Luxembourg Tax Alert 2022-13

Two important developments have occurred yesterday. Luxembourg has passed the 2023 budget (2023 Budget Law) and the EU has finally reached agreement on the EU Minimum Taxation Directive.

Yesterday, the Parliament passed the 2023 Budget Law. A request to be exempted from the second vote was filed with the State Council.

The 2023 Budget Law provides for certain reliefs and benefits for taxpayers, including an extension of the filing deadline for corporate and personal income tax returns, and an extension of the scope for the reduced and super-reduced VAT rates. While most of the tax measures have been adopted in line with the budget bill announced on 12 October 2022 (please refer to our Tax Alert 2022-09), certain measures have been further debated and clarified, most notably the proposed amendments to the reverse hybrid rules (article 168quater of the Luxembourg income tax law (LITL)). A new tax measure impacting the reduced subscription tax for investment funds was added.

Reverse hybrid rules

The transposition of the so-called “reverse hybrid rules” of ATAD 2 in Luxembourg tax law introduced article 168quater LITL and was effective as from tax year 2022.

In essence, under those provisions Luxembourg entities or arrangements that are in principle tax transparent for Luxembourg tax purposes (i.e. not subject to Luxembourg corporate income tax) could become taxable on their income in Luxembourg when certain conditions are met. One of those conditions being that the jurisdiction(s) of the investor(s) consider(s) the Luxembourg entity or arrangement as a taxable (i.e. tax opaque) person in Luxembourg. Such difference in qualification (and thus in allocation of income) would create the hybridity of the Luxembourg entity or arrangement.

In this respect, the 2023 Budget Law amending article 168quater clarifies that the absence of taxation of the income realized by the investor(s) through the Luxembourg tax transparent entity or arrangement must be due to such difference in qualification (as opposed to a subjective tax exemption of such investor(s)) for reverse hybrid rules (art. 168quater LITL) to apply.

In addition, the lawmakers usefully clarified that, in case of application of article 168quater LITL, only the portion of income attributable to associated enterprises triggering its application should be subject to Luxembourg corporate income tax. For instance, investors which do not qualify as associated enterprises, or which benefit from a subjective tax exemption should in any case not be impacted by such rules. 

As the amendment should apply as from tax year 2022, entities or arrangements that would have been impacted under the former rules may retroactively benefit from this new provision and should therefore be reassessed. KPMG Tax professionals will be pleased to assist you in this respect.

Reduced subscription tax for investment funds

Since 1 January 2021, UCITS and Part II UCIs (or their individual compartments) are able to benefit from a reduced subscription tax for the portion of their assets invested in environmental sustainable activities compliant with the EU taxonomy (please see Fund Taxation Alert 2021-03 for more information).

As part of the 2023 Budget Bill, a government amendment was issued to modify this reduced subscription tax by excluding nuclear power and gas from the investments that are qualifying for a reduced rate.

On 15 December, the Council of the EU formally adopted the EU Minimum Taxation Directive (“Directive”). The vote on this Directive was on hold for several months, due to the vetoes expressed by Poland and Hungary successively. A new compromise text (PDF | 0.5MB) (dated 25 November 2022) was published in advance of the agreement.

The Directive, once implemented into domestic law, will introduce a new minimum corporate tax rate of 15% on large multinational and domestic groups having consolidated group revenue of €750m or more in two of the past four fiscal years. The new rules will become effective for fiscal years beginning from 31 December 2023 for the Income Inclusion Rule (IIR) and 31 December 2024 for the Undertaxed Profits Rule (UTPR). Please refer to this newsletter for a comprehensive overview of the agreed Directive and comparison with the OECD GloBE model rules.

What does this mean for Luxembourg?

Luxembourg will now have until 31 December 2023 to transpose the new rules (the GloBE rules) into domestic law. While the number of Luxembourg ultimate parent entities (UPEs) falling within scope is expected to be limited, a higher number of Luxembourg companies belonging to large international groups will soon become subject to the new rules. There will be certain carve-outs for investment funds and real estate investment vehicles which will depend on consolidation requirements and other conditions. A case-by-case analysis is necessary to determine whether an investment entity is in scope or not.

For the groups in scope, the GloBE rules introduce a new requirement to compute the effective tax rate for each jurisdiction they operate in. Although Luxembourg has a corporate tax rate which is higher than 15%, companies may still have an effective tax rate below 15% when calculated under GloBE rules. This is mainly due to differences in the computation of the taxable income under GloBE and the Luxembourg domestic tax rules. In addition, it is not yet clear whether Luxembourg will opt for the implementation of a qualified domestic top up tax. Such a tax would apply in case the effective tax rate under GloBE rules falls below 15% and would ensure that the additional tax to bring the effective tax rate to 15% is payable in Luxembourg. There has been no announcement made in this regard.

Now is the time to act. The GloBE rules introduce a new level of complexity in an already complex and constantly evolving tax landscape. KPMG Tax professionals can assist you by performing an impact assessment of your structure and generally help with any questions you might have. We will of course keep you posted about any further developments and additional guidelines to be issued by the OECD. Stay tuned!