Luxembourg: Luxembourg amends participation exemption regime
International Tax Review is part of the Delinian Group, Delinian Limited, 4 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 00954730
Copyright © Delinian Limited and its affiliated companies 2024

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

Luxembourg: Luxembourg amends participation exemption regime

schmitz-merle.jpg

Samantha Schmitz-Merle

On August 5 2015, a draft law was presented to Parliament, which implements some recent amendments to the EU Parent-Subsidiary Directive (PSD) into Luxembourg law. The amendments aim to stop situations of double non-taxation created by the use of certain hybrid instruments and to incorporate a general anti-abuse rule (GAAR) into the EU Parent-Subsidiary regime. The amendments will apply to dividend income allocated after December 31 2015.

Eradicating double non-taxation

Beginning in 2016, dividends received by a Luxembourg company from another EU undertaking within the meaning of the EU PSD will no longer benefit from the corporate income tax (CIT) exemption provided by article 166 Income Tax Law (ITL) and from the municipal business tax (MBT) exemption provided by paragraph 9 of the MBT Law if the dividends are tax deductible in the other EU member state.

In other words, if the EU jurisdiction of source (jurisdiction of the subsidiary of the Luxembourg company) qualifies the instrument as a debt instrument and treats the payment made under this instrument as a tax-deductible interest payment, Luxembourg will no longer exempt the dividend income at the level of the Luxembourg company, based on the Luxembourg participation exemption regime.

Provided the other conditions of the participation regime are met, the exemption regime will only remain applicable if the income is treated as a dividend and is, as such, not tax deductible in the source country.

New GAAR

Beginning in 2016, a new general anti-abuse rule (GAAR) will be introduced which will apply both to the CIT and MBT exemption regime of dividends received by Luxembourg companies, and to the regime of withholding tax exemption on dividends paid by Luxembourg companies to other EU companies.

According to the draft law, dividends received by a Luxembourg company from another EU undertaking within the meaning of the EU PSD will no longer benefit from the Luxembourg CIT and MBT exemption from article 166 ITL and section 9 MBT Law if "they are allocated as part of an arrangement or series of arrangements that, having been put into place for the main purpose or one of the main purposes of obtaining a tax advantage which defeats the object or purpose of this Directive, are not genuine having regard to all relevant facts and circumstances. An arrangement or a series of arrangements, which may comprise several steps or parts, is considered as 'not genuine' if it is not put into place for valid commercial reasons which reflect economic reality."

In addition, dividends distributed to another EU undertaking will no longer benefit from the Luxembourg withholding tax exemption provided by Article 147 ITL if the allocation of the dividend is made under the conditions defined in the GAAR mentioned above.

The new GAAR is not commented further in the draft law. It will, as most GAARs generally do, since they are a matter of many various interpretations, introduce some legal uncertainty, pending deeper analysis of the concept by EU bodies (especially the ECJ). What is certain is that, to reduce the chances of GAAR application, taxpayers will have to scrutinise economic substance more than ever when structuring their investments within the EU.

What will not change?

The draft law only implements recent changes at EU level, which means that:

  • The amendments will only impact the tax treatment of dividends received from or paid to another EU undertaking and will not apply to dividends received from or paid to non-EU undertakings;

  • The amendments to be introduced will only impact dividend distributions, meaning that the Luxembourg capital gains exemption regime remains unchanged (no GAAR introduced); and

  • The conditions for the exemption of the participation for net wealth tax purposes remain unchanged (no GAAR introduced).

Other changes

Lastly, the draft law amends the list of EU undertakings within the meaning of the EU PSD so as to add new legal forms of Romanian and Polish companies.

Samantha Schmitz-Merle (samantha.merle@atoz.lu)

Atoz – Taxand

Tel: +352 26 940 235

Website: www.atoz.lu

more across site & bottom lb ros

More from across our site

Despite the relief, Brazil’s government has also presented a bill which seeks to re-impose a tax burden on companies’ payroll, one local tax specialist told ITR
Jeremy Brown arrives at the firm after a near 16-year career with Deloitte
PwC could elect a woman into the senior leadership position for the first time; in other news, KPMG Australia has extended its CEO’s term
The Senate report into PwC’s scandal is titled ‘The cover up worsens the crime’
Law firms that are conscious of their role in society are more likely to win work, according to a survey of over 23,000 in-house professionals
The firm’s tax business generated a quarter of HLB’s overall revenues in 2023
While successful pillar two implementation will require collaboration across all units, a combination of internal and external tax advice is at the centre of the effort
Binance has also been accused of manipulating foreign exchange rates via currency speculation and rate-fixing
Six individuals should have raised questions over information they received but did not breach professional standards, according to the firm
The partnership of KPMG UK has installed Holt for a second term as CEO and senior partner; in other news, a Baker McKenzie partner has sued the IRS
Gift this article