Looking toward future Luxembourg Tax Compliance developments
Because reminding you of deadlines and informing you about the new regulations is part of our job, we have compiled an overview of the main regulatory evolution since 2018. Have a look, and be prepared for the years to come.
Luxembourg affiliates of Multinational groups, of which the ultimate parent entity is not tax resident in a partner jurisdiction, have to file a CbCR in Luxembourg unless the group has appointed a “surrogate entity” resident in a partner jurisdiction which will file the CbCR. A partner jurisdiction is a country that has CbCR legislation and an agreement to exchange tax information with Luxembourg in a given year. Luxembourg has published a revised Grand-Ducal Regulation that updates the list of partner jurisdictions. Should the jurisdiction of the ultimate parent entity be mentioned on this list, it is no longer required for your Luxembourg affiliate or “surrogated entity” to file a CbCR, as the reporting obligation will shift to the ultimate parent entity.
Upon request, combined tax credits of up to approximately 15% of the acquisition price of certain new depreciable, tangible assets can be obtained. The tax credits result in a direct reduction of the tax of your Luxembourg business. In order to qualify for the credit, the asset must be allocable to a Luxembourg commercial taxable presence, intended to stay there on a permanent basis, physically used in a country within the European Economic Area, and depreciable over a period of at least three years. Only tangible assets (excluding buildings, and with an exception of certain software) qualify, and vehicles qualify under conditions.
To maintain a competitive tax environment, the Luxembourg government proposed in the 2019 budget bill the following key measures:
- The application of the interest deduction limitation rules (inspired by ATAD 1) at fiscal unity level rather than on a stand-alone basis only. The new rules will also clarify the treatment of losses carried forward and tax credits in the context of a fiscal unity.
- A decrease of the corporate income tax rate from 18% to 17%. For a company resident in Luxembourg City, the consolidated tax rate on profits (including the surcharge for the unemployment fund and the municipal business tax) would then decrease from 26.01% to 24.94%, applicable as per the 2019 tax year. Further, the reduced corporate income tax rate of 15% (22.80% consolidated rate in Luxembourg City) would in the future apply to profits up to EUR 175,000.
In principle, Luxembourg entities must file their tax returns in EUR. If the financial statements are denominated in another currency, the conversion into EUR may potentially trigger taxes in case of a conversion gain. In order to avoid such taxable results, you may request to use that other currency for the tax return. The request is subject to certain formalities and timing constraints. Alternatively, you may request an equalisation of such results by means of a provision in the tax balance sheet. This provision must be released and recognised through the profit and loss account in case of disposal of the relevant asset or a liquidation. This request is also subject to certain formalities and timing constraints.
To kick off the new year of monthly snippets, our Luxembourg tax compliance team has prepared a general overview with the most important upcoming deadlines for accounting, tax compliance and reporting in Luxembourg: the cheat sheet.
Corporate taxpayers have to report the exempt profits allocable to foreign permanent establishments (PE) in their tax returns. For the exemption to apply, the PE must be situated in a state with which Luxembourg has concluded a tax treaty. Treaties require a fixed place of business for a PE to be recognised. The diverging views on the business concept may result in double non-taxation: the source country does not tax and Luxembourg exempts.
Luxembourg has released a draft bill of law clarifying how the definition of a PE should be interpreted in a treaty context. The clarification states that a taxpayer is seen as carrying on an activity through a foreign PE when that activity can be considered as an independent activity, constituting a participation in the general economic life of the other state. The taxpayer may be asked to prove that a PE is recognised by the other state. Such proof must be given where the treaty does not provide for a specific provision aiming to avoid double non-taxation. The bill, yet to be voted, should be effective as from 1 January 2019.
Multinational enterprise groups (MNE Groups), having a total consolidated group revenue in excess of EUR 750 million (or an amount in another currency equivalent to EUR 750 million) in reporting year 2016 fall within the scope of the 2017 CbC reporting obligations. The deadline to file the 2017 CbC report is 31 December 2018. The ultimate parent entity of the MNE Group should file the 2017 CbC report in its (tax) jurisdiction. Even if the ultimate parent entity is not a (tax) resident of Luxembourg, the CbC reporting obligation could, under certain specific conditions, be shifted to Luxembourg.
Entities resident for tax purposes in Luxembourg and belonging to an MNE Group that falls within the scope of CbC reporting, must notify the Luxembourg tax authorities of the identity and tax residence of the entity that will file the 2018 CbC report (e.g. the ultimate parent entity). The notification must ultimately be filed on 31 December 2018.
A Luxembourg (special) limited partnership (SCS(p)) is transparent for Luxembourg corporate income tax (CIT) and net wealth tax (NWT) purposes, and is therefore not required to file CIT and NWT returns. However, an SCS(p) may be liable for municipal business tax (MBT, levied at a rate of 6.75% in Luxembourg city) if it conducts a business in Luxembourg. An SCS(p) also becomes subject to MBT if its general partner holds an interest of 5% of more in the SCS(p) (i.e., the SCS(p) is “tainted”). An SCS(p) which is liable for MBT must file a tax return to declare its taxable income and how this income should be allocated to its partners (Form 300).
Unless the SCS(p) is tainted as an MBT payer, it is not liable to MBT, provided it qualifies as a an alternative investment fund (AIF) or as a SICAR. An SCS(p) that falls under the SIF regime will benefit from a full MBT exemption, and cannot be tainted. The MBT analysis of an SCS(p) falling under the RAIF is – depending on its tax status– the same as that for an AIF/SICAR or a SIF. These type of SCS(p)s must only file a tax return providing details on how their income should be allocated to their partners (Form 200).
The 2017 corporate income tax return form poses the following question: “Did the company opt for the simplification measure stated in section 4 of the Circular of the Director of the tax administration L.I.R. No 56/1-56bis/1 as of 27 December 2016?”
The Circular gives guidance on the application of the arm’s length principle for companies that grant loans to related enterprises. Companies that borrow from and on-lend to related parties and thereby act as intermediaries may benefit from a simplification measure. They are assumed to comply with the arm’s length principle if they realize a net return of 2% (i.e., after tax) on their financing volume. Any other return reported by such intermediary or other type of financing intermediary should be justified by a transfer pricing study.
When filing their 2017 corporate income tax return, Luxembourg taxpayers have to answer, amongst others, the following question: “Did the company engage in transactions with related parties (articles 56 and 56bis LIR)?” Articles 56 and 56bis of the Luxembourg income tax law provide for the arm’s length principle and guidance on the application of the arm’s length principle, respectively. The arm’s length principle ensures that the impact of intra-group relations on pricing is ignored when determining the taxable profit of a company.
To improve the investment climate, the Luxembourg tax authorities have recently published a circular providing guidance on the deferral of linear depreciation (Circular n°32/1 of 15 May 2018). The possibility of deferred depreciation was introduced on 1 January 2017, although deferred depreciation is also available for assets acquired before 2017. Upon request of the taxpayer, linear depreciation of an asset for a given financial year can be fully or partially deferred to a later year.
At the end of the asset’s useful life, the entire amount of deferred depreciation has to be deducted. The request is made by ticking a box in the corporate income tax return and indicating the amount of the fiscal depreciation. The tax return must be accompanied by sufficiently detailed information which essentially enables the Luxembourg tax authorities to monitor the (aggregate) amount of the deferred depreciation. When an asset is subject to extraordinary depreciation (in the event of extraordinary technical or economic loss), the asset can no longer benefit from deferred depreciation, but must be depreciated in accordance with the normally applicable deprecation rules.
Electronic filing is mandatory for the 2017 corporate income tax and municipal business tax returns and the 2018 net wealth tax return and future years’ tax returns. Paper filing for those years will no longer be accepted. The electronic filing process has already proven to be very efficient. The electronic filing has to be made through the dedicated portal for online procedures.
Loyens & Loeff has access to this portal and can do the filing on your behalf through a power of attorney. Loyens & Loeff recommends to file your 2017 corporate income tax and municipal business tax returns and your net wealth tax return for 2018 prior to 1 January 2019 to minimize the risk of fines. More on this in our next snippet!
The statutory deadline for filing of the 2016 corporate, municipal business tax and net wealth tax returns was until 1 April 2017.
In practice, most companies did not tend to meet the statutory deadline of 1 April 2017 due to the preparation of signed and approved 2016 financial statements, and the Luxembourg Revenue takes a practical approach to avoid immediate fines.
In the first quarter of 2018, the Luxembourg Revenue has issued reminders with the final deadline of 5 May 2018 for the 2016 tax returns to be filed.
If the deadline as stipulated in the reminder is missed, an injunction of a fine up to an amount of EUR 25,000 could be imposed. A second type of fine for late filing can be imposed without any prior warning or notification and is imposed through the tax assessment. The maximum penalty amount is 10% of the tax due.
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: email@example.com