EU list of “non-cooperative jurisdictions” updated – new Luxembourg tax consequences
On 22 February 2021, the European Union list of “non-cooperative jurisdictions” (the EU List) has been updated by the Economic and Financial Affairs Council (ECOFIN). This update is important in Luxembourg following the recent adoption of a law (law of 10 February 2021), which disallows the deduction for income tax purposes of interest and royalties due to related companies established in a country included in the EU List. This denial of the deduction is a new measure and applies as from 1 March 2021. The deduction will not be denied where the taxpayer is able to proof that the interest or royalties have been incurred in the context of transactions that were entered into for valid bona fide commercial reasons which reflect economic reality.
Reference is made to our newsflash of 1 April 2020 with a summary of the initial bill. Compared to the bill the following changes are noteworthy:
the effective date has changed from 1 January 2021 to 1 March 2021;
in line with the principle of non-retroactivity, the denial of the deduction is limited to interests and royalties accrued as from 1 March 2021. The initial bill targeted both accruals and payments, which would have included payments of interests and royalties accrued prior to the entry into effect of the measure.
Update of jurisdictions included in the EU List
With the ECOFIN update on 22 February 2021, the EU List is now composed of the following jurisdictions: American Samoa, Anguilla, Dominica, Fiji, Guam, Palau, Panama, Samoa, the Seychelles, Trinidad and Tobago, the US Virgin Islands and Vanuatu. Barbados has been removed from the previous list and Dominica added with this update.
When the law takes effect on 1 March 2021, the relevant EU List will be the one that has now been updated. The list will be updated from time to time, probably resulting in certain jurisdictions being added or taken off the list. As from 1 January 2022, the new law will apply to the jurisdictions included in the latest version of the EU List as of 1 January of the given year. Any removal of jurisdictions from the list will take effect under the new law in Luxembourg as from the date of publication of the updated EU List in the EU Official Journal.
Carve-out for genuine transactions maintained
In line with the initial bill of law, the law provides for a “valid economic reasons” exception. The denial of the deduction will not apply when the taxpayer proves the existence of valid economic reasons for the underlying transaction 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.
Action to be taken
Loyens & Loeff can assist you with a full impact assessment of this new measure. For further information and/or to get support on impact assessments, please contact your trusted adviser at Loyens & Loeff.
Nelli KluschinAssociate Attorney at law
Nelli Kluschin, associate, is a member of the Tax Practice Group in our Paris office. She focuses on cross-border tax structuring for multinationals, investment funds, as well as family owned businesses.T: +33 149 53 94 68 M: +352 691 96 31 08 E: Nelli.Kluschin@loyensloeff.com
Yannis Lagdani, associate, is a member of the Tax practice group in our Luxembourg and Paris offices. He focuses on cross-border tax issues, private equity funds, as well as wealthy individuals and families.T: +352 466 230 652 M: + 352 691 963 216 E: firstname.lastname@example.org
Willem BonPartner Tax Adviser
Willem Bon, partner, is a member of the Tax Practice Group in our Luxembourg office. He focuses on cross-border tax issues, advising mainly multinational enterprises, investment funds, as well as wealthy individuals and families.T: +352 466 230 214 E: email@example.com