Luxembourg tax newsletter

Transcription

1 Luxembourg tax newsletter Luxembourg, January Introduction On 23 December 2016 the Luxembourg official gazette has published several laws 1 which introduce substantial changes to the Luxembourg direct taxes. Likewise, on 27 December 2016 the Luxembourg tax authorities have released an administrative circular 2 on intragroup financing activities which introduces important changes to the requirements which must be fulfilled by Luxembourg companies engaged in intra-group financing activities. This newsletter is intended to provide an overview of the main changes affecting corporate direct taxation (i.e. Corporate Income Tax, Municipal Business Tax and Net Wealth Tax), which have come into force as from 1 January Corporate income tax The main modifications regarding Corporate Income Tax ("CIT") are explained below Lower tax rates The nominal CIT rates are decreased. Further to this the aggregate rate for CIT and MBT is as follows: - Taxable income below EUR 17,500 should be subject to an aggregate CIT-MBT rate of 16.05% as from fiscal year Taxable income between EUR 17,500 and EUR 25,000 should be subject to an aggregate CIT- MBT rate of 22.80%. 1 Law of 23 December 2016 regarding the 2017 state budget, Law of 23 December 2016 regarding the tax reform and Law of 23 December 2016 regarding the transposition of the EU Directive on country-by-country reporting. 2 Administrative Circular LIR 56/1 56bis dated 27 December 2016.

2 - Taxable income between EUR 25,000 and EUR 30,000 should be subject to a progressive aggregate CIT-MBT rate ranging from 22.80% to 26.01% (27.08% in 2017). - Taxable income exceeding EUR 30,000 should be subject to an aggregate CIT-MBT rate of 26.01% from fiscal year 2018 onwards (27.08% in 2017) Restriction of tax losses carried forward Tax losses incurred as from fiscal year 2017 will be carried forward for a maximum period of 17 years. However, tax losses incurred in fiscal years ended between 1st January 1991 and 31st December 2016 will continue to be carried forward for an unlimited period of time. Tax losses must be offset as taxable income is realized. Failure to comply with this requirement will reduce the net amount of tax losses available to carry forward by the amount of the taxable income realized in the fiscal year which was not offset. There is no limitation regarding the amount of taxable income which can be offset. This modification applies to municipal business tax ("MBT") as well Increased investment tax credit As from fiscal year 2017 the supplementary tax credit should be assessed at 13% of the investment value (i.e. 12% in 2016 and previous fiscal years). Furthermore the tax credit for additional investments should be assessed at 8% or 9% of the investment (i.e. respectively 7% or 8% in 2016). Further to recent case law from the ECJ, the supplementary investment tax credit may apply to investments realized in Luxembourg or in any EEA state. 3. Net Wealth Tax The minimum annual net wealth tax ("NWT") liability for qualifying holding companies is increased to EUR 4,815 (i.e. EUR 3,210 in 2016). 4. Tax compliance and infringements As from fiscal year 2016 corporate taxpayers must file their CIT, MBT and NWT returns electronically. Failure to file the aforementioned returns in due time and form could give rise to a fine ranging from 5% to 25% of the taxes avoided or of the undue tax credits received. As from fiscal year 2017 the tax and criminal legislation is modified by introducing the notion of aggravated tax fraud. Further to this modification three forms of fraud will co-exist:

3 - Simple tax fraud (i.e. tax eluded or refund unduly received) which will be prosecuted and subject to administrative sanctions by the competent tax authorities. These sanctions should range between 10% and 50% of the tax avoided or the undue refund obtained. - Aggravated tax fraud should occur where the tax eluded or the tax unduly refunded either (i) exceeds EUR 10,000 and represents more than 25% of the tax which should be paid or refunded or (ii) it exceeds EUR 200,000. Aggravated tax fraud should be criminally prosecuted and may give rise to imprisonment (i.e. between one month and three years) as well as to a fine ranging between EUR 25,000 and six times the amount of the taxes eluded or the refund unduly obtained. - Tax swindling (escroquerie fiscale) should occur where the tax fraud is substantial (this term is not defined in the law) and it is proved that the taxpayer has systematically put in place measures to hide data or information from the tax authorities. Tax swindling should be criminally prosecuted and may give rise to imprisonment (i.e. between one month and five years) as well as to a fine ranging between EUR 25,000 and ten times the amount of the taxes eluded or the refund unduly obtained. 5. Value Added Tax ("VAT") 5.1. Exemption threshold increase As from 1 January 2017 the exempted threshold (i.e. amount of annual turnover below which it is not necessary to register for VAT purposes and charge VAT) is increased from EUR 25,000 to EUR 30, Liability of directors and managers As from fiscal year 2017 directors and managers (both statutory and de facto) may become personally and jointly liable for the VAT liability of the companies which they manage, in case they fail to respect the provisions set forth in the Luxembourg VAT Law. 6. Country-by-country ("CbC") reporting Luxembourg has introduced CbC reporting in its domestic legislation through the law of 23 December 2016 regarding the transposition of Council Directive (EU) 2016/881 on the mandatory exchange of information in the field of taxation. Likewise the CbC reporting standards are in line with the provisions of article 13 of the OECD Base Erosion and Profit Shifting ("BES") project Scope The CbC reporting standards affect multinational enterprises ("MNE") whose consolidated turnover exceeds EUR 750 million in the previous fiscal year.

4 In principle the Luxembourg ultimate parent company 3 is the entity responsible for completing and filing the CbC report ("Reporting Entity"). Nevertheless, a Luxembourg resident company other than the ultimate parent company shall act as the Reporting Entity in case the ultimate parent company is not obliged to file a CbC report in its jurisdiction of tax residence or in case the ultimate parent company is obliged to file a CbC report in its jurisdiction of tax residence but such jurisdiction does not exchange the CbC report with Luxembourg Content The CbC report must include the following information, which must be presented by using three tables: - Table 1 refers to the MNE group as a whole and must include, for each jurisdiction, an overview of the turnover, pre-tax income, income taxes (both accrued and paid), equity, retained earnings, employees and tangible assets. - Table 2 includes a list of the entities which are part of the MNE group 4 together with a description of their main activity. - Table 3 should include additional information which is relevant for tax purposes Filing requirements The CbC report must be filed electronically on an annual basis, within the twelve months following the end of the fiscal year to which it refers. In this respect, Luxembourg Reporting Entities shall prepare and file a CbC report as from fiscal year This implies that, when the fiscal year matches the calendar year, the first CbC report will have to be filed on 1 January 2018 at the latest. The law introducing CbC reporting does not contain any exception for collective investment vehicles. For the time being, no official communication has been issued in this respect Automatic exchange of CbC reports The Luxembourg tax administration will exchange the CbC reports with other EU member states as well as with the signatories of the multilateral convention on administrative assistance in tax matters. The exchange will be done within 15 months of the last day of the reporting fiscal year (18 months for the first reporting fiscal year) Penalties Penalties may arise in case the CbC report is not filed in due date and form as well as in case incomplete or incorrect information is included in the CbC report. The penalties are topped at EUR 250,000. Nevertheless the law introducing CbC reporting does not specify the procedure to quantify these penalties. 3 The company which is obliged to prepare the consolidated financial statements under accounting law 4 Entities which, further to accounting legislation, must be included in the consolidated accounts.

5 7. Transfer pricing Luxembourg transfer pricing legislation and practice are aligned with the provisions of the OECD. Until 31 December 2016 the main legal source for transfer pricing in Luxembourg was article 56 of the Income Tax Law ( ITL ), which codifies the arm s length principle by requiring transactions conducted among related parties to be have the same conditions as transactions conducted by independent parties. Failure to comply with this may give rise to adjustments in the taxable base of the taxpayer. As from 1 January 2017 a new article 56bis is added to the ITL, which provides the criteria and techniques to be followed in order to assess the arm s length transfer price for related transactions. In line with OECD provisions these criteria are based on the comparability analysis, which allows to identify the key drivers of the related party transaction in order to be able to identify comparable transactions conducted by independent parties. Article 56bis does not establish a hierarchy of transfer pricing methods but allows the use of the transfer pricing method which bets fits each transaction. Furthermore, article 56bis does not specify any transfer pricing documentation obligation and does not establish any threshold below which related party transactions do not need to be documented. For this reason the assessment of the documentation to be prepared to support related party transactions must be done on an individual basis, taking into account the features and the materiality of the transaction at hand. 8. Administrative circular on intra-group financing activities On 27 December 2016 the Luxembourg tax authorities have released a new circular ("Circular") on the tax treatment of intra-group financing activities. It is in force as from 1 January 2017 and replaces circulars 164/2 and 164/2bis Scope The Circular is intended to provide guidance on the valuation of intra-group financing activities conducted by Luxembourg resident companies. It is consistent with the latest transfer pricing developments, both at the OECD level and in Luxembourg. The term intra-group financing activity should be interpreted broadly and includes all activities related to the granting of funding to related parties (i.e. loans, credit facilities, etc.), irrespective of how such funding is financed (i.e. intra-group loan, issuance of securities, bank funding, etc.). The Circular provides guidance on the comparability analysis to be performed in order to assess the arm s length remuneration which should be obtained in the framework of intra-group financing activities. Likewise it regulates the procedure regarding the issuance of advance pricing agreements ("APA").

6 8.2. Comparability analysis The comparability analysis is intended to identify the functions, assets and risks assumed in the related party transaction and to assess consistent comparable transactions. Further to transfer pricing legislation the comparability analysis must be done using a substance over the form approach. In this context, the Circular provides guidance on the assessment of the equity at risk and the arm s length financing margin Equity at risk Financing companies must have an adequate level of equity at risk, taking into account the functions and risks assumed in the intra-group financing transactions. This level of equity at risk must be assessed further to a consistent risk analysis. This represents a material change compared to circulars 164/2 and 164/2bis, which used to provide for an equity at risk of EUR 2 million or 1% of the funding granted. Further to this provision limited recourse clauses and similar clauses used to limit the equity at risk at the level of the financing company should no longer be useful. Financing companies should have an adequate level of substance in Luxembourg. For this purpose the majority of directors/managers should be (professionally) resident in Luxembourg and should be properly qualified. The key decisions must be physically taken in Luxembourg. The aforementioned provisions should improve the beneficial ownership position of the Luxembourg financing companies Arm s length financing margin In line with transfer pricing legislation, financing companies must realize an arm s length margin on their financing activity, which must be assessed further to comparable transactions which are conducted among independent parties. An external transaction should qualify as comparable as long as the functions, assets and risks are similar to those of the controlled transaction. In line with transfer pricing provisions, the Circular highlights that transactions which lack commercial validity and which would not be concluded by independent parties should be disregarded Safe harbours Notwithstanding the aforementioned, the Circular provides for some safe harbours regarding the assessment of the equity at risk and the arm s length margin. If the comparability analysis shows that the profile of the financing company (i.e. functions, assets and risks) is comparable to the profile of the entities governed by Regulation (EU) 575/2013 on prudential requirements for credit institutions and investment firms ("Regulation 575/2013") (i.e. banks and similar financial entities), the equity at risk should be deemed to be adequate to the extent that the financing company meets the solvency criteria provided under Regulation 575/2013 (i.e. equity at risk of 8% of the risk weighted assets).

7 In this case, the financing company should be deemed to realize an arm s length margin to the extent that its after tax margin is, at least, 10% of the equity at risk. This percentage could be modified by the Luxembourg tax authorities in order to reflect evolving market conditions. The Circular also provides for a safe harbour regarding financing companies which mainly act as intermediary companies ("Intermediary Companies"). This is the case of on lending financing structures in which the funding granted to the related party is financed with related party debt. Due to the limited risks assumed, Intermediary Companies should be deemed to realize an after tax margin of, at least, 2% of the financing granted. This percentage could be modified by the Luxembourg tax authorities in order to reflect evolving market conditions. Intermediary Companies which opt for the aforementioned safe harbour should inform on this choice in their tax returns. This information may be exchanged with other jurisdictions under applicable legislation and tax treaties Advance pricing agreement ("APA") The Circular amends the procedure to file an APA request. The main modification deals with the content of the transfer pricing report, which is increased in order to provide more detailed information on the comparability analysis, in particular, the benchmark of comparable transactions APA granted before 1 January 2017 The Circular explains that the APA granted by the Luxembourg tax authorities before 1 January 2017 are not valid as from fiscal year The Circular does not provide for any transitional measure regarding the financing structures in place as at 31 December However, transfer pricing reports prepared under circular 164/2 and 164/2bis are not expected to be challenged for a reasonable amount of time in order to give taxpayers the possibility to smoothly adapt to the new requirements. * * * * *

8 We trust you find this publication useful and welcome the opportunity to answer any questions or comments you may have with respect to its contents. We will keep you updated on any additional tax measures. Raffaele Gargiulo Partner E: Andrew de Vries Senior associate E: Eduardo Trancho Associate E: Van Campen Liem Luxembourg 23 Boulevard Joseph II L-1840 Luxembourg Luxembourg T: F: E: