TAX ALERT TAX MEASURES INTRODUCED BY THE BILLS OF LAW N OS 6720, 6721 AND 6722 IMPLEMENTING LUXEMBOURG S 2015 BUDGET

Transcription

1 TAX ALERT TAX MEASURES INTRODUCED BY THE BILLS OF LAW N OS 6720, 6721 AND 6722 IMPLEMENTING LUXEMBOURG S 2015 BUDGET NOVEMBER

2 I. INTRODUCTION The framework for Luxembourg's budget from 2014 to 2018 has been presented and filed, in the form of the Bills of law n os 6720, 6721 and 6722, by Luxembourg's Minister of Finance on 15 October These Bills should enter into force on 1 January 2015, however some provisions may be further amended or even postponed by the Luxembourg Parliament and in this regard, numerous meetings are foreseen in order to discuss these Bills before the end of the year. Bill n o 6721 introduces Luxembourg s first multiannual programming in accordance with the Law of 12 July 2014 on the coordination and governance of public finance and more broadly with the Fiscal Compact 1. The programming laws are intended to define the multiannual financial orientations of the Luxembourg State, local governments and social security funds as part of Luxembourg s objective of balancing its public budget by maintaining a medium-term budgetary growth of 0.5%/GDP per year and limiting its public debt below 30% of the GDP. 2 Initiating this pluriannual financial planning, Bill n o 6720 uncovers the 2015 budget and the relevant legislative measures in the traditional way, while Bill n o 6722 adds supplementary legislative measures taken more specifically in view of the longer term objectives. Out of the grand total of 258 measures, those mostly influencing sources of public income (in comparison to public expenses) are obviously tax-related. A striking new measure under Bill n o 6720, which should have a lasting impact on the budgetary income, is the tax for administrative and operating costs, estimated to generate almost EUR 4 million in the first year of implementation. This new tax is closely related to the legalisation of the advance ruling procedure and hence even more justified. Indeed, in view of the importance of the advance ruling procedure for corporate taxpayers, its codification in law carries substantial beneficial repercussions in terms of securing the tax positions of those taxpayers and ultimately, notwithstanding the new tax, should lead to an increase in the number of advance ruling requests. II. THE MAIN TAX MEASURES OF THE 2015 BUDGET 1. Codification of the advance ruling procedure and introduction of a tax for administrative and operating costs Article 3 of Bill n o 6722 foresees a general provision according to which the Luxembourg direct tax authorities may levy a tax of up to EUR 10,000 in consideration of the administrative and operating costs incurred in dealing with a taxpayer's request for obtaining information and other services. Our understanding is that this provision should apply to any requests for advance rulings, such as advance tax agreements (ATA) and advance pricing agreements (APA). 1 The Fiscal Compact is formally referred to as the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (TSCG) or more plainly as the Fiscal Stability Treaty. It is an intergovernmental treaty introduced as a new stricter version of the previous Stability and Growth Pact, signed on 2 March 2012 by all member states of the European Union, except the Czech Republic, the United Kingdom and Croatia (subsequently acceding the EU in July 2013). 2 Although the multiannual planning also refers to the on-going year 2014, making short-term forecasts for the remainder of the year, the first measures are only effectively taken as from

3 Bill n o 6722 thus formally recognises the existing administrative practice, which is currently only based on the application of the principle of legitimate expectations (principe de la confiance légitime), allowing for taxpayers to get legal certainty as to the tax treatment of specific operations at their final tax assessment at a later stage, while ensuring, at the same time, a better application of Luxembourg tax laws and their uniform interpretation. The current system of advance rulings is also modernised by giving a specific legal basis to its procedure pursuant to a new Article 29a of the General Tax Law (Abgabenordnung), which will be further detailed by a Grand-ducal decree. This Article notably provides that no advance ruling may be given for purely theoretical or illegal transactions and that such advance ruling may only be invoked by the concerned taxpayers (and not third parties) only for transactions (factually) covered by the advance ruling. Furthermore, the legal provision ensures that the Luxembourg tax authorities are bound by the advance rulings they issue and thus reinforces Luxembourg taxpayers' security with regard to their tax treatment. 2. Update of the transfer pricing regime Under domestic law, the arm's length principle is enshrined in Article 164, paragraph 3 of the Luxembourg Income Tax Law ( LITL ). Under this provision, the profits of a partner, member or interested party derived directly or indirectly from a company or association from whom he/she would normally not have received had he/she not been in such a relationship constitutes a hidden profit distribution and must be added to reported earnings. Although the hidden distribution (and hidden capital) concept has been further developed by the Luxembourg case law and doctrine, the Government is of the opinion that the transparency of Luxembourg s legislation in this respect must be strengthened, in particular at a time such as this where transfer pricing is continuously emphasised at an international level. Bill n o 6722 proposes to replace the rather ambiguous Article 56 of the LITL, which currently provides that the Luxembourg tax authorities may modify the taxable basis of a taxpayer on the basis of a profit allocation stemming from particular economic relationships that an undertaking maintains with a non-resident person or entity. The new Article 56 of the LITL seeks to clearly transpose the arm s length principle by providing that, when (i) an undertaking participates directly or indirectly in the management, control or capital of another undertaking, or (ii) the same persons participate directly or indirectly in the management, control or capital of two undertakings, where in either case of (i) or (ii) the two undertakings are bound in their business or financial relations by conditions that are agreed upon or imposed and which differ from those which would be agreed upon between independent parties, the profits of these undertakings will be determined according to conditions which would prevail between independent undertakings and taxed accordingly. In addition, the commentaries to Bill n o 6722 explain that even though the Luxembourg tax legislation contains no express provision regarding transfer pricing documentation, it is clear that the taxpayer must be able to justify the figures and data in its tax returns, including transfer prices, that is to say prices set in the (usually intra-group) context of related parties. In order to be fully in line with the Code of Conduct adopted by the EU Council on 27 June 2006 on the transfer pricing documentation and more generally with the OECD guidelines, the Luxembourg Government wishes to remove any doubt in this matter by inserting a subparagraph 3 to the paragraph 171 of the Abgabenordnung expressly indicating that the taxpayer s obligations of information and documentation vis-à-vis the Luxembourg tax authorities also covers transactions between related parties. The commentaries to Bill n o 6722 further specify that, even though the burden of proof for the facts triggering a tax liability lies with the Luxembourg tax administration, it is clear that the taxpayer is obliged to provide all necessary documents and information 3

4 in order to enable the tax administration to assess the transfer prices. When the tax administration presents a set of circumstances and facts indicating the probability of a profit transfer to a related party, the economic reality of the relevant transaction(s) may be questioned by the tax administration. Subsequently, the tax administration may unduly reduce the taxable basis without the need for further justification. A reversal of the burden of proof may thus take place and it is up to the taxpayer to prove that there has not been an unduly decrease of profits. The nature and extent of transfer pricing documentation depend on the (complexity of the) facts and circumstances of each case. In this respect, the Government reiterates that paragraph 171 of the Abgabenordnung forbids the tax authorities from demanding proof of assertions made by the taxpayer if such evidence is not reasonably required. Whereas the current Luxembourg transfer pricing regime only requires transfer pricing reports for requests of advance pricing agreements in relation to intra-group financing, it seems that the aim of Bill n o 6722 s is to extend the requirement for transfer pricing reports to other transactions as soon as evidence of the transfer prices could be reasonably required. It should be noted however, that already in the present day, it is not uncommon for taxpayers to prepare transfer pricing reports even for non-financing transactions when the level of complexity and/or need for certainty is sufficiently high. 3. Abolition of the tax credit on the withholding tax on investment income In the framework of the EU Pilot project 5272/13/TAXU, the European Commission has drawn Luxembourg s attention to the fact that the tax credit on the withholding tax on investment income ( WHT ) may be incompatible with the Community law, in particular in light of recent EU case law. Indeed, the Luxembourg government shares the view that such tax credit may be discriminatory to non-resident taxpayers since, if they are in a loss position, they would not be able to credit the WHT in the EU Member State where they are located, whereas a Luxembourg resident taxpayer in a loss position may recover the WHT through a tax reimbursement (instead of a tax credit). Bill n o 6720 therefore contemplates to add a paragraph 6a to the Article 154 of the LITL, according to which WHT may not, in principle, be reimbursed even to Luxembourg resident taxpayers except where the reimbursement originates from the participation exemption regime which has only been applied after the withholding tax has already been effectively levied Reduction of the minimum flat tax for small companies The minimum flat tax entered into force in Luxembourg for the 2011 tax year at a rate of EUR 1,575 (including the 5% solidarity surcharge of the time) and was revised for the 2013 tax year, depending under which criteria a company falls in, to a rate of EUR 3,210 (taking into account the increase of the solidarity surcharge to 7%) or a progressive rate ranging from EUR 535 to EUR 21,400 (including the solidarity surcharge of 7%). Currently, the aforementioned EUR 3,210 minimum tax should be applicable to all fully taxable resident corporate entities for which the sum of fixed financial assets, receivables on related entities, transferable securities and cash at bank exceeds 90% of their balance sheets (i.e. mainly holding and financing companies), whereas all other corporations having their registered seat or central administration in Luxembourg should be subject to the aforementioned progressive minimum taxes. 3 This would be the case where, at the time of the distribution and the subsequent WHT (which must be levied within eight days of the distribution), the beneficiary has not committed to hold a participation of at least 10% or exceeding the acquisition price of 10% for a continuous period of twelve months, but at the end of such period has indeed fulfilled these conditions foreseen by the Luxembourg participation exemption. 4

5 Bill n o 6720, however, foresees that the EUR 3,210 minimum tax should not be applicable to taxpayers for which the total balance sheet does not exceed EUR 350,000, ipso facto subjecting them to the lowest possible minimum tax of EUR Introduction of a contribution for the future of the children A contribution for the future of the children should be levied on the professional income, replacement income and income from assets realised by individual taxpayers at a rate of 0.5%. 6. Increase of the VAT rates and introduction of VAT recovery procedure As already announced by the Luxembourg government in 2013, Bill n o 6720 increases the normal VAT rate from 15% to 17%, the reduced VAT rate from 6% to 8% and the intermediary VAT rate from 12% to 14%. The super-reduced VAT rate should left untouched for most of the transactions except for catering services related to providing alcoholic beverages and the allocation of a housing for main dwelling by a third party (e.g. a landlord). Moreover, Bill n o 6720 installs an administrative and judicial VAT recovery procedure and foresees default interest rates for taxpayers who are recognised as having a right to a VAT reimbursement. III. CONCLUSION The global vision enshrined in the multi-year planning of Bill n o 6721 gives a broader framework of reference, thus enabling a genuine strategic control and management of public finances. The logic of the path being paved for the future seems all the more coherent when as rather than seeking to make a definite break with the past Bill n o 6721 instead looks to embrace and improve upon the practices of the latter. The transfer pricing measures stand as a prime example. The two transfer pricing circulars n os 164/2 and 164/2bis issued by the Luxembourg Tax Authorities on 28 January 2011 and 8 April 2011 respectively, had already paved the way for a successful revamping of the transfer pricing regime in Luxembourg. With market practice already well accustomed to the new administrative requirements, Bill n o 6722 does not attempt to scramble the habits but simply embodies the legislative response to the natural evolution of the transfer pricing regime. 4 Another example is the codification of the advance ruling procedure. The new provisions do not attempt to reshape the already well-established administrative practice, but merely reinforces Luxembourg's commitment for clarity and transparency in its tax regime, thus also further improving Luxembourg's international standing. In view of the other positive measures (e.g. WHT aligned with EU law and case law, minimum tax reduced for small companies, VAT recovery hugely simplified), further modernisation of the legislative landscape would be welcome and this is to be expected in light of the introductory remarks of Bill n o 6722 which state that the measures implemented therein are only the first steps of the multiannual programming. 4 It should, however, be kept in mind that the Chapter V of the OECD guidelines related to the transfer pricing documentation is currently undergoing a revision, which should directly and indirectly impact more significantly Luxembourg transfer pricing practice. 5

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