tax update april 2013
Summary Luxembourg news 3 Adoption of the law on administrative cooperation in the field of direct taxation 3 Introduction of the bill regarding deferred taxation of unrealised capital gains upon migration 4 New VAT provisions 4 Recent case law 4 International news 6 Supply of insurance services for a leased item (Case C-224/11- BGZ Leasing) 6 Refusal to assign a VAT identification number due to the inadequacy of resources (Case C- 527/11- Ablessio SIA) 6 VAT exemption for investment advisory services in the fund industry (Case C-275/11 - GfBK) 7 VAT treatment of management services provided to a pension scheme (Case C-424/11 - Wheels Common Investment Fund Trustees) 7 Useful information 8 End of the audiovisual investment certificate tax regime 8 Conformity with the Constitution of the contribution to the chamber of commerce 8 Double tax treaty network 8 2
Luxembourg news Adoption of the law on administrative cooperation in the field of direct taxation On 27 February 2013, the Luxembourg Parliament (Chambre des Députés) adopted bill No. 6455 implementing Council Directive 2011/16/EU on administrative cooperation in the field of taxation (the Directive ). Based on OECD standards, the Directive enhances the cooperation between tax authorities of the Member States of the European Union ( EU ). It provides for the exchange of information that is of foreseeable relevance to the administration and the enforcement of Member States' tax laws. In this respect, it foresees that the exchange of information between tax authorities can be made upon request, automatically or spontaneously and prescribes standard forms and procedures as to how the information is exchanged. In addition, it also introduces other means of administrative cooperation (simultaneous controls, presence of foreign tax authorities during enquires, requests for notification and sharing of best practices). The Directive applies to taxes of all kinds with the exception of VAT, customs duties, excise duties and compulsory social contributions already covered by separate legislation. The Directive contains a most favoured nation clause: if a Member State provides wider cooperation to a third country than that provided for under the Directive it may not refuse such wider cooperation to another Member State that requests it on its own account. Finally, the Directive entered into force on 1 January 2013, with the exception of the provisions relating to automatic exchange of information which will enter into force on 1 January 2015. For further information on the Directive, please refer to our tax update of October 2012 available at http://www.arendt.com/publications/pages/taxupdates /tax-update-october-2012.aspx. The law dated 29 March 2013 (the Law ) was published on 4 April 2013 and has been in force since 1 January 2013. The Law transposes the Directive and provides in particular for the following: - The Law refers to the current regime of the exchange of information upon request introduced by the law dated 31 March 2010 that already applies to information requests made by almost all EU Members States by virtue of individual double tax treaties. - The Law does not provide any measures as to the automatic exchange of information, since the Directive only enters into force in this respect on 1 January 2015. A separate law will be adopted in due course in order to introduce, in accordance with the Directive, an automatic exchange of information from 1 January 2015 on five categories of income and capital based on available information (income from employment, director's fees, life insurance products not covered by other Directives, pensions, ownership of and income from immovable property). - The law foresees a mandatory spontaneous exchange of information in the following limited situations: (a) grounds exist for supposing that there may be a loss of tax in the other Member State; (b) a person liable to tax obtains a reduction in, or an exemption from, tax in Luxembourg which would give rise to an increase in tax or to liability to tax in the other Member State; (c) business dealings between a person liable to tax in Luxembourg and a person liable to tax in the other Member State are conducted through one or more countries in such a way that a saving in tax may result in one or the other Member State or in both; (d) the Luxembourg tax authorities have grounds for supposing that a saving of tax may result from artificial transfers of profits within groups of enterprises; (e) information forwarded to Luxembourg by the competent authority of the other Member State has enabled information to be obtained which may be relevant when assessing liability to tax in the latter Member State. Further to the implementation of the Directive, in particular its most favoured nation clause, as well as the current FATCA negotiations between Luxembourg and the United States of America, the Luxembourg government has recently announced that it will adopt, as from 1 January 2015, the automatic exchange of information, 3
instead of the 35 % tax currently withheld, with respect to savings income (e.g. interest) covered by the Directive 2003/48/EC on taxation of savings income in the form of interest payments. The Luxembourg government stressed however that it will be actively involved in ensuring that a global level playing field in the area of transparency and effective exchange of information in tax matters will be established. Introduction of the bill regarding deferred taxation of unrealised capital gains upon migration On 15 March 2013, the Luxembourg Minister of Finance filed bill No. 6556 with the Luxembourg Parliament (Chambre des Députés) regarding the tax treatment of unrealised capital gains upon the migration of a Luxembourg enterprise or permanent establishment. Under current Luxembourg tax law, the migration from Luxembourg to another jurisdiction of a Luxembourg enterprise or permanent establishment triggers as a rule the immediate realisation of any unrealised capital gain (i.e. difference between the fair market value and the book value) on its assets and liabilities. The bill introduces the possibility of deferring the taxation of such gain in case of migration of a Luxembourg enterprise or permanent establishment owned by a resident of another Member State of the European Economic Area ( EEA ) to another EEA Member State. Luxembourg income tax deriving from the gain realised upon such migration will not be immediately due, but deferred until the effective disposal of the assets/liabilities or until the taxpayer ceases to be a EEA resident. The deferral is subject to appropriate annual documentation. The taxpayer may renounce to such deferral. In addition, the adoption of the following amendments has been proposed: Luxembourg (as exit country) will take into account the future capital losses after to the migration to the extent such capital losses will not be taken into consideration in the other EEA Member State; the transfer to another Member State of the EEA of a Luxembourg enterprise or permanent establishment of an individual taxpayer will be treated equally; and capital gains realised on a fixed asset may be transferred to a new eligible asset (i.e. roll over relief) which is part of a permanent establishment located in the EEA to the extent the entrepreneur is a resident of a Member State of the EEA. The bill follows the decision of the Court of Justice of the European Union ( CJEU ) dated 29 November 2011 (Case C-371/10) according to which Art. 49 of the Treaty on the functioning of the European Union ( TFEU ) relating to the freedom of establishment precluded legislation of a Member State from prescribing the immediate recovery of tax on unrealised capital gains relating to assets of a company transferring its place of effective management to another Member State at the time of the transfer. New VAT provisions The Law of 27 February 2012 and Grand-Ducal decree of 29 March 2013 implementing various VAT measures was adopted and published in the Official Gazette (Mémorial) of 4 April 2013. The new measures concern the following: the transposition of the Invoicing Directive 2010/45/EU; the transposition of Article 4 of Directive 2008/8EC concerning the hiring of means of transport or pleasure boats to non-taxable persons, which had to be implemented by 31 December 2012; and various other administrative and compliance provisions. Recent case law Debt waiver qualifying as hidden capital contribution (Case No. 31339C) On 7 February 2013, the Luxembourg administrative court of appeal (Cour administrative) overturned judgment No. 26409 rendered by the lower administrative court (Tribunal administratif) regarding the qualification of a debt waiver as tax neutral hidden capital contribution. 4
In the case at hand, a Luxembourg company benefitting from partial debt waivers (with a return to better fortune clause) granted by its shareholders claimed the recognition of a hidden capital contribution. Pursuant to the hidden contribution doctrine, an arm's length advantage granted by an affiliated company (irrespective of its level and degree of affiliation) to a related company, and which leads to an increase in the assets or a decrease in the liabilities of the latter, may be considered to be a hidden contribution for Luxembourg direct tax purposes. Such hidden contribution must be deducted from the taxable profit of the beneficiary. The lower administrative court argued however that the debt waiver could not qualify as a hidden contribution, since it is not an economic asset, and thus must be recognised as a taxable profit. Referring to the parliamentary works, the court of appeal concluded that a debt waiver is an economic asset, eligible to qualify as additional informal capital contribution. The amount waived may consequently not be treated as a taxable profit. In addition, following the analysis of a case law of the German Supreme Court (BFH 23 May 1984 BSt Bl II, 723 ff), the court of appeal concluded that a debt waiver and a return to better fortune clause are two distinct operations and that such clause may thus not alter the qualification of the debt waiver as a hidden capital contribution. It should be noted that the court did not decide on the value of the debt waiver qualifying as addition informal capital contribution and in particular whether such capital contribution must be booked for the nominal amount or the fair market value of the liabilities waived. The court instead deferred this decision to the tax authorities, who have not yet published their position in this respect. Verification of the conditions of an exchange of information request (Case No. 31929C) On 26 February 2013, the Luxembourg administrative court of appeal (Cour administrative) held that the Director of the Luxembourg tax authorities (Administration des contributions directes) must materially verify whether the conditions for an exchange of information request in accordance with Article 26 of the OECD Model Tax Convention are met. In the case at hand, the Dutch tax authorities requested information on the shareholders of a Luxembourg family wealth management company (société de gestion de patrimoine familial - SPF). The court held that the request for an exchange of information was not valid, as the Dutch requesting authority was not mentioned as competent authority to do so under the Netherlands-Luxembourg double tax treaty and no evidence as to an appropriate delegation by the competent authority to the requesting authority has been provided. Identification of the taxpayer - foreseeable relevance of the information (Case No. 31732C) On 17 January 2013, the Luxembourg administrative court of appeal (Cour administrative) rendered its judgment in a case where information on a former French tax resident, then residing in Switzerland, was sought by the French tax authorities in relation to his income tax return for 2010. The requested information related mainly to a Luxembourg company in which the former French taxpayer was suspected of holding a majority of the shares. The court held that the request for an exchange of information by the French tax authorities was not invalid on the sole grounds that no copies of the documents on which the request was based were attached to the request. Also, the fact that the French authorities did not provide direct evidence on the link between the taxpayer and the company did not render the request invalid to the extent that the factual elements provided by the French tax authorities made it probable that a link existed between the taxpayer and the Luxembourg company. Furthermore, the mere formal omission of the taxpayer s name on the exchange of information request forms cannot entail the refusal of a request. Finally, the court held that it is not relevant for the validity of the request that the taxpayer resides in another country at the time the request is made to the Luxembourg tax authorities, if that taxpayer was a tax resident in France during the tax year to which the request relates. Confidentiality of the request and right to a fair trial (Cases No. 31661 and 31934) On 28 February 2013 and 6 March 2013, the Luxembourg lower administrative court (Tribunal administratif) rendered two judgments 5
addressing the confidentiality of exchange of information requests by a foreign tax authority and its relation to the right to a fair trial. In both instances, the court found that the Luxembourg tax authorities are required to provide the taxpayer with a copy of the initial exchange of information request issued by the foreign tax authorities. In this respect, the court clarified that it is not sufficient to merely make reference to the initial request or to provide a copy of such request to the registrar of the court, for consultation by the adverse party, without the latter having the right to make or receive copies of the request. Consequently, the court has now firmly taken the view that the right to a fair trial requires that the parties to a procedure before a Luxembourg court in relation to an exchange of information request have the right to consult and receive a copy of the initial exchange of information request sent to Luxembourg by the foreign tax authorities and that such a document should be provided in due time so that the taxpayer is in a position to adequately prepare his defence. International news Supply of insurance services for a leased item (Case C-224/11- BGZ Leasing) On 17 January 2013, the Court of Justice of the European Union ( CJEU ) ruled as follows: - the supply of insurance services for a leased item and the supply of the leasing services themselves must, in principal, be regarded as distinct and independent supplies of services for VAT purposes. It is incumbent on the referring court to determine whether, having regard to the specific circumstances of the case in the main proceedings, the transactions concerned are so closely linked that they must be regarded as constituting a single supply or whether, on the contrary, they constitute independent services; - where the lessor insures the leased item itself and re-invoices the exact cost of the insurance to the lessee, such a transaction constitutes an insurance transaction. This CJEU judgment appears to be in contradiction with the administrative position of the Luxembourg VAT authorities and the decisions of the Luxembourg courts in the context of similar activities carried out by the leasing industry in Luxembourg (leasing companies provide a single taxable service, the insurance costs being regarded as ancillary to the rents and therefore liable to VAT). Discussions between the leasing sector and the Luxembourg VAT authorities will need to take place in order to determine the practical implications of this decision. Refusal to assign a VAT identification number due to the inadequacy of resources (Case C-527/11- Ablessio SIA) On 14 March 2013, the Court of Justice of the European Union ( CJEU ) ruled that while the category of persons who must be identified by a VAT registration number is provided for in Directive 2006/11, there are no provisions as to the conditions that may be placed on the issuing of such number. As per this Directive, a taxable person is defined as being any person who carries on an economic activity independently. Established case law has determined that persons intending to start a taxable activity are also eligible to apply for a VAT number. The Directive precludes any Member State from refusing to allocate a VAT registration number merely because the applicant is unable to show that he has at his disposal the material, technical and financial resources to carry out the economic activity declared at the time of submitting their application for registration. Any refusal based on the necessary prevention of tax evasion must be proportionate and based on sound evidence. The CJEU however noted that not having the resources to commence the activity was not sufficient to lead to a conclusion of tax evasion. However, it cannot be excluded that circumstances of this nature, corroborated by the presence of other objective elements leading to the suspicion of the taxable person s fraudulent intentions, may constitute factors that have to be taken into account as part of the overall assessment of the risk of evasion. 6
Based on this decision, the inadequacy between the activities declared for VAT registration purposes and the substance necessary for handling such activities may, together with other serious elements, lead the VAT authorities to consider the VAT registration request as abusive or fictitious. VAT exemption for investment advisory services in the fund industry (Case C-275/11 - GfBK) On 7 March 2013, the Court of Justice of the European Union ( CJEU ) rendered its decision with respect to the question of whether investment advisory services in the fund industry benefit from a VAT exemption. The issue raised by the national court that deferred the case before the CJEU was whether and under what conditions advisory services provided by a third party (in this case GfBk) to an investment management company concerning investments in transferable securities fall under the concept of management of special investment funds for the purposes of VAT exemption. As already ruled by the CJEU, in order to benefit from VAT exemption, management services provided by a third-party manager must, viewed broadly, form a distinct whole and be specific to, and essential for, the management of special investment funds. With respect to advisory services, the CJEU came to the following conclusions: - services consisting in giving recommendations to purchase and sell assets are intrinsically connected to the activity characteristic of the investment fund which consists in the collective investment in transferable securities of capital raised from the public; - the fact that advisory and information services are not listed in Annex II to Directive 85/611 does not preclude their inclusion in the category of specific services falling under activities for management of a special investment fund; - the fact that advisory and information services provided by a third party do not alter the fund's legal and financial position likewise does not preclude them from falling under the concept of management of a special investment fund; - if investment advisory services provided by a third party were subject to VAT, this would have the effect of giving investment funds with their own investment advisers an advantage over funds which decide to outsource such services to third parties. As a result, the CJEU decided that investment advisory services supplied by third parties necessarily fall under the notion of fund management services for the purposes of VAT exemption (irrespective of whether the advisors are subject to the control of a supervisory authority or not). From a Luxembourg perspective, this decision is particularly welcome since it confirms the position traditionally adopted by the local VAT authorities with regard to investment advisory services supplied to an eligible investment vehicle or its management company. This was however not the case in all the other EU Member States; consequently, new areas of VAT leakage may appear in certain countries (indeed, as a result of this very large exemption, foreign advisors might not benefit from any right to VAT deductions in their countries). The decision is of the utmost importance not only for Luxembourg regulated investment funds, but also for assimilated investment vehicles, such as SICARs, securitisation vehicles and as of the transposition of the Alternative Investment Fund Manager Directive (AIFMD) into national law any entity qualifying as an AIF. VAT treatment of management services provided to a pension scheme (Case C-424/11 - Wheels Common Investment Fund Trustees) On 7 March 2013, the Court of Justice of the European Union ( CJEU ) ruled that an investment fund pooling the assets of a retirement pension scheme is not a special investment fund within the meaning of the VAT Directive and may therefore not benefit from the VAT exemption available for fund services, for the following reasons: 7
- the retirement pension scheme is not open to the public; - employees do not bear the investment risk; - employers contributions are made as a consequence of a legal obligation to the employee rather than in the course of an investment activity; - the pension received by the employee does not depend on the value of the scheme s assets and the performance of the investment made. Other pending cases before the CJEU with respect to pension funds (notably C-464/12) should more importantly impact the current Luxembourg VAT regime and will therefore have to be closely followed up. Useful information End of the audiovisual investment certificate tax regime On 29 January 2013, the Luxembourg government presented bill No. 6535 regarding the National Fund in Support of Audiovisual Production (the Fund ). The bill is aimed at redesigning the current audiovisual schemes. In this context, preference is given to direct aids granted by the Fund instead of tax advantages. As a result, the temporary favourable tax regime regarding the audiovisual investment certificates will be abolished as from 1 January 2013 and replaced by an increase in direct aids from the Fund. Conformity with the Constitution of the contribution to the chamber of commerce On 19 March 2013, the Luxembourg constitutional court (Cour constitutionnelle) upheld, in several preliminary rulings requested by the Luxembourg lower administrative court (Tribunal administratif), the constitutionality of the right of the Luxembourg chamber of commerce to determine the way in which its contributions are levied. Double tax treaty network Over the last 3 months, the following developments concerning the Luxembourg double tax treaty network have occurred: - Negotiations have been started in view of signing a double tax treaty with respectively Botswana, Brunei and the Isle of Man, as well as a new double tax treaty with Estonia and Singapore; - Luxembourg signed a double tax treaty with Sri Lanka (30 January 2013) and the Czech Republic (5 March 2013); - On 7 March 2013, bill No. 6552 approving the tax treaty and protocol signed between Luxembourg and Taiwan on 19 December 2011 was filed with the Luxembourg Parliament (Chambre des Députés); - As for several other countries, Mongolia terminated its double tax treaty with Luxembourg which will no longer be in force as from 1 January 2014. 8
This tax update of Arendt & Medernach is designed to provide our clients with information on recent developments of important fiscal areas. Published comments are not intended to constitute tax advice and do not substitute for the consultation with tax counsel required before any actual undertakings. For further information please contact: Eric Fort, Partner eric.fort@arendt.com Bruno Gasparotto, Principal bruno.gasparotto@arendt.com Alain Goebel, Partner alain.goebel@arendt.com Thierry Lesage, Partner thierry.lesage@arendt.com 9