Tax Deductions Of Luxembourg Securitisation Special Purpose Entities At Risk
In a formal notice of 14 May 2020, the Commission requests that Luxembourg amends the way it has implemented the interest deduction limitation rule into its domestic tax law.
In a formal notice of 14 May 2020, the Commission requests that Luxembourg amends the way it has implemented the interest deduction limitation rule (IDLR) into its domestic tax law. When transposing the first anti tax avoidance directive (ATAD I), Luxembourg included securitization special purpose entities falling within the scope of EU Securitisation Regulation (No 2017/2402) (SSPEs) into the definition of financial undertakings that are exempt from the IDLR. This rule applies since the tax year 2019.
The Commission considers that the carve out granted to SSPEs goes beyond what is allowed under the financial undertaking exemption and requires Luxembourg to adapt its legislation to its reading of ATAD I within the next four months. Failing to do so may lead the Commission to send a reasoned opinion to Luxembourg, potentially followed by an infringement procedure before the European Courts. A likely outcome is that the Luxembourg IDLR rules will be amended to exclude SSPEs from the scope of the financial undertaking exemption. It is currently unclear when a change of law would take effect, i.e., as of 1 January 2020, as of the date on which the amending law enters into force or as of another point in time.
If an SSPE no longer qualifies as an exempt financial undertaking under ATAD I and earns taxable income other than interest and economically equivalent income, it may no longer be able to deduct all of its interest expenses and/or commitments towards its investors. Their interest deductions would, subject to certain grandfathering rules, be capped at the higher amount of 30% of EBITDA or EUR 3 million. This may notably be the case for SSPEs that invest in distressed or discounted debt with a view to realizing capital gains. Such SSPEs may thus face a substantially higher tax burden than initially projected. This would only be different if capital gains on the distressed or discounted debt were viewed as interest or economically equivalent income or if the deductions taken by the SSPE would not qualify as interest or interest equivalent. So far, there is no clear guidance on these questions.
We will closely monitor these developments. Should you have any questions, please contact your trusted Loyens & Loeff advisor.
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