Legislative Clarification On The Luxembourg Reverse Hybrid Entity Tax Rule With Retroactive Effect

On 23 December 2022, the Luxembourg reverse hybrid rule provided by Article 168quater of the modified Luxembourg Income Tax Law ("Article 168quarter LITL") was officially amended with the passing of the Luxembourg Budget Law for 2023¹.

The new Article 168quater of the LITL clarifies the scope of the reverse hybrid entity rule with an additional condition for a Luxembourg tax transparent entity to be considered as a reverse hybrid entity.

The rule now requires that the double non-taxation outcome resulting from the reverse entity must only be due to the mismatch classification of such entity. In other words, the absence of taxation on the profits of the Luxembourg tax transparent entity must be due to its tax opaque classification under the laws of the jurisdiction of its investors. Consequently, tax-exempt recipient investors (benefiting from a local tax exemption), as well as recipient investors located in tax neutral jurisdictions should not be taken into