Luxembourg Tax Alert 2022-03

EU securitization vehicles in scope of Luxembourg interest limitation rules as from 2023

EU securitization vehicles in scope of Luxembourg interest limitation rules as from 2023

EU securitization vehicles in scope of Luxembourg interest limitation rules as from 2023

On 9 March 2022, the Luxembourg Ministry of Finance filed a new bill to amend the scope of interest limitation rules. This is the response to the infringement procedure launched by the EU Commission with respect to the exemption currently granted to securitization vehicles ("SVs") governed by the 2017 EU regulation.

Background and content of the bill

As a first step of the procedure in May 2020, the EU Commission sent a letter of formal notice to Luxembourg, requesting for a change of the tax law implementing the interest limitation rules.

In December 2021, the European Commission sent a reasoned opinion to Luxembourg, as a formal reminder to ask for a correct implementation of article 4 (7) of the Anti-Tax Avoidance Directive (“ATAD 1”), which was the last step of the procedure before referring to the Court of Justice of the European Union. The EU Commission considers the exemption of SVs governed by article 2, point 2) of Regulation (EU) 2017/2402 from Luxembourg interest limitation rules as going beyond the allowed exemptions of ATAD 1.

As a result, Luxembourg has decided to amend the interest limitation rules under article 168bis of Luxembourg income tax law. The new bill excludes the above-mentioned SVs from the definition of “financial undertaking”, with effect as from financial years starting on or after 1 January 2023.

As a consequence, these vehicles would then become fully subject to interest limitation rules, capping the deduction of net interest expenses (i.e., the amount of interest expense exceeding the interest income) up to the higher of 30% of tax EBITDA or EUR 3 million. This may, therefore, limit the capacity of those SVs to deduct interest expenses against revenue other than interest income or its equivalent.

KPMG Comment

 While the mismatch in the definition of “financial undertaking” between Luxembourg domestic law and  ATAD 1 could have been justified, given that the 2017 EU regulation was adopted after the publication of the ATAD 1 in 2016, the European Commission has taken a “static” approach on the ATAD 1 implementation.

The non-retroactive effect of the new provisions, which rely upon the principles of legal certainty and of legitimate expectations for taxpayers, is more than welcome. 

Next steps

The bill needs to follow the usual legislative process. In the meantime, it is now important to anticipate the entry into force of the new law and its impact.

Our dedicated team of tax experts are here to support and guide you in this exercise.