Luxembourg Tax Alert 2023-19

The tax landscape continues to change at a fast pace. A lot of new tax measures, part of which have been voted this week, will become applicable in 2024, with more changes coming. This newsletter provides you with an overview of all the main tax measures that should be of importance for 2024, as well as an overview of what is in the pipeline for the years to come.

Luxembourg Pillar 2 Law Enters into Effect

On 20 December, the Parliament passed the Global Minimum Tax bill. A request to be exempted from the second vote was filed with the State Council. The new law will introduce three new taxes to ensure that large multinational groups and large-scale domestic groups with consolidated revenues of EUR 750 million or more (for at least 2 of the past 4 years) are taxed at a minimum rate of 15% on a newly defined broad tax basis. The new rules will apply for fiscal years starting on or after 31 December 2023. 

For more information, please refer to our previous newsletters on the initial bill (KPMG Tax Alert 2023-11) and the amended bill (KPMG Tax Alert 2023-18), including important disclosure requirements to be addressed in the 2023 financial statements, for example in relation to pre-Pillar 2 tax attributes.

On 18 December, the OECD also issued a new set of administrative guidance (PDF, 2MB) to clarify the application of the Pillar 2 rules. This new guidance is already the third set of administrative guidance and covers, amongst others, additional elements for the transitional country-by-country reporting safe harbour, further clarifications on the definition of consolidated revenue threshold, and how to deal with mismatches between fiscal years within the groups in scope. 

New Investment Tax Credit

Starting in 2024, companies in Luxembourg will be able to benefit from a modified investment tax credit. The bill, which was passed by the Parliament on 19 December, modifies the current investment tax credit for “global investments” and complements it by introducing a new investment tax credit to promote digital transformation, as well as ecological and energy transition. A request to be exempted from the second vote was filed with the State Council.

Please refer to KPMG Tax Alert 2023-10 for a detailed overview of the amended investment tax credit. 

At this stage, the amended tax credit would not qualify as a “Qualified Refundable Tax Credit” for Pillar 2 purposes. This may negatively impact the effective tax rate for taxpayers covered by the scope of Pillar 2. We understand that the government is currently reviewing this aspect and might take the necessary steps to make further amendments to the law. 

New United-Kingdom / Luxembourg Double Tax Treaty (DTT)

Following the exchange of ratification instruments between both parties on 22 November 2023, the United Kingdom/Luxembourg DTT, signed on 7 June 2022, is now in force.

The new DTT implements some substantial changes, inter alia regarding tax residency rules, exemption from withholding tax on dividends and royalties, land-rich companies, collective investment vehicles or the method to eliminate double-taxation.

The DTT will be applicable as follows:

• In the United Kingdom
  • With respect to withholding tax, to income derived on or after 1 January 2024
  • With respect to income tax and capital gains tax, for any year of assessment beginning on or after 6 April 2024
  • With respect to corporation tax, for any financial year beginning on or after 1 April 2024
• In Luxembourg:
  • With respect to withholding tax, to income derived on or after 1 January 2024
  • With respect to other taxes on income, and taxes on capital, to taxes chargeable for any taxable year beginning on or after 1 January 2024

As an exception to the above, the existing DTT may still apply to pensions and teachers’ remuneration subject to conditions.

Please refer to KPMG Tax Alert 2022-06 for more information. 

Public Country-by-Country Reporting (public CbCR)

In July, Luxembourg adopted the law transposing the EU Directive on public CbCR. The new rules introduce a new requirement for multinational groups to report certain tax and related group information in an EU Member State’s commercial business register and on the company’s website. The rules will apply to multinational groups whose total consolidated group revenues exceed EUR 750 million in each of the two preceding consecutive financial years, and have either their ultimate parent undertaking in an EU country, or that have operations in the EU through an EU subsidiary or branch of a certain size. In line with the EU Directive the new requirements will apply to financial years beginning on or after 22 June 2024.

For more information, please refer to our KPMG Tax Alert 2023-02.

Additional Transfer Pricing documentation

In March, a draft law was published which, once enacted, would introduce additional TP documentation requirements. Concerning Luxembourg tax resident entities of multinational groups which meet certain thresholds, the draft law introduces, amongst others, the concept of “Master File” and “Local File” documentation requirements with the objective to provide information regarding their global business operations, TP policies and intragroup transactions. Whilst the draft law initially foresaw financial year 2024 to be in scope, it is now likely to be postponed by a year, nevertheless putting Luxembourg in the same direction of travel as the OECD when it comes to transfer pricing compliance. 

For more information, please refer to our KPMG Tax Alert 2023-03.

New amended tax brackets - Personal tax schedule will evolve as from 2024

The coalition agreement 2023-2028 has brought some adjustments in the personal tax schedule starting as of 1 January 2024. The personal income brackets will be adjusted considering both the last four cost of living indexations and the former adjustment brackets enacted in 2023, resulting in a potential tax decrease whose availability is dependent on the level of income and the tax class of the individuals concerned.

Additional changes to the Tax credits will be introduced as well:

• A new tax credit will be introduced to compensate CO2 tax costs on lower salary ranges reaching an annual threshold of EUR 144 per worker, which will gradually reduce to EUR 0 for wage earners deriving annual employment income reaching the threshold of EUR 80,000.
• Crédit d’impôt Conjoncture (CIC) will reach its limitation and will no longer be in force as of 1 January 2024.
• Wage-earner tax credit (CIS) of EUR 600 per year will apply which will gradually reduce to EUR 0 for wage earners deriving annual employment income reaching the threshold of EUR 80,000.

Teleworking with Germany

Germany and Luxembourg are in the process of ratifying the Protocol to their bilateral tax treaty.

The law approving the modification of the Germany-Luxembourg tax treaty concluded on 6 July 2023 provides interesting possible changes for cross-border workers, which, amongst other changes, includes: 

• The threshold of 19 workdays being increased to 34 workdays per calendar year for both private workers and, subject to conditions, public workers.
• The introduction of a buffer of less than 30 minutes of work per workday worked outside Luxembourg and not considered for the counting of the workdays’ threshold of the worker.
• Other considerations covering on-call duties, pension, new exit taxation events, and dismissal indemnities which may affect the taxation of the concerned individuals.

The protocol provisions would apply as follows: (i) on or after 1 January following the year in which the protocol has entered into force for provisions, such as the new exit taxation, pensions, and dismissal indemnities (1 January 2024 or 1 January 2025 depending on when the instruments of ratification are exchanged), and (ii) 1 January 2024 for provisions, such as the 34-workdays, the 30-min buffer and the on-call duties. 

New Reporting Obligations on Payment Services Providers

As of next year, certain payment service providers will be subject to new reporting requirements under the “Central Electronic System of Payment” or shortly, CESOP. 

For more information, please refer to our KPMG Tax Alert 2023-01.

Increase in VAT Rates

As of 1 January 2024, the temporary VAT rate cuts as agreed during the “anti-inflation package” will end and go back to their normal rate (17%, 14%, 8%, and 3%). For more information, please refer to our KPMG Tax Alert 2023-16.

Director’s fees

Changes are to be expected in 2024 in relation with the VAT treatment of director’s fees following the CJEU’s TP case law. We will soon publish a KPMG Tax Alert in this respect. 

To comply with the General Data Protection Regulation (EU 2016/679) (“GDPR”), the law of 16 May 2023 amends the CRS Law to provide that each Luxembourg Reporting Financial Institution has the obligation to inform and provide to each individual all CRS information before the information is reported to the ACD.

ESG will continue to play an important role during 2024, influencing the business decisions with a view to the future. ESG will continue to have a significant impact on the tax function. Heads of Tax and Tax Professionals will need to identify how best to engage and partner with the broader business, as well as transform their function to drive value, manage costs, and mitigate risk, all of which will be part of their contribution to the wider organizational ESG agenda.

Check out the "ESG to-do list for tax leaders" and explore how tax functions can and should add value connected to ESG. Additional blogs and videos exploring each of the core topics can be found on our Tax ESG homepage.

• Directive on Administrative Cooperation (DAC) 8: In May 2023, the Economic and Financial Affairs Council of the EU (ECOFIN) approved an amendment to the DAC to cover the exchange of information on crypto assets, as well as tax rulings for individuals (DAC8). EU Member States are now required to transpose the Directive into national law and the new rules should apply as from 1 January 2026 (with some exceptions). For more information, please refer to the Euro Tax Flash from the KPMG’s EU Tax Centre. 

• Proposed EU Directive on Faster and Safer Relief of Excess Withholding Taxes (FASTER):  The FASTER Directive proposal was published on 19 June 2023 introducing a common EU-wide system for withholding tax on dividend or interest payments. Key proposals include a common EU digital tax residence certificate, “relief at source” procedure, a “quick refund” system, and a standardised reporting obligation.  If agreement is found, the proposal would enter into force on 1 January 2027. Please refer to this Euro Tax Flash for an overview of FASTER and to this Euro Tax Flash for an update on the latest status. 

• Proposed Transfer Pricing (TP) Directive: In September, the EU Commission issued a proposed Directive to incorporate into EU law the OECD arm’s length principle and OECD Transfer Pricing Guidelines and consequently to provide for harmonization on the application of TP rules within the EU. As for FASTER, reaching agreement on this proposed Directive is a priority by the upcoming Belgian Presidency. According to the proposal, the rules should apply as from 1 January 2026. For more information, please refer to our newsletter (KPMG Tax Alert 2023-13) and the EU Tax Flash prepared by the KPMG EU Tax Centre.

• Proposed Directive on Business in Europe – Framework for Income Taxation (BEFIT):  Also in September, the EU Commission issued a proposal for a Directive on a new corporate tax system in the EU. BEFIT aims to reduce complexity and compliance costs, by providing common rules for determining the corporate tax base of EU-based entities of a group and for the allocation of profits between Member States, based on a pre-defined formula (formulary apportionment). The Belgian presidency is planning on advancing on this proposal, although the priority is not as high as for FASTER and the proposed TP Directive. For more information, please refer to our newsletter (KPMG Tax Alert 2023-13) and the EU Tax Flash prepared by the KPMG EU Tax Centre. 

• Proposed Directive on Establishing a Head Office Tax system (HOT) for SMEs: On the same day as the TP and BEFIT proposals, the EU Commission also published a proposal for a Directive that would benefit small and medium sized enterprises (SME). This proposal would provide certain SME entities, which have permanent establishments in other EU Member States, to calculate their tax liability based on the tax rules of the EU Member State of their head office. For more information, please refer to our newsletter (KPMG Tax Alert 2023-13) and the EU Tax Flash prepared by the KPMG EU Tax Centre.

• Proposed Directive to Prevent the Misuse of Shell Entities (Proposed Unshell Directive/ so-called “ATAD3”): Since the Unshell proposal was issued on 22 December 2021, the text of the Directive has been subject to discussions between EU Member States. In its report issued in December 2023, the Economic and Financial Affairs Council of the EU (ECOFIN Council) indicates that the two-stage approach (automatic exchange of information / best practices on applying tax consequences to be exchanged between Member States and evaluated) proposed in September did not reach consensus. The Spanish Presidency then submitted a new proposal in November, reflecting an alternative way forward suggested by the European Commission. This new version was based on a minimum standard approach (meaning that Unshell would not work as a safe harbor) and included a tool box of consequences. The ECOFIN has however noted that no agreement was reached and that further discussions will be needed to find compromise solutions. 

• SAFE (Securing the Activity Framework of Enablers): The goal of the SAFE initiative is to supervise enablers who design, market and/or assist in the creation of tax arrangements or schemes in non-EU countries that may lead to tax evasion or aggressive tax planning for the EU Member States.  
  As this initiative seems to be linked to the Unshell Directive, it is likely that its potential adoption will only progress when the implementation of the ATAD3 does as well.

• Pillar 1: On 18 December 2023, the OECD provided a statement (PDF, 1.2MB) with an update to the timeline to finalise the Multilateral Tax Convention (MLC) on Amount A, which would reallocate certain taxing rights to market jurisdictions. According to the statement, the OECD aims to finalise the MLC by March 2024 with a signing ceremony in June 2024. For the MLC to enter into force, it needs to be ratified by at least 30 jurisdictions including the headquarters jurisdictions of at least 60% of MNEs currently expected to be within Amount A’s scope.