that consists of three main legal texts:

• Regulation (EU) 2024/1624 of 31 May 2024 aimed at preventing money laundering and terrorist financing (“ML/TF”), commonly known as the EU AML Single Rulebook (“AMLR”). This regulation will come into effect on 10 July 2027, except for specific new obliged entities, for whom it will apply from 10 July 2029.
• Directive (EU) 2024/1640 of 31 May 2024 concerning mechanisms to prevent financial system abuse for ML/TF (“AMLD6”). This directive will be applicable as of 10 July 2027.
• Regulation (EU) 2024/1620 of 31 May 2024 establishing the authority for AML/CFT (“AMLAR”) in the EU. This regulation will take effect from 1 July 2025. However, specific provisions will apply earlier, on 26 June 2024, and 31 December 2025.

Critiques of the previous AML/CFT framework

• This AML/CFT package, aimed at strengthening and harmonizing the AML/CFT rules in the EU follows substantial progress in combating ML/TF related issues. It tackles key challenges encountered in enforcing previous legal instruments, such as:

• the diverse implementation made it challenging to enforce consistent AML/CFT-related measures across all EU Member States;
• the enforcement instruments available were insufficient to detect and penalize illicit financial activities effectively. This hindered the framework’s ability to deter criminals;
• inconsistent AML/CFT supervision across EU Member States made it difficult for EU financial intelligence units (“FIUs”) to cooperate due to a lack of a unified AML/CFT framework across the union.

Strengthening the AML/CFT measures in the EU 

• The main objectives of this package are threefold:

• It addresses systemic weaknesses and closes loopholes that criminals exploit to launder illicit proceeds or finance terrorist activities within the financial system.
• It harmonizes the AML/CFT legal framework across the EU Member States through a single rulebook.
• It establishes a decentralized EU regulatory body called the EU AML/CFT Authority (“AMLA”) to ensure consistent implementation of the AML/CFT rules and coordination among national authorities.

The Package’s key components: an overview

1. AMLR – The EU AML Single Rulebook 

• The AMLR expands the previous AML/CFT framework and introduces several important provisions that exhaustively reinforce AML/CFT-related measures across the EU. These provisions include on:

• the scope of application on obliged entities,
• internal policies, controls, and procedures of obliged entities,
• customer due diligence (“CDD”),
• beneficial ownership transparency,
• reporting obligations,
• Information sharing,
• data protection and record-retention, and
• measures to mitigate risks deriving from anonymous instruments.

Extended scope of obliged entities 

• The scope of entities that are subject to AML/CFT requirements, referred to as the ‘obliged entities’, is extended. Despite certain exemptions, the following entities are now within the AMLR’s ambit:

• crypto-asset service providers (“CASPs”) that amount to a value of at least EUR 1,000;
• traders involved in high-value goods trading such as jewelry, luxury watches, precious metals and stones, aircraft, motor vehicles, watercraft, art crafts, and others;
• professional football clubs in certain transactions, and football agents. Member States may exempt smaller clubs if they can demonstrate low risk, for example, those with a turnover of less than EUR 5 million in the last 2 years;
• gambling service providers with certain exemptions.

Internal policies, procedures, and controls

• In scope entities must establish internal policies, procedures, and controls to reduce their exposure to the risk of ML/TF. The management of the obliged entity has to appoint (i) a designated ‘compliance officer’, and (ii) a board member, known as the ‘compliance manager’ – both globally responsible for ensuring adherence to the AML/CFT rules as defined in the AMLR.

Reinforcement of CDD: simplified or enhanced

• The AMLR reinforces the CDD requirements while introducing tightened specific detailed measures concerning cases where obliged entities must exceed simplified due diligence and perform enhanced due diligence (“EDD”) such as:

• cross-border correspondent relationships for CASPs;
• financial and credit institutions dealing with high-net wealth individuals, exceeding €50 million and assets under management exceeding €5 million;
• occasional transactions and business relationships involving high-risk third countries, based on a risk assessment aligned with the FATF lists.

EU-wide limit for cash payments

• In-scope entities must follow the new EUR 10,000 cash payment limit.  Member States have the flexibility to set a lower maximum if needed due to specific national risks, subject to a three-month notification. Customers are required to be identified and beneficial owners verified in occasional cash transactions of at least EUR 3,000.

Consolidating and reinforcing beneficial ownership transparency

• In scope entities must implement a streamlined beneficial ownership transparency to customers and counterparties. The concept of beneficial ownership remains the same, but a clearer framework has been established for identifying individuals who ultimately own or control legal entities, as well as multi-layered or complex ownership structures.
• The threshold for ownership interest, shares, or voting rights is set at 25 percent or more. Member States should use a risk-based approach for categories of entities with high-risk to ML/TF. They can propose a threshold of no more than 15 percent to the EU Commission. However, the EU Commission has the authority to set a higher threshold based on risk, as long as it is lower than 25 percent.
• In cases of medium-high risk to ML/TF, if the relevant entity is based outside the EU, it must register its beneficial ownership in the central register (in Luxembourg, currently the registre des bénéficiaires économiques, “RBE“) before establishing a business relationship with an in-scope entity in the relevant EU Member State.
• Furthermore, stricter requirements have been set for reporting discrepancies in beneficial ownership registers.
• Provisions on data protection and record retention have been revised to allow competent authorities access to information on beneficial ownership held by in scope entities.

Additional potential countermeasures and “high-risk third countries”

• Obliged entities shall be required to apply EDD measures to occasional transactions and business relationships involving third countries deemed high-risk. Either the obliged entities or the EU Member States, if the high-level risk justifies it, may adopt additional countermeasures, to protect the union’s financial environment from potential ML/TF risks. If Member States adopt further countermeasures, they shall notify the EU Commission thereof who may cause such measures to be revoked if they are deemed unnecessary.

2. AMLD6

• The AMLD6 widens the regulatory scope of ML offenses, clarifies definitions related to those offenses and their perpetrators, and enforces stricter penalties across Member States. It covers provisions that could not be included in the AMLR: (ii) Registers, (iii) FIUs, (iv) AML Supervisions, (v) Cooperation, (vi) Data Protection. The following summarizes the key aspects of the AMLD6.

Central registers of beneficial ownership

• AMLD6 provides for robust rules regarding beneficial ownership information and their recording in Central Registers. The central register contains information about the beneficial ownership of legal entities and legal arrangements, as well as details about nominee arrangements and foreign legal entities (in Luxembourg, currently the RBE). This information must be accurate, up-to-date, and verified. It should be retained for at least 5 years, with an additional 5-year period in the case of a criminal investigation under Article 10.
• Furthermore, those registers are reliable databases for beneficial ownership information. They cross-check the data with financial sanctions and ensure, within a reasonable time, that the submitted information is accurate and consistent. If there are any issues, registration can be withheld. In case of uncertainty, authorities have the right to conduct on-site inspections.
• Access to the registers is granted to FIUs, other competent authorities, self-regulatory bodies, and obliged entities free of charge and in digital form. Public access is conditional and granted to persons with a legitimate interest, e.g., the press.

National AML supervision, central account registers and FIUs

• AMLD6 aims to enhance collaboration between FIUs and other competent authorities, i.e., AMLA, Europol, Eurojust, and the European Public Prosecutor’s Office. By fostering reciprocal cooperation and information exchange, AMLD6 seeks to improve the efficiency in addressing complex or cross-border financial crime cases. The directive also provides FIUs with increased capabilities to better detect and track cases of ML/TF.
• Moreover, AMLD6 improves the organisation of national AML/CFT-systems by exhaustively outlining mutual cooperation between FIUs and supervisors. In this regard, the obliged entities will be supervised using a risk-based approach by separate national supervisors. These supervisors have the authority and obligation to conduct essential off-site, on-site, and thematic checks, as well as any other necessary inquiries and assessments, pursuant to Article 40. Additionally, they are expected to collaborate with each other and with the FIUs.
• A single central register (in Luxembourg, the Central Register of Bank Accounts, CRBA) will further contain information about accounts identified by International Bank Account Numbers (“IBANs”), including virtual IBANs, securities accounts, and CASPs accounts. The central account registers in Member States will be interconnected to enable efficient exchange of information with FIUs.

Statistical reporting, supervisory colleges and regulatory technical standards:

• Member States are required to maintain and publish AML/CTF statistics to review effectiveness.
• AMLD6 imposes a requirement on Member States to establish supervisory colleges in both financial and non-financial sectors within the union, as well as with counterparts in third countries. In this regard, AMLA will issue guidelines that should be subsequently incorporated into legal frameworks by Member States.

3. AMLA

• AMLA is the new decentralized body of the EU, to be based in Frankfurt am Main, Germany, and to be fully operational by Summer 2025.
• AMLA’s purpose is to tone-up the AML/CFT framework, ensure high-quality supervision, promote harmonization, and facilitate information exchange among FIUs and other competent authorities within the union. Its function is twofold:

• Supervision

AMLA combines both direct and indirect supervisory competences over financial entities. AMLA directly supervises ML/TF high-risk entities, including CASPs. It also indirectly supervises other financial entities by collaborating with national financial supervisors. In the non-financial sector, AMLA mainly coordinates with national supervisors and promotes their supervisory alignment.

• Harmonization and coordination

AMLA is required to follow a standardized supervisory methodology. Given the cross-border nature of ML/TF, AMLA will create an integrated mechanism with national supervisors to ensure in-scope entities comply with AML/CFT-related obligations in the financial sector. While supporting those in the non-financial sector. It will issue guidelines, recommendations, and opinions to promote consistency among those supervisors.

• Additionally, AMLA is mandated to create and maintain a central AML/CTF database of information to facilitate AML supervisory activities.
• AMLA is entrusted to support and coordinate between FIUs. This involves, amongst other actions, participating in joint ML/TF analysis and managing the FIU’s information exchange system (FIU.net).

Luxembourg: horizons ahead

• The primary legal AML/CFT instruments in Luxembourg consist of the law of 12 November 2004, as amended (“AML Law“), the Grand-Ducal Regulation of 1 February 2010, as amended, and the law of 13 January 2019 related to the RBE. The AML Law is supported by various AML/CFT circulars and guidelines issued by national competent authorities, e.g., the CSSF.
• The AML/CFT framework in Luxembourg is heavily influenced by the EU harmonization efforts. Additionally, as a member of the OECD and a jurisdiction within the FATF, Luxembourg, like any other EU Member State, is expected to comply with the new EU AML/CFT package and by adjusting its relevant legal framework according to the provisions of the AMLR and the AMLD6 within three years, and the AMLAR within one year.

Authors: Zaha Natour, Compliance Officer

Jul 25, 2025 – On 24 July 2025, Draft Law No 8590 was submitted to the Luxembourg Parliament (Chambre des Députés) intending to update and render more attractive the tax regime for carried interest granted to managers of alternative investment funds (“AIF”).

The proposed changes aim at attracting more front office employees to Luxembourg by increasing the scope of beneficiaries and taking into account various forms of carried interest.

Background

The proposal is in line with the 2023-2028 coalition program of the government that committed to provide for an attractive framework for alternative investment funds and their managers including a review of the carried interest tax regime.

The existing carried interest tax regime was introduced by the Law of 12 July 2013 relating to alternative investment fund managers transposing the AIFM directive 2011/61/EU including a standard regime and a temporary favourable regime. The standard regime is dedicated to employees of the alternative investment fund manager (“AIFM”) or management company and provided for the full taxation of the carried interest based on a profit-sharing right and the application of the ordinary regime for capital gains (which could result in the tax exemption of the capital gains realized after a 6-months holding period) on the portion of the carried interest that could be linked to the disposal of a participation held by the manager in an underlying corporate entity. The temporary favourable tax regime provides for a reduced taxation of the carried interest for a period of 10 years at the quarter of the applicable global tax rate under the condition that the beneficiary redomiciled to Luxembourg before 2018.

The Draft Law draws from this regime and the feedback it received thereon to propose amendments that increase legal certainty and broaden the scope of eligible persons and forms of carried interests.

Proposed tax regime

The Draft Law broadens the scope of eligible persons and provides for a different tax regime depending on whether the carried interest is a contractual arrangement only or involves the holding of an interest.

Eligible individuals 

Eligible persons are broadly defined as including any natural person who can be the manager or any other person at the service of the manager or the management company of an AIF. Commentaries to the Draft Law mention that the beneficiary can be employed by another entity than the AIFM, such as an advisor, and be in a relationship other than employment with the AIFM, such as an independent director.

Compared to the existing regime, the scope of the proposed regime is broader and not limited to employees of the AIFM or the management company.

Contractual arrangements

• Carried interest definition: The Draft Law refers to a participation in the fund’s “outperformance” on the basis of a profit-sharing arrangement granting specific rights over the fund’s net assets and income in order to include the broadest possible definition of carried interest. Commentaries to the Draft Law clarify that “outperformance” refers to the performance exceeding a pre-determined hurdle rate. It is also mentioned that such hurdle rate shall correspond to market practice to steer clear from any requalification under the abuse of law concept.
• Form: The carried interest is solely based on a contractual arrangement (e.g., provided for in the Limited Partnership Agreement). Under this form, the beneficiary is not required to acquire an interest in the AIF nor hold an interest mirroring the AIF’s performance.
• Payment: The commentaries to the Draft Law provide that the remuneration can be paid by the AIF or another entity (e.g., the general partner). The preexisting requirement that investors shall be repaid their invested amounts first is removed considering that AIF investors are informed and contractual arrangements generally provide sufficient protection (such as claw back clauses). Thus, carried payments on a deal-by-deal basis would now be eligible to the regime.
• Reduced taxation: The remuneration under those types of carried interest will be subject to a quarter of the global tax rate applicable to the taxpayer. Eligibility to such tax regime is not time limited as under existing rules which provide for a favourable tax treatment for only up to a 10-year period.

Participation based arrangements

• Form: The participation based carried interest covers two forms. First, the above-described contractual interest when it is accompanied with the requirement to hold a direct or indirect participation in the AIF. The commentaries add that the link between the carried interest and the participation should have an economic reality in terms of amount and duration to avoid steer requalification under the abuse of law concept. The second form is where the individual can acquire a participation in another vehicle entitling the holder of said participation to a carried interest.
• Taxation: The remuneration representing the carried interest follows the ordinary rules applicable to capital gains and is not considered as a taxable income if received more than 6 months after the investment (unless it represents a participation in a corporate entity exceeding a stake of 10% in the capital of such entity). Income resulting from the participation and not representing the carried interest remains subject to the ordinary tax regime.
• Legal forms of the investment vehicle: For the taxation of the participation based carried interest at the level of the beneficiary, the legal form of the interest issuer is disregarded. This is a welcome simplification as applying the tax transparency of partnerships or mutual funds could complexify the tax qualification at the level of the carry beneficiary.

Interaction with existing carried interest regime

The Draft Law that should come into force, if approved by the parliament, in 2026 intends to abolish the existing carried interest tax regime as from fiscal year 2026. The commentaries provide that the new rules are sufficiently broad provide for a more favourable taxation of all beneficiaries under the current carried interest regime.

Key Takeaways

The current carried interest tax regime is being phased-out as some shortcomings were identified. The Draft Law provides for a favourable tax regime to a larger variety of carried interest arrangements available in the market. In addition, it enlarges the scope of eligible beneficiaries previously limited to AIFM employees. In addition, it should limit preexisting difficulties pertaining to the qualification of the income received when the beneficiary is also an employee.

Author: Pol Mellina, Partner, Daniel Riedel, Partner, Ali Ganfoud, Senior Counsel

Nov 04, 2024 – Filings with the Luxembourg Trade and Companies Register (“RCS”) must observe new substantial requirements and formalities as of 12 November 2024 (the “Implementation Date”).

Change of format of the RCS filing forms from offline PDF to online HTML

In order to address the practical issues associated with the PDF format of the RCS filing forms that are well known by the users of the Luxembourg business registers portal, and  implement a more user-friendly interface for such filings, the format of the RCS filing forms will change, as of the Implementation Date, from PDF forms that needed to be downloaded, filled out offline, and re-uploaded to the RCS portal, to HTML forms that will need to be directly filled out online via the RCS portal.

The RCS administrator already indicated in this respect that, as of the Implementation Date, any new filing request initiated via a new online HTML filing form will need to be filled out by the applicant only, i.e., the latter will no longer be able to forward the request to a third party for data entry purposes (as opposed to the offline PDF forms previously used that could be passed along to third parties for such purposes).

A new requirement for the natural persons registered with the RCS: the registration of a LNIN

Taking the opportunity of the change of format of the RCS filing forms from offline PDF forms to online HTLM forms, the authorities also decided that the persons and entities registered with the RCS will now have to communicate, as of the Implementation Date, the Luxembourg national identification number (the “NIN”, a.k.a. matricule number or CNS number, as provided for by the amended law of 19 June 2013 relating to the identification of natural persons) for any natural person registered with the RCS that are related to such persons and entities.

Who is concerned?

Essentially all natural persons registered within the file of an entity registered with the RCS are concerned, in any capacity whatsoever (e.g., as a partner, agent, auditor, etc…) and whether such natural persons are new natural persons to be registered or natural persons already registered in the file of the entity concerned.

NIN will need to be requested and filled out when a natural person registers themself with the RCS, or  filing a modification with the RCS (it will be mandatory when filing a modification for a change on natural persons and, during a transitional period only, optional when filing a modification not aiming at a change on natural persons).

A couple of exceptions will however exist where the NIN shall not be communicated, especially (i.) in case of a judicial representative appointed in the framework of a procedure registered with the RCS or when the natural person is an agent of a foreign entity’s branch opened in the Grand Duchy of Luxembourg).

Quid for the persons who do not already hold a NIN?

Although all the persons living and / or working in the Grand Duchy of Luxembourg have been granted a NIN, a number of natural persons registered with the RCS (especially foreign natural persons) do not.

In such a case, the creation of a NIN will have to be requested as part of the filing to be carried out with the RCS and the following information will need to be filled out in the requisition – HTML! – form:

1. Last Name;
2. First Name(s) (as indicated in the supporting documentation);
3. Date, Place and Country of Birth;
4. Gender (male, female or unknown);
5. Nationality; and
6. Private home address (number, street, postal code, locality, country).

It shall be noted that the authorities already confirmed that the information relating to the gender, nationality, and private domicile will not be registered with or disclosed by the RCS but rather sent over to the State Center of Information Technologies (Centre des technologies de l’information de l’Etat) in order to be registered in the National Register of Natural Persons.

Likewise, the NIN will not be publicly disclosed.

Last but not least, it is also important to note that supporting documentation must also be attached as proof in order to:

1. prove the identity of the person – i.e., by providing a copy of a national identity card or passport, and
2. prove the address of the private residence – i.e., by providing official certificates of residency issued by a municipality, a declaration of honor from the person concerned stamped or countersigned by the regional authority responsible for confirming residential addresses such as an embassy, notary or police station, or, if none of these documents can be produced, a water, electricity, gas, telephone or internet access bill.

This seems to be a strict list of supporting documents and the authorities already confirmed that a number of other documents will not be accepted such as criminal records, lease contract, tax statement… which we sometimes see in practice in the framework of certain AML / KYC situations.

Changes that enable a control of the Luxembourg addresses

In addition to the above, another substantial change relates to the Luxembourg addresses of the registered offices of the entities registered with the RCS, and persons and entities registered in a file and who are resident in the Grand Duchy of Luxembourg, which will be automatically checked and controlled by the Luxembourg authorities.

Essentially, such a control will consist in the Luxembourg authorities checking the consistency of the Luxembourg addresses filed with the RCS, that will, from the Implementation Date on, need to comply with and match the information contained in the National Register of Towns and Streets (Registre national des localités et des rues) available at “https://www.services-publics.lu/caclr/building_listing_form.action”.

Any Luxembourg address indicated in an RCS filing form will be automatically checked for consistency and, in the event of inconsistency, an error message will be displayed and the applicant will need to correct such address.

https://www.lbr.lu/mjrcs/jsp/webapp/static/mjrcs/en/mjrcs/pdf/FAQ_Natio…

Author: Linda Harroch, Partner

Mar 31, 2025 – The long-awaited transposition into Luxembourg law of Directive (EU) 2022/2381 on improving the gender balance among directors of listed companies and related measures (the “Directive”) is now on track. Draft law No.8519 setting a quantitative target for gender balance among directors of listed companies (the “Draft Law”) was submitted to the Luxembourg Parliament (Chambre des Députés) on 28 March 2025.

For further insights into the Directive, refer to our 2023 Newsletter.

This legislative proposal establishes binding requirements to ensure gender balance within the boards of directors of listed companies. It also outlines measures for compliance, reporting, and enforcement.

Scope and objectives 

The Draft Law shall apply to all companies whose registered office is in Luxembourg and whose shares are admitted to trading on a regulated market in one or more EU Member States. However, in alignment with the Directive, the Draft Law excludes from its scope listed companies that qualify as micro, small, and medium-sized enterprises (“SMEs”).

One of the key objectives of the Directive is faithfully mirrored in the Draft Law by introducing a minimum requirement: at least 33% of board positions, both executive and non-executive, must be held by the under-represented gender by 30 June 2026.

The Luxembourg angle

While largely aligned with the Directive, companies should be aware of several Luxembourg specific elements introduced by the Draft Law:

Supervisory authority

The CSSF shall be designated as the competent authority, tasked with overseeing compliance, collecting data, and publishing an annual list of companies that meet the target.

Procedural adjustments

Where companies fall short of the target, they must adapt their director selection procedures. Clear and neutral criteria must be applied and documented during the selection process, with preference given to equally qualified candidates from the under-represented gender—unless objective diversity-related or legal considerations justify otherwise.

Candidate rights

Candidates involved in the selection process may request access to the evaluation criteria used and any factors that influenced the final appointment decision.

Public reporting

Companies shall be required to report annually on gender representation. This data must be disclosed to the CSSF, published on their websites, and, where relevant, included in their corporate governance statements. After the Draft Law enters into force, the CSSF will submit a report on its application to the Luxembourg government every two years, starting on 1 December 2025. This report will subsequently be forwarded to the European Commission, as mandated by the Directive.

Coordination with equality authorities

The gender equality observatory, established under the law of 7 November 2024, will work alongside the CSSF to monitor progress and promote best practices.

The Draft Law will enter into force upon its official publication and shall expire on 31 December 2038.

Enforcement

The CSSF shall be granted robust supervisory and enforcement powers, including the authority to issue warnings and reprimands, to publish public statements identifying non-compliant companies, and to impose administrative fines of up to EUR 250,000; additionally periodic penalty payments may be levied on companies that repeatedly fail to comply with the obligations (up to EUR 1,250 per day; capped at EUR 25,000).

What’s Next?

As the Draft Law progresses through Luxembourg’s legislative process—its timeline contingent on the speed and degree of consensus among stakeholders—companies which will fall within its scope are encouraged to take proactive steps in anticipation of its entry into force.

On this basis, listed companies can already start conducting a gap analysis to evaluate current board gender representation; review and formalize director selection policies, ensuring alignment with the transparency and fairness standards set by the Draft Law; prepare internal processes for reporting obligations and consider developing or refreshing a broader diversity policy.

Authors: Nuala Doyle, Partner, Deniz Güneş Türktaş, Senior Associate

Apr 16, 2025 – Background

On 26 February 2025 the European Commission published a new package of proposals to simplify and reduce the reporting requirements under Corporate Sustainability Reporting Directive (CSRD), the EU Taxonomy (EUT), and the Corporate Sustainability Due Diligence Directive (CSDDD), the Omnibus package.

This proposal marks an effort to enhance competitiveness and investment capacity, by decreasing administrative burdens and compliance stringency under the applicable overlapping directives and distinct regimes.

This article provides an overview of the proposed changes to the EUT and CSRD regimes. For more details on the CSDDD proposed amendments, please consult our separate newsletter article on Omnibus Package regarding CSDDD.

EU Taxonomy

The EU Taxonomy Regulation is a classification system that defines environmentally sustainable economic activities to guide investments toward the EU’s climate and environmental goals. It provides detailed technical screening criteria, established through delegated acts. The EU Taxonomy Regulation became applicable in phases starting from January 2022, from which time in-scope entities were required to report the proportion of their turnover, capital expenditures (CapEx), and operational expenditures (OpEx) that were aligned with the taxonomy’s criteria for environmentally sustainable activities. For more details on the regime, please consult our previous EU Taxonomy article.

Some of the key substantive changes to the EUT framework include:

• Amendments to delegated acts regarding the content and form of taxonomy reporting, including the following:
  • Financial materiality threshold – companies would be exempted from assessing taxonomy-eligibility and alignment of economic activities that are not financially material for their business (i.e. accounting for less than 10% of their total revenue, capital expenditure or assets). This change is expected to lead to approximately a 70% reduction in data points.
  • Simplification of reporting templates – eliminating redundant or overly complex disclosure requirements
• Introduction of an “opt-in” regime

For companies with more than 1,000 employees and net turnover below EUR 450 million taxonomy reporting will not be required. These would have the benefit of a voluntary “opt-in” taxonomy reporting with lighter disclosure requirements.

• Adjustment of the green asset ratio 

The green asset ratio (GAR) represents the proportion of assets invested in taxonomy-aligned economic activities as a share of total covered assets. To make the GAR more representative of a financial institution’s sustainable activities, it is proposed to exclude reporting assets that relate to companies falling outside the revised scope of the CSRD, excluding SMEs and large companies with fewer than 1,000 employees (see CSRD Section below).

• “Do no significant harm” criteria 

Simplifications to the “Do no significant harm” (DNSH) criteria for pollution prevention and control related to the use and presence of chemicals that apply horizontally to all economic sectors under the EU Taxonomy would be introduced.

• “Stop-the clock”: Implementation delay 

The Commission plans to adopt the final amendments in the second quarter of 2025. If the proposal is adopted, large EU undertakings falling under the voluntary “opt-in” exception, as well as listed SMEs would benefit from a two-year delay in the effective date.

CSRD

The CSRD strengthens and standardises corporate sustainability reporting across the EU, replacing the Non-Financial Reporting Directive. Effective from January 2023, it expands reporting requirements under the European Sustainability Reporting Standards (ESRS). Entities in scope must disclose audited ESG data, including sustainability risks, impacts, and performance.

The Omnibus Package proposes significant changes to the CSRD reporting scope. Among the key amendments, we note the following:

Reduction in scope

The CSRD would apply only to large undertakings with more than 1,000 employees (an increase from the previous threshold of 250 employees) and either a turnover exceeding EUR 50 million or a balance sheet total above EUR 25 million. For companies with fewer than 1,000 employees that are no longer in scope of the CSRD, the Commission would, through a delegated, introduce a voluntary reporting standard. This standard would be based on the standard for SMEs (VSME) developed by the European Financial Reporting Advisory Group (EFRAG) – a private association established to work with the European Commission, in charge of drafting and amending European Sustainability Reporting Standards.

According to the Explanatory Memorandum of the Omnibus Package Proposal, this change is expected to exempt around 80% of previously covered companies, including listed SMEs, unless they meet the new thresholds. Non-EU parent companies would be subject to CSRD only if they generate EU-derived turnover of EUR 450 million, up from EUR 150 million.

Simplification of reporting standards

The ESRS will be revised to:

• reduce mandatory data points by focusing on key quantitative metrics,
  • eliminate sector-specific standards and prioritise interoperability with global frameworks, and,
  • provide clearer guidance on materiality assessments.

Postponement of reporting deadlines

Similarly to the EUT regime, the large entities with opt-in exemptions and listed SMEs, would begin reporting for financial years 2 years after the initial set date.

The CSRD has not yet been implemented in Luxembourg law. However Draft Law No. 8370 has been submitted on 29 March 2024 before the Luxembourg Parliament to transpose the CSRD and the Commission Delegated Directive (EU) 2023/2775 into national legislation, and the legislative process to adopt that draft law is currently underway.

Authors: Isabel Høg-Jensen, Partner and Alexandra Vizitiu, Junior Associate