From Luxembourg to down under

Pillar 2 administrative guidance and new bill adopted: substance based carve-out for tangible assets

The second set of administrative guidance on the Global Anti-Base Erosion Model Rules (Pillar 2) (PDF, 1.5MB) was published on 17 July 2023 and includes guidance on the Substance Based Income Exclusion (SBIE). This guidance clarified some of the concerns related to the requirement that the tangible assets must be located in the jurisdiction of the constituent entity. Unfortunately, this clarification does not address the concerns that are typically relevant for shipping and offshore companies (that are not eligible to full application of shipping exemption), as the exemption only applies if an asset is used in the jurisdiction where the owner is based. The OECD announced that “further consideration will be given to a simplified allocation mechanism with respect to industries with a substantial portion of their employees and assets located outside of the jurisdiction for a substantial portion of the Fiscal Year.”

In Luxembourg, the guidance on the SBIE was included in the amended bill (n°8292) adopted by the Chamber of Deputies on 20 December 2023. Notably, the amendment of article 28 of the approved law introduces provisions from the July guidance dealing with location-related issues (e.g. employees working in multiple jurisdictions). The approved law also introduces the possibility of a Grand-ducal regulation to provide more details on the SBIE and the treatment of certain tangible assets (airplanes, ships and satellites, etc.) once additional guidance is issued by the OECD.

Moreover, the potential implementation of a marketable investment tax credit has also been addressed in the law. Any Luxembourg company subject to Pillar 2 rules might be able to benefit from a specific, negotiable and transferable tax credit thanks to a specific Grand-ducal regulation to be issued in the future.

Adoption of a new law improving Luxembourg investment tax credits to accelerate sustainable transformation

On 19 December 2023, the Luxembourg Parliament voted to approved bill n°8278 revamping the investment tax credits available under article 152bis of the Luxembourg Income Tax Law (“LITL”).

The main aim of the law is to lend support to Luxembourg-based companies as they strive to embrace investments in digital transformation, ecological/energy transition. And it’s not just a question of investment costs…In addition to the increase in applicable rates, a pivotal change within these proposed reforms is the operating expenses linked to digital transformation and ecological/energy transition which would be eligible for an 18% tax credit.

However, the ITC described is aimed primarily at projects, and excludes the logistics sector by excluding self-propelled vehicles. Self-propelled vehicles remain eligible for the existing global ITC, for which the rate would increase from 8% to 12% under the law (plus an additional 2% tax credit if the asset qualifies for special depreciation under article 32bis of the LITL).

This law is expected to serve as a compelling incentive for companies to expedite their investments in digital transformation and ecological/energy transition.

So, what does the law say? For starters, that new investments will be subject to a new attestation and certification system. The taxpayer must first submit a project report to the Ministry of Economy which will in turn request an opinion from an advisory committee on the eligibility of the investments and operating expenses before issuing the attestation. Subsequently, an annual certificate on the reality of the costs and their compliance with the new requirements will be granted, which then needs to be attached to the tax return.

This, of course, comes with some practical issues for the shipping sector as the "green" criteria must be sufficiently flexible for this depreciation to benefit the greatest possible number of ships flying the Luxembourg flag.

If no changes are made to the current bill, consideration could be given to tabling a new specific bill; to take into account elements relating to the maritime sector, with an alignment on the current reform of registration fees for "green" ships with a special staggered depreciation (i.e. 2%, 4%, 6%) depending on the ship's energy category as defined by Luxembourg’s Commissariat aux affaires maritimes that would apply to article 32bis LITL.

The European Commission publishes proposal for a directive to introduce BEFIT

Shipping income covered by a tonnage tax regime is carved out from the BEFIT tax base. For income that is not carved out, the aggregated BEFIT tax base must be calculated (and therefore effectively allow for cross-border loss compensation). If the aggregated BEFIT tax base is negative, the loss is carried forward indefinitely in time. If positive, the profit is allocated to the various jurisdictions where the BEFIT group members are located. Exceptions are made for profits from extractive activities (allocated to place of extraction), profits from shipping not covered by a tonnage tax regime and air transport (allocated to the member state where the company of the ship is located). Learn more here.

Germany: New guidance on the German tonnage tax regime

Established in 1999, the German tonnage tax regime offers shipping companies a favorable flat tax rate on profits earned globally. In 2002, initial guidelines were issued by German tax authorities to interpret the tonnage tax law, followed by minor updates in subsequent years. The original guidance was recently replaced, driven by court decisions and legal regulations.

Despite this update, crucial questions regarding the German tonnage tax regime remain unanswered. Interestingly, offshore vessels are generally excluded from the tonnage tax application in Germany, primarily due to their limited involvement in international transportation. Find out more here.

Duty drawback can be a valuable option for companies paying large amounts of duties on imported goods. However, the duty drawback process can be very complex, and there are a variety of common pitfalls to consider when implementing a duty drawback program.  Don’t miss this insightful webcast by the KPMG US trade and customs team on the challenges and leading practices surrounding duty drawback. 

United Kingdom: Proposed amendments to tonnage tax regime

The UK Treasury is set to implement significant changes to the tonnage tax system. The proposed legislation (scheduled for 1 April 2024) seeks to broaden eligibility by allowing third-party ship management companies to participate. This expansion includes those engaged in both ship management and the operation of qualifying ships. Additionally, the proposal aims to raise the capital allowances thresholds for ship lessors, increasing the lower limit from GBP40 million to GBP100 million, and the upper limit from GBP80 million to GBP200 million. Expenses related to acquiring ships within this range will qualify for capital allowances, capped at GBP200 million. These amendments are designed to strengthen the UK's competitive stance in the global tonnage tax landscape. For a deeper dive, check out Budget: Additional flexibility in UK tonnage tax regime - KPMG UK

These regulations complement the current framework, offering eligible companies an extended opportunity to engage in the tonnage tax regime. The specified window running from 1 June 2023 to 30 November 2024 is detailed here.

Australia: Updated regulations for shipping exempt income certificate requirements

Training and management requirements for a shipping exempt income notice or certificate are to be issued. The Minister for Infrastructure, Transport, Regional Development and Local Government issued an updated shipping reform (tax incentives) regulations 2023 — repealing and replacing the shipping reform (tax incentives) regulations 2012 which sunset on 1 October 2023 — that outline the training and management requirements for a shipping exempt income notice or certificate to be issued to an Australian registered vessel.

An entity with a shipping exempt income certificate may gain access to the income tax exemption provided for under sections 51-100 of the Income Tax Assessment Act 1997. The updated regulations introduce minor amendments and establish the continuation of the measures in place.
 

Malaysia: Inland revenue board updates public ruling on taxation of income from employment on board a ship

The public ruling regarding the taxation of income from employment on board a ship has been updated by the Inland Revenue Board. The definition of “seagoing ship” has also been clarified. Moreover, the tax treatment of income from seafarers had been clarified as the documents mandatory to obtain substantiate tax exemption claims.

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This blog post is adapted from a newsletter by KPMG partner and tax lawyer Ernst-Jan Bioch.

Marie-Sara Pages, Tax Manager, Commerce & Industry at KPMG Luxembourg and Member of the Luxembourg Maritime Cluster.

Henri Prijot, Tax Partner, Commerce & Industry at KPMG Luxembourg and Board Member of the Luxembourg Maritime Cluster.