Luxembourg - Response to BEPS

Luxembourg - Response to BEPS

Luxembourg has actively participated in the OECD BEPS project since its beginning and has implemented or is in the process of implementing the minimum standards. Luxembourg’s signing of the Multilateral Instrument on 7 June 2017 again demonstrates the country’s strong political commitment to swiftly applying the new rules. Meanwhile, the government continues to stress the need to promote the coordinated implementation of the BEPS Actions at an international level to ensure a level playing field worldwide. Luxembourg’s approach to implementing the BEPS measures is also to be considered in a wider European context, one of its key steps being, as with other European countries, the implementation of the ATA 1 and 2 Directives.


EU anti-tax avoidance directives

Luxembourg will have to transpose most of the ATA 1 Directive’s provisions before the end of 2018. The exit taxation rules (ATA 1 Directive) and most of the ATA 2 Directive’s provisions on hybrid mismatches will have to be transposed before the end of 2019 (before the end of 2021 for the rules on reverse hybrids).

The following requirements of the directives are expected to be transposed:

  • Interest limitation: The transposition of the ATA 1 Directive provisions should significantly change the current rules.
  • Exit taxation: Luxembourg will need to slightly adapt the current rules to fully reflect the scope of the transactions that are covered as well as the extent of the tax deferral rules.
  • General anti-abuse rule: It is expected that Luxembourg will adapt its long-standing current GAAR.
  • Controlled foreign company rules: Luxembourg currently has no controlled foreign company rules.
  • Hybrid mismatches: Luxembourg will need to extend the scope of its current anti-hybrid rules (which resulted from the transposition of the 2016 amendments to the EU Parent-Subsidiary directive). 

A first bill for the ATA 1 Directive transposition is not expected before early 2018. As the ATA 1 and 2 Directives provide only minimal protection for the internal market and lack detailed guidance, their implementation in Luxembourg will have to be closely monitored.

Patent box regime

Following the repeal of its intellectual property (IP) regimeas of 1 July 2016, Luxembourg issued, in August 2017, a bill  introducing a new IP tax regime in line with the “modified nexus approach” developed by the OECD in the BEPS report on Action 5. The bill provides for an 80 percent tax exemption on income derived from patents (including IP assets functionally equivalent to patents) and copyrighted software, as well as a full net wealth tax exemption of these assets. If passed, the new IP regime would be applicable from 2018.

Tax transparency

Luxembourg has implemented numerous measures to reinforce tax transparency in line with the recent EU directives and the BEPS minimum standards. This includes the implementation of the rules on the automatic exchange of information on tax rulings and the rules on non-public CbyC reporting. The Luxembourg government recently indicated that it is not in favor of the public reporting of confidential information and that information should be exchanged only between tax authorities.

Transfer pricing

Luxembourg has further enhanced its transfer pricing regulations by clarifying the legislation in line with the OECD Transfer Pricing Guidelines as laid down in the 2015 final report on Actions 8-10. With this enhancement, Luxembourg emphasizes that the arm’s length principle must also be applied in the context of a wider value chain analysis.

The Luxembourg tax authorities also published, at the end of 2016, a new transfer pricing circular aimed at clarifying the transfer pricing rules for companies principally performing intragroup financing transactions. The new guidance highlights the importance of comparability analysis in the application of the arm’s length principle.

Tax treaties

In the context of the Multilateral Instrument, Luxembourg has decided to insert in its covered tax agreements the principal purpose test rule as an anti-treaty abuse provision, as well as the rules for making dispute resolution mechanisms more effective, which are both minimum standards. Luxembourg has also chosen a few other measures, which are non-minimum standards. On hybrid mismatches, Luxembourg has chosen some of the rules on transparent entities as well as Option A for the application of methods for the elimination of double taxation. On the artificial avoidance of PE status, Luxembourg has chosen Option B of Article 13 on the specific activity exemption. Furthermore, Luxembourg has opted in for the mandatory binding arbitration. Considering the complexity of the rules, the concrete impact of those choices will have to be analyzed for each covered tax agreement.

In the context of new treaty negotiations, Luxembourg has already started to implement the OECD BEPS recommendations on Action 6. Luxembourg signed, in early 2016, a tax treaty with Senegal that adopts some of the minimum standards (e.g. GAAR, including a principal purpose test). It is expected that future treaties will include the same.

Tax competitiveness

During the last months and years, Luxembourg has consistently reaffirmed its political commitment to adapt its tax framework in line with the new international and European standards.

The choices generally made in the context of the implementation of the European directives or the Multilateral Instrument clearly reflect this commitment as well as Luxembourg’s strategic vision to maintain its tax competitiveness.

To further enhance the country’s attractiveness, some measures have been recently taken including the progressive decrease of the corporate income tax rate from 21 percent to 18 percent, leading to a corporate tax rate (combined with other business taxes) of about 26 percent in 2018. The Luxembourg government has indicated that it may consider further decreases in the future.

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