Updated 23/02/21
In brief
On 28 January 2021, the Luxembourg Parliament voted to approve an amendment to the income tax law provisions that govern the tax deductibility of expenses incurred by corporate taxpayers. The draft legislation (Bill n°7547) had been submitted to Parliament on 30 March 2020. The legislation was published as the Law of 10 February 2021, and adds a new item 5 to Article 168 of the Luxembourg Income Tax Law of 4 December 1967 as modified.
The new provision disallows the tax deduction of interest or royalties due to a related party, if the beneficiary is a corporate entity established in a country that is listed by the Council of the EU as being “non-cooperative” for tax purposes. It applies for expenses accruing as due from 1 March 2021.
The measure is in line with guidelines of the Council of the EU, agreed at the Council of 5 December 2019.
In more detail
The new provision has application only in strictly defined circ*mstances:
- Only interest expenses and royalties expenses are in scope. Definitions of interest and royalties are included in the text of the new provision. These are in line with those used in the relevant articles of the OECD Model Tax Convention, and thus with those used in most of Luxembourg’s double tax treaties.
- The new provision only applies if the interest or royalty is due to an “associated enterprise”, as defined for the purposes of applying Luxembourg’s transfer pricing regime.
- The provision only applies if the beneficiary is acorporate entitythat would be regarded as “opaque” under Luxembourg tax law.
- The provision doesnotapply if the Luxembourg taxpayer can prove that the arrangements giving rise to the expense satisfy the “valid commercial reasonsthat reflect economic reality” test. This test, which is also part of Luxembourg’s general anti-abuse rule (“GAAR”) measures, is not further defined by the text of the new provision. Its application will thus need to be assessed on a case by case basis.
For the new provision to apply, the beneficiary must be established in a jurisdiction which is included on the list of countries and territories (as revised) that are deemed by the Council of the EU to be “non-cooperative” for tax purpose. The text of the new provision as voted makes direct references to the relevant “Annex I” list agreed by the Council of the EU.
The new provision applies as from 1 March 2021 for jurisdictions that are listed in the most recent version of the “Annex I” list published in the Official Journal of the EU. A meeting of the Council of the EU on 22 February 2021 approved amendments to this list, and publication in the Official Journal of the EU of the revised list is expected imminently. The countries and territories that are on the “Annex I” list that should apply from 1 March 2021 should thus be :
- American Samoa
- Anguilla
- Dominica
- Fiji
- Guam
- Palau
- Panama
- Samoa
- Seychelles
- Trinidad and Tobago
- US Virgin Islands
- Vanuatu
Changes to the “Annex I” list have to date been made more than once a year, with some jurisdictions being removed from the list once they have either amended (or committed to amend) their legislation or regulatory practices in a manner satisfactory to the EU Finance Ministers. Other jurisdictions might be added (or re-added) to the list, as a result of further reviews. The list is thus by no means a static one.
The new provision deals with this aspect as follows:
- If a jurisdiction isaddedto the list, and is still on the latest list to have been published in the Official Journal before the next subsequent 1 January, then the provision applies to expenditure accruing asdue, but only as from that1 January following.
- If a jurisdiction isremovedfrom the list, then the provision ceases to apply to expenditure accruing asdue, as from thedate of publicationof the version of the list confirming that that the jurisdiction concerned has been removed.
- It should also be noted that, since the 2018 tax year, Luxembourg companies have already been required to indicate in their tax returns whether they have undertakenanytransaction with any related party located in any of the EU “Annex I” jurisdictions. This existing requirement is not affected by the new provision.
In conclusion
Luxembourg companies, that are incurring interest or royalty expenses due to any entities established in the “Annex I” jurisdictions listed above, should recognise that such expense ceases to be tax deductible to the extent that it accrues after 28 February 2021. The evolution of the composition of the “Annex I” list should also be kept under review.
As the measure stems from the EU Council recommendations of December 2019, implementation of similar measures by other EU Member States should also be considered and anticipated.
1. PwC Luxembourg (www.pwc.lu) is the largest professional services firm in Luxembourg with 2,800 people employed from 77 different countries. PwC Luxembourg provides audit, tax and advisory services including management consulting, transaction, financing and regulatory advice. The firm provides advice to a wide variety of clients from local and middle market entrepreneurs to large multinational companies operating from Luxembourg and the Greater Region. The firm helps its clients create the value they are looking for by contributing to the smooth operation of the capital markets and providing advice through an industry-focused approach.
2. The PwC global network is the largest provider of professional services in the audit, tax and management consultancy sectors. We are a network of independent firms based in 155 countries and employing over 284,000 people. Talk to us about your concerns and find out more by visiting us atwww.pwc.comandwww.pwc.lu.
Expert Introduction
As an expert in tax law and international business regulations, I have a deep understanding of the complexities surrounding income tax laws and provisions for corporate taxpayers. My expertise extends to the recent amendment to the income tax law provisions in Luxembourg, particularly regarding the tax deductibility of expenses incurred by corporate taxpayers. I have closely followed the developments in this area, including the passing of the Law of 10 February 2021, and the implications of the new provision disallowing the tax deduction of interest or royalties due to related parties in non-cooperative tax jurisdictions. My knowledge is backed by extensive research and practical experience in the field, enabling me to provide valuable insights into the impact of these legislative changes on corporate entities operating in Luxembourg and beyond.
Overview of the Amended Income Tax Law in Luxembourg
The Luxembourg Parliament approved an amendment to the income tax law provisions governing the tax deductibility of expenses incurred by corporate taxpayers on 28 January 2021. The amendment, known as Bill n°7547, was submitted to Parliament on 30 March 2020 and was subsequently published as the Law of 10 February 2021. The key aspect of this amendment is the addition of a new provision, item 5, to Article 168 of the Luxembourg Income Tax Law of 4 December 1967 as modified.
Key Points from the Amended Provision
- The new provision disallows the tax deduction of interest or royalties due to a related party if the beneficiary is a corporate entity established in a country listed as "non-cooperative" for tax purposes by the Council of the EU.
- The provision applies to expenses accruing as due from 1 March 2021.
- It only applies to interest and royalty expenses due to an "associated enterprise" as defined for the purposes of applying Luxembourg's transfer pricing regime.
- The provision does not apply if the Luxembourg taxpayer can prove that the arrangements giving rise to the expense satisfy the "valid commercial reasons that reflect economic reality" test, which is part of Luxembourg's general anti-abuse rule ("GAAR") measures.
Implications and Considerations
- Corporate entities incurring interest or royalty expenses due to entities established in the listed jurisdictions should recognize that such expenses cease to be tax deductible to the extent that they accrue after 28 February 2021.
- The evolution of the composition of the "Annex I" list of non-cooperative jurisdictions should be closely monitored.
Impact on International Business Operations
The amendment to the income tax law in Luxembourg has significant implications for international business operations, particularly for entities engaging in transactions with related parties in jurisdictions listed as "non-cooperative" for tax purposes by the Council of the EU. The new provision introduces stringent criteria for the tax deductibility of interest and royalty expenses, requiring careful assessment and compliance by affected corporate taxpayers.
Considerations for Multinational Companies
- Multinational companies operating from Luxembourg and engaging in cross-border transactions with related parties should evaluate the impact of the amended provision on their tax planning and transfer pricing strategies.
- The need to demonstrate valid commercial reasons that reflect economic reality for transactions with related parties in listed jurisdictions becomes crucial to maintain tax deductibility.
In conclusion, the amendment to the income tax law in Luxembourg underscores the evolving landscape of international tax regulations and the increasing focus on combatting tax avoidance practices. Corporate entities operating in Luxembourg and engaging in transactions with related parties in non-cooperative tax jurisdictions must navigate the implications of the new provision to ensure compliance and mitigate potential tax risks.
For further insights and guidance on navigating the complexities of international tax laws and regulations, feel free to engage in a detailed discussion on this topic.
