Luxembourg Tax policy Marc Schmitz marc.schmitz@lu.ey.com +352 42 124 7352 1 Tax rates (2017 18) 1.1 Key tax rates 1234 Tax controversy John Hames john.hames@lu.ey.com +352 42 124 7256 Top corporate income tax (CIT) rate (national and local average if applicable) Top personal income tax (PIT) rate (national and local average if applicable 2017 Percentage change 27.08% 26.01% 1 3.95% The maximum PIT rate is 44.94%, or 45.78% when including the contribution of 7% or 9% to the employment fund The maximum PIT rate is 44.94%, or 45.78% 2 when including the contribution of 7% or 9% to the employment fund 3 0% Standard value-added tax (VAT), goods and services tax (GST) or sales tax rate 17% 17% 4 0% EY key contacts 1 Article 174 of the law of 4 December 1967 on income tax, as amended. The CIT rate has been reduced from 19% to 18% for the tax year. The rate consists of the 18% CIT rate, with an additional 7% employment fund surcharge and 6.75% municipal business tax for companies located in Luxembourg City. Furthermore, CIT is levied at a reduced rate for taxable profits not exceeding 30,000. 2 Article 118 of the law of 4 December 1967 on income tax. 3 Article 6 of the law of 30 June 1976 on creation of an employment fund, as amended. 4 Article 39 of the law of 12 February 1979 on value-added tax, as amended. 192 The outlook for global tax policy in
L 2 Tax policy in 2.1 Key drivers of tax policy change The key themes of the budget law are quality of life, competitiveness and continuity. Regarding tax policy, the Government aims to: Recruit additional staff for the various tax administrations Increase fairness in taxation Sustain digitalization of enterprises and facilitate transition to zero emission mobility through abatements and tax credits The Government and various administrations have played an active role in the digital transformation process to become a Smart Nation. There has been a reinforcement and diversification of economic structures (e.g., single window for the logistics sector and support to the space sector). Financial support has increased in favor of innovation and research. 2.2 Tax burdens in 5 Tax types Any changes proposed/known or possible for 5? What is the expected tax burden in, as compared to 2017? (1) Headline CIT rate (2) Overall size of corporate tax base in (3) Interest deductibility (4) Hybrid mismatches N/A Smaller corporate tax base in Around the same corporate tax base size in Larger corporate tax base size in 5 The responses provided are based on the assumption that the EU directive addressing tax avoidance practices (Anti-Tax Avoidance Directive, ATAD and ATAD 2 ) will enter into force in 2019. The outlook for global tax policy in 193
Tax types Any changes proposed/known or possible for 5? What is the expected tax burden in, as compared to 2017? (5) Treatment of losses (6) Capital Gains Tax (impacting corporations) (7) Withholding taxes (8) Taxes on digital activity impacting businesses (including changes to PE definition, etc.) (9) Controlled Foreign Companies (CFC) (10) Thin capitalization (11) Transfer Pricing changes N/A, as there is no Capital Gains Tax No changes in N/A, as there is no CFC regime N/A, as there is no thin capitalization regime 194 The outlook for global tax policy in
L Tax types (12) Research and Development (R&D) incentives (13) Other business incentives including depreciation/ amortization/capital asset allowances, etc. (14) Changes to tax enforcement approach (15) VAT, GST or sales tax rate (16) VAT, GST or sales tax base (17) Top marginal PIT Rate Any changes proposed/known or possible for 5? N/A, as there is no VAT, GST or sales tax N/A, as there is no VAT, GST or sales Tax What is the expected tax burden in, as compared to 2017? (18) PIT base The outlook for global tax policy in 195
2.3 Tax policy outlook for summary Overall CIT burden Lower Overall PIT burden X No change Higher X Lower No change Higher Overall VAT/GST/sales tax burden Lower X No change Higher 2.4 Tax policy outlook for detail Corporate income taxes In addition to the decrease of the CIT rate for the tax year, the benefit of the Investment Tax Credit is extended, as from 1 January, to passenger cars with zero emissions and to acquired software (subject to limits and conditions). Furthermore, current tax legislation is likely to undergo the following changes: Alignment with EU legislation of the procedure for the exchange of information upon request Introduction of a new intellectual property regime that endorses the nexus approach agreed at both the international and EU levels Taxes on digital activity Direct taxes (including enforcement approaches such as a DPT or tech sector audit focus) Luxembourg shares the view of most EU Member States that current rules are not always well-equipped for taxing digital activities and that collaboration is needed to find adequate solutions. However, Luxembourg does not agree with simplistic short-term solutions that would make Europe less competitive in an international environment. The Government therefore insists on ensuring a level playing field and is pushing for discussions to be held at the OECD level, where many countries are involved, particularly the United States (which hosts the biggest number of internet companies). Indirect taxes No changes are expected in. Taxes on wages and employment Following the 2017 tax reform, further adjustments have been enacted and are applicable as from 1 January, including: Providing simplified conditions so that married nonresident taxpayers can be assimilated for tax purposes to resident taxpayers Extending the deadline for married resident taxpayers to communicate their choice regarding the type of taxation to which they want to be subject (i.e., joint taxation, pure separate taxation and separate free allocation taxation) Extending the tax allowance amounting to 2,500 for sustainable mobility 6 (abattement pour mobilité durable) to rechargeable hybrid electric cars for individual use with carbon dioxide (CO 2 ) emission not exceeding 50g CO 2 /km 6 The tax allowance for sustainable mobility entered into force on 1 January 2017 by the law of 23 December 2017 (the 2017 tax reform). 196 The outlook for global tax policy in
L Since 1 July 2016, long term capital gains derived from the sale of real estate are taxed at a quarter of the overall taxpayer s tax rate. This measure was planned to last until 31 December 2017, but has now been extended until 31 December. Amending the tax regime applicable to stock option plans (the lump-sum valuation of freely transferable options, which are taxable when they are granted, increased from 17.5% to 30% of the value of the underlying assets from 1 January ). VAT/GST/sales taxes The following changes have been enacted and are applicable as from 1 January : Extension of the VAT exemption for management services provided to collective internal life insurance funds whose investment risks are borne by policyholders and are subject to the supervision of the Luxembourg Insurance Commission Increase of the VAT rate applicable to forestry products (from 4% to 12%) Taxation of goods retained by a taxpayer (or his legal successors) after the termination of his economic activity, when the VAT incurred on such goods has been partially or fully deducted Implementation of the EU Directive on the VAT treatment of vouchers Abolition of the regulation on services rendered by independent groups of persons to their members effective 1 January (to align with judgments of the Court of Justice of the EU) The following changes are also expected in : Taxation of goods retained by a taxpayer (or his legal successors) after the termination of his economic activity, when the VAT incurred on such goods has been partially or fully deducted Implementation of EU Directive on the VAT treatment of vouchers 2.5 OECD MLI In your opinion, in which year is the OECD Multilateral Instrument (MLI) likely to be ratified in your country? 2019 2020 or later Do not expect my country to participate/ratify Do you expect your country to adopt a (mandatory) Principal Purpose Test (PPT) under the BEPS MLI during the course of? Yes No 2.6 Political landscape As a result of elections held in October 2013, the Government is composed of three parties (the Democratic Party, the Socialist Workers Party and the Green Party). Legislative elections are scheduled for October. 2.7 Current tax policy and tax administration leaders Tax policy leaders: Xavier Bettel, Prime Minister Pierre Gramegna, Minister of Finance, Treasury and Budget Tax administration leaders: Pascale Toussing, Director of the Direct Tax Administration Carlo Fassbinder, Director of Taxation at the Ministry of Finance Romain Heinen, Director of the Indirect Tax Administration (VAT and Customs) 2.8 What key tax policy changes did you experience in your country in 2017? Corporate Income taxes Decrease of the CIT rate for the 2017 tax year Limitation of loss carryforwards (from 2017, the use of loss carryforwards are limited in time to 17 years for losses realized from financial years closing after 31 December 2016; however, there is no limitation in time for losses generated between 1 January 1991 and 31 December 2016) Increase of the rate of the investment tax credit Introduction of deferred depreciation Incentive for the transfer of businesses Increase in tax penalties and fines and extension of the definition of fraud Introduction of country-by-country reporting The outlook for global tax policy in 197
Clarification of the arm s-length principle, with a set of basic elements to be respected in the framework of a transfer pricing analysis based on the principles as revised in the context of the base erosion and profit shifting (BEPS) initiative New transfer pricing circular for companies carrying out intra-group financing activities (substantial guidance has been provided on the comparability analysis and functional profile) Taxes on wages and employment Abolition of the temporary budget balancing tax of 0.5% from 1 January 2017 Reduction of income tax progressivity pace through lower rates in the first tranches and introduction of higher tax rates for top tranches Adaptation of employee and single families tax credit Increase in deductions for payments to building societies Increased deduction for mortgage interest Tax exemption of 50% for rental income from real estate rented to recognized organizations Company car flat taxation replaced by taxation based on CO2 emissions Taxation of capital gain at 1/4th of the average tax rate on sales of real estate between 1 July 2016 and 31 December 2017 VAT/GST/sales taxes Increase in the turnover threshold for the application of the small and medium-sized companies regime (from 25,000 to 30,000) Introduction of personal and several liability of (i) delegated administrators of public limited companies; (ii) managers of limited liability companies; and (iii) ipso jure or de facto managers in charge of the day-to-day management of the company s VAT obligations (including payment of VAT due by the company), in cases of blameworthy failure to fulfill their legal requirements General increase in penalties Introduction of other specific measures in the Luxembourg VAT law and criminal code aimed at fighting VAT fraud and VAT evasion Activities of directors submitted to VAT 2.9 Pending tax proposals N/A 2.10 Consultations opened/closed Open: N/A Closed: N/A Increase in the flat tax on determined interest paid by paying agent (from 10% to 20%) 3 Tax enforcement in 3.1 General approach to tax enforcement in A. Will proactively build trust-based relationships with taxpayers, encouraging cooperative compliance, while still insisting on substance-based approaches B. Will be open to trust-based relationships, generally seen as non-aggressive in dealings with taxpayers, while also insisting on substance-based approaches C. Will be neutral in approach will not be viewed as overly open or openly aggressive in dealings with taxpayers D. Will apply highly robust scrutiny to all taxpayers, using all available tools and laws, but will generally be seen as being fair and balanced when dealing with taxpayers E. Will be viewed as generally aggressive with taxpayers, applying highly subjective and/or retroactive interpretations or threatening/using criminal sanctions 198 The outlook for global tax policy in
L 3.2 General approach to tax enforcement in The Luxembourg Government has said that moving to a Digital First environment for improving tax enforcement is one of its top priorities. In that respect, a joint initiative was launched some years ago by the Luxembourg Inland Revenue and the State Information Technology Center (CTIE) as part of the program Digital Lëtzebuerg. This ongoing program aims to simplify the relationship between the tax authorities and the local communities as they move to an innovative digital society. Electronic filing of the corporate income, municipal business and net wealth tax returns is mandatory from the 2017 tax year. For this purpose, specific software using secured access is available for the electronic submission of tax returns. For VAT purposes, electronic filing of tax returns is already mandatory. The Luxembourg VAT authorities introduced a standard e-audit file called Fichier Audit Informatisé AED (FAIA). The FAIA file can be requested by the VAT authorities for the performance of a VAT audit for all companies subject to the standard chart of accounts (with some exceptions). Although it has to be requested by the VAT authorities, the possibility to provide this file is a mandatory requirement for the aforementioned companies. It has been announced by the VAT authorities that they will progressively increase requests for a FAIA file within the scope of VAT audits. 3.3 Key risk factors and audit triggers in 1 Transfer pricing The focus of the tax authorities in will most likely be on transfer pricing issues. 2 VAT deduction methods It is expected that the tax authorities will pay more attention to VAT deduction methods (direct allocation v. prorated method). 3.4 Retroactive application of tax laws in Do you expect the tax authority to make use of a retroactive/ retrospective application of the BEPS recommendations in? Yes No Do you expect the tax authority to use a retroactive application of other national tax legislation in? Yes No 3.5 Tax enforcement developments in 2017 Significant increase in penalties, both for direct taxes and VAT Extension of the tax fraud definition and implementation of the tax aspects included in international requirements in the context of the fight against money laundering and the financing of terrorism Increased number of requests for FAIAs in order to audit taxpayers more efficiently in VAT matters 3.6 Potential tax enforcement developments in It is expected that the tax authorities will continue in to combat aggressive tax planning and tax fraud in line with EU and international tax developments, both for direct taxes and VAT. Following legislative developments regarding transfer pricing, the tax authorities may also shift their audit focus on companies with intra-group services or activities, and more specifically regarding intra-group financing activities. The outlook for global tax policy in 199