Luxembourg Tax Alert 2021-09

The tax landscape continues to change at a fast pace. A lot of new tax measures have been introduced this year and more changes are coming in the upcoming years. This newsletter provides you with an overview of all the main tax measures that should be of importance for 2022, as well as an overview of what is in the pipeline for the years to come. 

On 16 December 2021, the Luxembourg government announced the extension of the social security agreement regarding home working with Germany, France and Belgium until 30 June 2022. Please refer to this press release.

Earlier this month, the above-mentioned countries had already agreed on the extension of the tax agreements until 31 March 2022 (potentially extended automatically until 30 June 2022). Please refer to the following press releases:

•   Press release for France
•   Press release for Belgium
•   Press release for Germany

Starting 1 January 2022, employers will be required to access the new digital tax card platform at least once a month as part of the “mandatory phase”(fines could be raised).

As from that date, employees are no longer required to hand over their tax card to the employer.

Reverse hybrid rules target Luxembourg entities or arrangements whose net income is considered to be the net income of one or more persons (other than the entity itself). For instance, Luxembourg partnerships such as société en commandite simple (SCS) and société en commandite spéciale (SCSp) are in scope. While such entities are in principle not subject to any income tax, they will become subject to Luxembourg corporate income tax on (a portion of) their net income, provided the conditions of reverse hybrid rules are met. In practice, many investment funds (including AIF) should, however, not be impacted by these rules, notably under the Collective Investment Vehicle (CIV) exemption.

Reverse hybrid rules apply as from tax year 2022, i.e., as from next year for most Luxembourg entities (entities having a diverging financial year are already subject to those rules).

Do not hesitate to reach out to your tax adviser to assess the potential impact of these complex rules to your specific case.

On 5 March 2021, the United Kingdom’s Financial Conduct Authority announced that the majority of LIBOR settings will cease to be quoted as from 31 December 2021. The transition from LIBOR to other rates requires some analysis to ensure, among others, compliance with:

• the terms and conditions of the legal agreement (e.g. any fallback reference rates already indicated, any provisions dictating a specific procedure for a replacement rate, any provision that may be impacted by events outside of each party’s control, etc); and
• the arm’s length principle: the replacement of LIBOR needs to ensure that the change may not be impactful from both the borrower and lender’s perspective in order not to trigger a taxable exposure. 

Operating the transition may not only create legal and tax questions, but also trigger some changes from other perspectives, such as:

• accounting: hedge accounting, debt derecognition, financial statement disclosure requirements;
• systems: impact of changes to accrued interest calculations, interaction between back office and other business functions, changes needed to existing market data feeds and controls;
• valuation and risk management: pricing, compounding conventions, use of discount rates, fair value adjustments.

The Circular L.I.R. n° 56/1 – 56bis/1, published on 27 December 2016 and applicable as from financial year 2017 for companies performing intra-group intercompany transactions, is no news anymore. However, FY2022 is likely to be a milestone year for back-to-back financing.

Most of the analyses that were performed during FY2017 were using 5-year data. The assumption was that the analysis would be valid for 5 years, as long as the FY2017 financing activity did not change materially during that period of time. For all the entities concerned, it means that FY2022 may be the right time to refresh the FY2017 analysis based on the new facts and circumstances and market data.

Also, more generally, the market is evolving. A 3-year cycle is now regarded as more compliant with the OECD Guidelines. From that perspective, it is likely that transfer pricing studies performed later in FY2018 and FY2019 would need to be updated as well.

We are at your disposal for a diagnosis of your transfer pricing documentation, to ensure your company is still compliant with Luxembourg transfer pricing rules.

Overview

In July 2021, 130 jurisdictions, all being members of the OECD/G20 Inclusive Framework on BEPS, approved a statement providing for a new framework to rework significantly the current international tax rules. The final terms of this statement were confirmed in October 2021. As of this date, 137 countries have joined the statement, including all OECD and G20 member countries.

The revamp of the international tax rules would include two Pillars:

•   Pillar 1: Reallocating taxing rights to market countries;
•   Pillar 2: The introduction of a global minimum tax of 15%. The OECD model rules (PDF, 2.4 MB) have been published on 20 December 2021.

More detailed information about the two Pillars can be found in this newsletter prepared by the KPMG EU Tax Centre.

Impact for Luxembourg

Implementation of these new rules is expected to happen in connection with new directives and guidance from the EU (please refer to the section “EU Tax Updates”). Although the OECD model rules have not been published at this stage, Pillar 1 is generally not expected to cause significant impact for Luxembourg companies. The threshold to fall within the scope of Pillar 1 is expected to be quite high and certain exclusions should apply (such as a financial services exception for regulated entities).

Pillar 2, on the other hand, will certainly have an impact for some multinationals in Luxembourg, as the applicable threshold is significantly lower and the scope of the exclusions narrower. There is however a carve-out for investment funds, real estate investment vehicles, and the holding entities held at least at 85% or 95% by the latter (subject to certain conditions). More clarity is expected once the OECD model rules on Pillar 1 and the EU Directives to implement Pillar 1 and Pillar 2 are published. KPMG will keep you informed on further developments.

The EU has set a very ambitious agenda for the upcoming years, with a long list of new measures and directives. Once transposed into Luxembourg national law, these new tax rules are expected to produce a significant effect.

• Shell entities: Tackling the misuse of legal entities with no or minimum substance and no real economic activities, which may take the form of a new Anti-Tax-Avoidance Directive - ATAD 3. The European Commission is expected to publish a proposal on 22 December 2021.
• EU Directive on Pillar 2: A global minimum tax, as provided for under Pillar 2, is intended to be implemented via a new EU Directive. A proposal is expected to be published on 22 December 2021.
• DEBRA: The goal of this tax measure would be to harmonize the current debt-to-equity bias in the EU by creating a tax environment that places debt and equity financing on equal footing for tax purposes. The exact design is not known at this stage but could be either by disallowing the deductibility of interest payments, or by creating an allowance for equity (i.e. notional interest deduction). A proposal for this initiative is expected in April 2022.
• ETR Disclosure: If introduced, this measure would require certain large companies with operations in the EU to publish on an annual basis their effective corporate tax rate. A proposal is expected to be published in the first quarter of 2022.
• EU WHT Relief System: The goal of this very welcomed measure would be to make withholding tax refund procedures more efficient. A proposal is expected to be published in the second half of 2022.

•  EU Public Country-by-Country Reporting (CbCR): On 1 December 2021 the Directive on Public CbCR was published in the EU Official Journal. Member States now have until 22 June 2023 to implement these new rules, which would then apply for financial years starting on or after 22 June 2024. For more information on this new Directive, please refer to this newsletter prepared by the KPMG EU Tax Centre.
• DAC 7: This Directive provides for the automatic exchange of information on revenues generated by sellers on digital platforms. Luxembourg will have to transpose this Directive into national law by 31 December 2022. It is expected to apply as from 1 January 2023. For more information on DAC7, please refer to this newsletter prepared by the KPMG EU Tax Centre.
• DAC 8: This Directive provides for the automatic exchange of information on crypto-assets and e-money. A proposal is expected to be published by the EU Commission in the first quarter of 2022.
• BEFIT (Business in Europe: Framework for Income Taxation): BEFIT is the EU Commission’s long-term project to move towards common rules for determining the corporate tax base and for the allocation of profits between member states. This initiative replaces the former Common Consolidated Corporate Tax Base (CCCTB). A proposal is expected in 2023.

Expected Timeline in a Nutshell:

With all these upcoming changes, close attention should be paid on how this might affect your structure.  KPMG has a dedicated team of experts that can guide you through this new complexity. We can assist you by doing an impact assessment of your structure and generally help with any questions you might have.