Luxembourg will deny tax deductions for interest and royalties owed to related companies in blacklisted jurisdictions
The proposal of law published on 31 March 2020 provides that interest and royalties owed as from 1 January 2021 to related companies established in a blacklisted jurisdiction would no longer be deductible for Luxembourg corporate income tax and municipal business tax purposes. The rule would, however, not apply to tax deductions claimed in the context of transactions entered into for valid commercial reasons which reflect economic reality.
Recipients in the scope of the rule
If the recipient of the interest or royalties is a transparent (i.e., look-through) entity for Luxembourg tax purposes, it must be assessed whether the participants in that entity would be in the scope of the rule. Hence, interest and royalties owed to related entities organised, e.g., as limited partnerships established in blacklisted jurisdictions are not automatically in the scope of this new rule.
Moreover, if the recipient of the interest or royalties is not the beneficial owner the income, it must be assessed whether the beneficial owner would be in the scope of the rule. It remains to be seen how the notion of beneficial owner is to be interpreted for purposes of this rule.
The notion of related companies has to be interpreted in accordance with the domestic definition introduced in 2016. Companies are related if (i) one directly or indirectly participates in the management, control or capital of the other or (ii) the same persons directly or indirectly participate in the direction, control or capital of both companies.
Notion of interest and royalties
The concept of interest would cover any interest or arrears paid or owed under any type of receivables, including profit participating loans. Premiums on debt instruments would also be in scope. Penalties for late interest payment would, however, be excluded.
The concept of royalty would cover a remuneration of any type paid or owed for the use of or right to use of authors’ rights, patents, trademarks, designs and models, formulas, secret processes or know-how acquired in the industrial, commercial or scientific field.
Carve-out for genuine transactions
The “valid economic reasons” escape requires the taxpayer to show economic reasons which are real in view of the overall facts and circumstances and which grant a sufficiently important economic benefit beyond a mere potential tax benefit. It is for the taxpayer to prove the existence of the valid economic reasons.
Impact of changes to the EU blacklist
A jurisdiction is considered as blacklisted for purposes of this new rule if it features on Luxembourg’s ad hoc blacklist established for that purpose. Once a year, Luxembourg will update its ad hoc blacklist as follows:
- New jurisdictions appearing on the latest published version of the EU blacklist at the date of the update will be added to the Luxembourg ad hoc blacklist, with effect at 1 January of the following year. The new measure would thus apply to interest and royalties paid or owed to a related company established in the newly blacklisted jurisdiction as per 1 January of that following year.
- Jurisdictions no longer appearing on the latest published version of the EU blacklist at the date of the update will be removed from the Luxembourg ad hoc blacklist. Royalties and interest paid or owed to a related enterprise established in the no-longer blacklisted jurisdiction would not be in the scope of this new rule as from the date the EU has published the removal of the jurisdiction from the EU blacklist.
The bill of law will go through the ordinary parliamentary process and should be adopted prior to year-end, with a view to taking effect as of 1 January 2021.
The current version of the bill of law does not provide for the ad hoc blacklist; the first version will be established later this year as part of the budget bill of law for the year 2021. The first ad hoc blacklist will include the jurisdictions appearing on the most recent version of the EU blacklist by then. As of today, the EU blacklist is composed of twelve jurisdictions: American Samoa, the Cayman Islands, Fiji, Guam, Oman, Palau, Panama, Samoa, Trinidad and Tobago, the U.S. Virgin Islands, Vanuatu and the Seychelles. The next review of the list is scheduled for October 2020.
We will keep you updated on further developments. Should you have any question, please contact your trusted Loyens & Loeff adviser.
Frank van KuijkPartner Tax Adviser / Attorney at Law / Avocat
Frank van Kuijk, partner, is a member of our Investment Management and Tax practice groups in our Luxembourg office. He focuses on the structuring and regulatory work for alternative investment fund managers. Within the Investment Management Practice Frank heads the tax team integrated therein.T: +352 466 230 330 E: firstname.lastname@example.org
Jochem van der WalPartner Attorney at law / Tax adviser
Jochem van der Wal, attorney at law and tax adviser, is a partner in the Tax Practice Group of our Luxembourg office. He focuses on general Luxembourg and international tax matters.T: +31 20 578 52 34 / +352 466 230 235 E: email@example.com
Pierre-Antoine KlethiSenior Associate Attorney at law / Avocat / Tax Adviser
Pierre-Antoine Klethi, senior associate, is a member of the Tax and Investment Management Practice Groups in our Luxembourg office. He focuses on corporate taxation (including relevant international developments), fund structuring and EU State Aid investigations.T: +352 466 230 429 E: firstname.lastname@example.org