LEGAL ALERT LUXEMBOURG UPCOMING TAX CHANGES NOVEMBER - 2017 ã2017
I. INTRODUCTION The major tax changes expected in Luxembourg in the coming months are introduced by five different sets of legislation. First in line is the law of 23 December 2016 (the 2017 Tax Reform ), which introduced already last year certain tax measures that would only enter into force in 2018. These tax measures were specifically designed to enhance the competitiveness of Luxembourg in complying with the international landscape (including the OECD s BEPS action plan and the tax avoidance directive released on 21 July 2016), and promoting greater fairness and strengthening employment. For further information on the 2017 Tax Reform please refer to our tax alert of August 2016. Second in line is the Luxembourg bill n o 7200 on the budget for 2018 (the 7200 Bill ) filed on 11 October 2017 by the Minister of Finance with the Luxembourg Parliament, which foresees tax measures completing the 2017 Tax Reform. Third in line is the bill n o 7163 on the new IP box regime submitted on 4 August 2017 by the Luxembourg Minister of Finance to the Parliament (the New IP Box Regime ). Fourth in line is the modification of the tax treatment applicable to stock options, which was announced by the Minister of Finance during the presentation of the 7200 Bill. Fifth in line is the transposition of Council Directive 2016/2258 of 6 December 2016 amending Directive 2011/16/EU as regards access to anti-money laundering information by tax authorities ( DAC 5 ) by the bill of law n o 7208 filed on 8 November 2017 (the 7208 Bill ). The 2017 Tax Reform and once enacted both the 7200 Bill and the New IP Box Regime should enter into force as from 1 January 2018. It is also expected that a circular should be issued soon to replace the current circular on stock options. As of today the parliamentary approval process of the 7200 Bill, 7208 Bill and the New IP Box Regime are on-going. Hence amendments could still be proposed by the Luxembourg Parliament. We should also take the opportunity of this tax alert to highlight some major tax changes for the years ahead mainly due to the OECD BEPS action plans. II. TAX MEASURES INTRODUCED BY THE 2017 TAX REFORM 1. Individual taxation as an option for couples The 2017 Tax Reform introduced into Luxembourg tax law the possibility for couples (married or under a civil partnership which decided to be taxed collectively) to choose between a pure individual taxation or a taxation with revenue allocation. This measure has been introduced to reinforce the financial autonomy of each spouse and avoid situations in which a spouse with lower income was discouraged to carry out his/her professional activity. Further to the 2017 Tax Reform, these options should be available as from 1 January 2018. In this perspective, the 7200 Bill provides that the taxation choice should be made before 31 March year following the concerned fiscal year. If the choice is made before or during the concerned fiscal year, this should already impact the withholding tax on salary and tax advances, but in this case the choice may still be revoked or changed by 31 March of the year following the concerned fiscal year. This measure provides great flexibility to the tax payers as they may assess which option is the best after the end of the concerned fiscal year. 2
2. Decrease of the corporate income tax Further to the 2017 Tax Reform, Luxembourg corporate taxpayers are liable to municipal business tax at a rate which depends on where the company is located (companies located in Luxembourg city are subject to a rate of 6.75%) and to corporate income tax at a rate of: - 15% for taxable profits not exceeding EUR 25,000; - EUR 3,750 plus 39% for taxable income exceeding EUR 25,000; and - 19% for taxable profits in excess of EUR 30,000 (leading, together with the solidarity surcharge and the municipal business tax in Luxembourg-city, to an aggregate tax rate of 27.08% 1 ). With a view of strengthening Luxembourg s competitiveness, the 2017 Tax Reform lowers the medium and maximum brackets of the corporate income tax rate applicable as from 2018 as follows: - EUR 3,750 plus 33% for taxable income exceeding EUR 25,000; and - 18% for taxable profits in excess of EUR 30,000 (leading, together with the solidarity surcharge and the municipal business tax in Luxembourg-city, to an aggregate tax rate of 26.01% 2 ). III. TAX MEASURES INTRODUCED BY THE 7200 BILL 1. Assimilation of non-resident tax payers to resident tax payers Currently, a non-resident tax payer may be assimilated to a resident tax payer if at least 90% of its income is taxable in Luxembourg (50% for Belgian tax residents). The 7200 Bill introduces more flexibility by providing that a Luxembourg non-resident tax payer who has at most EUR 13,000 of net income not taxable in Luxembourg may be assimilated to a Luxembourg tax resident even if the 90% threshold is not reached. For the assimilation to work, such income should in principle be taxable in another country, the amount of which should also be sufficient to allow the tax payer to benefit from tax credits or exemptions in such other country. Another measure introduced by the 7200 Bill is that a Luxembourg non-resident tax payer who works in Luxembourg but also teleworks from time to time in his country of residence may be assimilated to a Luxembourg tax resident even if the 90% threshold is not reached. Indeed, normally income paid by a Luxembourg employer to its employees (whether resident or non-resident) is taxable in Luxembourg even when the employees work abroad. However, such income should become taxable notably in Germany and Belgium if an employee resident respectively in Germany or Belgium works at least 1 This aggregate tax rate does not take into account the allowance for municipal business tax purposes of EUR 17,500 (increased to EUR 40,000 for taxpayers not subject to corporate income tax). 2 This aggregate tax rate does not take into account the allowance for municipal business tax purposes of EUR 17,500 (increased to EUR 40,000 for taxpayers not subject to corporate income tax). 3
respectively 20 or 24 in their country of residence. In such a case, the 7200 Bill foresees that this income, which is taxable by another country, may nevertheless be considered as taxable in Luxembourg but (i) only in view of checking whether the above-mentioned 90% threshold is met and (ii) only for income corresponding to at most 50 days of work abroad. This rule aims at allowing commuters to benefit from the assimilation mechanism within this 50 days limit even though they have less than 90% taxable income in Luxembourg and more than EUR 13,000 of income taxable in a neighboring country. 2. Other tax measures For inheritance tax purposes, the 7200 Bill foresees to extend the inheritance tax exemption for married couples (or couples under a civil partnership since at least 3 years) with descendants to such couples without descendants. For VAT purposes, the 7200 Bill extends the fund management exemption to internal collective fund management of life insurance for which the subscribers are liable for the financial risk and which are subject to the surveillance of the Luxembourg Insurance Commission (Commissariat aux assurances). For direct tax purposes, the 7200 Bill seeks to clearly identify as capital companies the two news forms of companies recently introduced by the law of 10 August 2016 and the law of 23 July 2016, i.e. respectively the simplified jointstock company (société par actions simplifiée) and the simplified private limited company (société à responsabilité limitée simplifiée). In addition, the 7200 Bill foresees to extend the tax deduction for sustainable mobility, already introduced by the 2017 Tax Reform for zero emission vehicle and certain types of cycles, to plug-in hybrid electric vehicles. This deduction is available every 5 years for (i) zero emission vehicle or plug-in hybrid electric vehicles for an amount of respectively EUR 5,000 or EUR 2,500 and (ii) for cycle for an amount of EUR 300. 3. Exchange of information in the field of taxation As a result of the Court of Justice of the European Union ( CJEU ) s decision of 16 May 2017 (case Berlioz Investment Fund SA v. Directeur de l Administration des Contributions directes (C-682/15)), the 7200 Bill foresees to amend the Luxembourg law of 25 November 2014 on the procedure applicable to the exchange of information in the field of taxation (the EOI Law ), to comply with the CJEU rules and the Charter of Fundamental Rights of the European Union. In a nutshell, the Luxembourg Administrative Court referred a question to the CJEU for a preliminary ruling on whether the Luxembourg procedure in relation to the exchange of information in the field of taxation was in line with the Charter of Fundamental Rights of the European Union. As a matter of fact, under the EOI Law as currently in force, no access to the exchange of information request and remedy to challenge the said request are granted to the tax payer. The CJEU ruled that the Luxembourg tax authorities should not limit its analysis of the exchange of information request to a brief and formal analysis but should also examine whether the information requested is foreseeably relevant for the purpose of the foreign tax investigation. The 7200 Bill therefore foresees an amendment to the EOI Law to (i) oblige the Luxembourg tax authorities to examine whether foreseeably relevant information is actually sought by the foreign tax authorities for the tax investigation identified by the exchange of information request and (ii) allow for the information holder to appeal 4
against the information injunction (whereas currently only the penalty for not complying with an information injunction may be appealed against). Under the 7200 Bill, once the tribunal is seized, it will have access to the entire exchange of information request in order to work out the possibility that the information sought manifestly has no foreseeable relevance to the investigation being carried out by the requesting authority. However, the tax payer should not be able to access such request, except that the tax authorities response to the appeal must contain the identity of the concerned tax payer and the purpose of the information sought. In addition, if the Court considers that this information is insufficient, it may request that more information be disclosed. Although, the tax payer should in principle not be allowed to respond to the tax authorities (which brings in this case the question of the relevance of receiving such information) the Court may instruct the parties to submit additional written arguments. 4. Investment tax credit The 7200 Bill proposes to introduce an investment tax credit for (i) sustainable mobility to zero-emission vehicles and (ii) to software investments. The global investment tax credit is limited to 8% of the acquisition value of the first EUR 150,000 and 2% over EUR 150,000. The additional investment tax credit amounts to 13% of the acquisition price of the qualifying investment. Regarding the global investment tax credit for zero-emission vehicles the maximum acquisition amount is set at EUR 50,000. There is no limitation for the complementary investment tax credit. When software are acquired from unrelated parties, the investment in relation thereto should qualify for the global investment tax credit which is however limited to 10% of the tax due in the year such software is acquired. It is therefore important to note that the investment tax credit may not benefit to software acquired from a related party of self-developed as in such case they may benefit from the New IP Box Regime so as to avoid overlapping of these two tax benefits. 5. Expected changes of the Luxembourg stock-option tax regime As stated during the presentation of the Luxembourg 2018 Budget by the Minister of Finance the tax regime applicable to Luxembourg stock options should be amended in the coming months. Currently, and as confirmed by a circular from the Luxembourg tax administration in 2012 3 the stock options are valued at 17,5% of the fair market value of the underlying shares and then added to the taxable basis of the stock option holder. While freely transferable stock options are taxable upon granting, taxation of not freely transferable stock options is triggered only when such options become transferable. This tax regime is seen as very advantageous to the beneficiary of the stock options. In order to enhance the transparency of these stock options plans, the Luxembourg tax administration issued a circular in 2015 4 which provides that stock options scheme have to be declared to the Luxembourg tax administration. It is foreseen that in the future the stock options should be taxable at half of the global tax rate. As of today, the maximum global tax rate amounts to 42% for Luxembourg individual taxpayer (exclusive of unemployment fund surcharge), which means that stock-options should be taxable at 21% of their fair market value. It is worth noting that the 7200 Bill does not contain any provision in this respect so any changes (notably to the circular) have to be carefully monitored in the near future. 3 Circular L.I.R. n 104/2 from the Luxembourg tax administration of 20 December 2012. 4 Circular L.I.R. n 104/2 (bis) from the Luxembourg tax administration of 28 December 2015. 5
IV. LUXEMBOURG NEW IP BOX REGIME On 4 August 2017, the Luxembourg Minister of Finance submitted to the Parliament a bill on the very expected New IP Box Regime (the New IP Box Bill ). The former Luxembourg IP box regime that allowed Luxembourg tax payers to benefit from an 80% exemption of their income on certain intellectual property rights has been repealed by the law of 18 December 2015 with effect as from 1 July 2016, with a transitory period until 30 June 2021 the benefit of which is nevertheless subject to antiabuse rules 5. The New IP Box Bill is in line with BEPS action plan 5 on countering harmful tax practices. According to the New IP Box Bill the regime should be available to both individuals and corporate taxpayers as well as Luxembourg permanent establishments of foreign companies located in a European Economic Area member state. This new regime should be restricted to patents, utility models, copyrighted software, supplementary protection certificates for medicinal and plant-protection products, orphan drug designations and extensions of supplementary protection certificates for paediatric medicine. IP assets that have a marketing nature are now excluded from the scope of the New IP Box Bill. This mainly concerns trademarks and domain names. Pursuant to the New IP Box Bill an 80% income tax exemption on qualifying IP rights should be applicable provided it can be demonstrated by the tax payer that expenditures such as R&D which gave rise to the IP income have been incurred. For instance, real estate, interest, financing and acquisition costs of IP assets are not eligible expenses. Luxembourg will allow a 30% of the qualifying R&D expenditures (up to the total amount of the overall R&D expenditures). Furthermore, a 100% net wealth exemption should be granted. V. IMPROVEMENT OF THE MONITORING OF EXCHANGE OF INFORMATION DUE-DILIGENCE PROCEDURES Directive 2011/16/EU, as amended by Council Directive 2014/107/EU, implements the global Standard for Automatic exchange of Financial Account Information in Tax Matters with the EU and stipulates that financial institutions have to look through intermediary structures, and identify and report on its beneficial owners. As anti-money-laundering information includes notably identification of beneficial owners pursuant to Directive 2015/849 of the European Parliament and of the Council ( Directive AML 4 ), access to such information by the tax authorities would allow them to ensure that financial institutions are effectively identifying and reporting on beneficial owners. DAC 5 thus provides access to tax authorities to mechanisms, procedures, documents and information foreseen by articles 13, 30, 31 and 40 of Directive AML 4. The Luxembourg transposition of DAC 5 is not limited to administrative cooperation at the European level, but is extended also to a wider international level since tax 5 The grandfathering period is reduced to 31 December 2016 (1 January 2018 for net wealth tax) for IP rights acquired from related parties, unless the concerned IP rights were eligible to the existing IP Box regime. The anti-abuse rules also foresee a spontaneous exchange of information concerning existing IP box regimes in connection with IP rights acquired or created after 6 February 2015. 6
authorities will have access to anti-money-laundering information in the framework notably of double tax treaties and the Foreign Account Tax Compliance Act (FATCA). Transposition of DAC 5 should be done as soon as possible (as due-diligence procedures have already started and first exchange of information under Directive 2011/16/EU are to be finalised by September 2017) and no later than 1 January 2018. VI. THE YEARS AHEAD In the frame of the OECD s BEPS action plans different actions should continue to be taken by Luxembourg in order to implement these measures into domestic law. At the level of the European Union, Directive 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices that directly affect the functioning of the internal market ( ATAD ) and Directive 2017/952 amending ATAD as regards hybrid mismatches with third countries ( ATAD 2 ) tackle hybrid instruments, interest deduction and double tax treaties abuse. No bill of law implementing these directives has been filed in Luxembourg yet, but the transposition should take place before 2020. On a world-wide scale, the multilateral instrument ( MLI ) was signed on 7 June 2017 by 68 jurisdictions, including Luxembourg, in view of aligning existing tax treaties with the different BEPS action plans. The MLI only applies to existing double tax treaties if (i) the treaty countries have signed and ratified the MLI and (ii) the treaty countries have opted for the same MLI rules. Luxembourg has opted out from a number of MLI rules 6 and also made reservation to other MLI rules 7, thus reducing significantly the overall impact of the MLI on Luxembourg s double tax treaty network. The MLI contains two minimum standard provisions, i.e. a new preamble providing that double tax treaties may not be used abusively and a principal purpose test, which states that benefit of the double tax treaty should be denied if the structure has not been put in place for sound and valid economic reasons. The most significant impact of the MLI stems from its article 5, under which Luxembourg has opted for solution A, whereby Luxembourg must apply the credit method on dividends received by a Luxembourg company from a foreign company (instead of the exemption method, which is currently more prevalent under Luxembourg double tax treaties). Nonetheless, companies may still avail themselves of the exemption method under the Luxembourg participation exemption regime provided that the conditions thereof are met. No bill of law has yet been issued in Luxembourg to ratify the MLI. Application of the MLI should therefore be carefully monitored, also in respect of each treaty country since the application of the MLI is contingent with its ratification by both treaty countries and with the options and reservations made by each treaty country. 6 Such as for instance, article 4 MLI on double tax residency, article 8 MLI on transfer of dividends, article 9 MLI on capital gains from the disposal of real estate companies and article 10 IML on permanent establishments with third countries. 7 Such as for instance, article 3 MLI on transparent entities and articles 18 to 26 MLI on arbitration clauses. 7
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