Luxembourg Tax Alert 2023-05

Luxembourg Tax Authorities update DAC6 FAQ

Luxembourg Tax Authorities update DAC6 FAQ

LPP and notification obligations (amendment to §6):

The FAQ now contains a footnote mentioning that the notification obligations for intermediaries protected by the Legal Professional Privilege (LPP) described in §6 apply, subject to case C-694/20 from the Court of Justice of the European Union (CJEU). This court case ruled that DAC6 provisions imposing notification obligations to lawyers towards persons who are not their clients, are against the EU charter on fundamental rights.

However, the FAQ does not really clarify how this CJEU case should impact DAC6 notification obligations in practice. It is expected that a law clarifying notification obligations for lawyers and all other intermediaries protected by the LPP will be issued in the future. 

Hallmark C.1.a.– Cross-border tax deductible payments to an associated enterprise that is not tax resident anywhere (amendment to §11.3.1):

The FAQ still mentions that this hallmark is based on the concept of residence found in article 4 of the OECD model convention. By reference to §8.11 of the commentaries to article 4 of the Model Tax Convention on Income and Capital, the FAQ now adds that a person which is liable to tax in theory, but not in practice, should still be considered as a tax resident for purposes of applying article 4. §8.11 takes the example of entities which are subject to tax, but tax-exempt if some conditions are met (e.g., charities).

Although this is not explicitly mentioned in the FAQ, we understand that this point indirectly confirms that this hallmark should not target tax-exempt entities, but only “stateless” entities, which rely on mismatches to avoid being tax resident anywhere.

Hallmark C.1.d - Cross-border tax deductible payments to an associated enterprise, where the payment benefits from a preferential tax regime (new item - §11.3.4):

Based on the FAQ, this hallmark should target domestic income or gains that are not taxed, based on a double tax convention or a domestic preferential regime.

This is surprising, as payments benefitting from a full exemption from tax are in principle targeted by hallmark C.1.c.

Hallmark E.3 – Intragroup cross-border transfer of assets/risks/functions with an impact on the Earnings Before Interest and Taxes (EBIT):

Concept of transfer (amendment to §11.5.2)
The FAQ adopts a legal approach (and not a tax approach) to assess whether there is a transfer of assets. On this basis, we understand that a transfer between a head office and its permanent establishment should be out-of-scope of hallmark E.3, as there is no transfer from a legal point of view. On the other hand, we understand that a transfer from or to a tax transparent entity might be in scope of hallmark E.3 if all of its other conditions are met, in case there is a transfer from a legal perspective.

In addition, intra-EU mergers, where all assets and liabilities of the absorbed entity remain in a permanent establishment of the absorbing entity located in the country of the absorbed entity, should not be considered as a cross-border transfer of assets/risks/functions, for the purpose of hallmark E.3.

As a reminder, the FAQ states that in case of a liquidation, the liquidated entity will not have any EBIT anymore going forward (as a result of a full transfer of assets/risks/functions). On this basis, liquidations might be in scope of hallmark E.3, when its conditions are met and if the liquidated entity had a positive projected EBIT for the next 3 years.

Migrations with continuity of legal personality (new item - §11.5.3):
Due to the legal approach adopted to assess hallmark E.3, the FAQ clarifies that a migration (or transfer of the statutory seat of a company) with continuity of legal personality, does not lead to a transfer for the purpose of hallmark E.3.

On this basis, such migrations with continuity of legal personality should be out-of-scope of hallmark E.3.

Unlike what was foreseen in the previous version of the FAQ, it is no longer required that the migrating company keeps a permanent establishment in its country of origin, with the same assets/risks/functions.

Definition of EBIT (amendment to §11.5.4):
The definition of EBIT has been amended and now mentions that interest income and expenses, as well as tax income and expenses, should not be taken into account to compute the EBIT of the transferor.

We therefore understand that a transfer of an asset generating interest income (e.g., loan, debt security, etc.) should not be regarded as impacting the EBIT of the transferor and should therefore not be in scope of hallmark E.3.

How to compute the EBIT reduction to assess hallmark E.3 (new item - §11.5.5):
One of the conditions of hallmark E.3 is that the EBIT of the transferor is reduced by more than 50% during the 3 years following the transfer.

The FAQ mentions that to assess this reduction, two computations need to be made:

  • for the next 3 years, what would have been the EBIT of the transferor had the transfer not happened; and
  • for the next 3 years, what should be the projected EBIT of the transferor, taking into account the transfer.

Based on the FAQ, the start date of the 3 years period can either be the date of the transfer or the closing date of the accounting period during which the transfer took place.

The date chosen should be indicated in the DAC6 reporting.

What’s next

The DAC6 FAQ brings some welcome clarifications.

However, the FAQ might still need to be further developed given that, for instance, it does not include guidelines on all hallmarks.

KPMG Luxembourg’s tax professionals are here to assist you regarding any question you may have, as well as helping your company deal with its practical DAC6 obligations (i.e. by providing you with a DAC6 impact assessment, supporting you in your DAC6 strategy paper or performing your reporting obligations on your behalf).