Luxembourg has introduced controlled foreign company (CFC)
rules for the first time in national legislation as part of its
transposition of the EU's Anti-Tax Avoidance Directive (ATAD
The rules are in effect for Luxembourg taxpayers from their
financial years commencing on or after January 1 2019.
From the two options provided by ATAD 1, under which member
states can choose to impose the CFC charge, Luxembourg has
elected option B, which will allow it to tax a CFC's
undistributed income which has arisen from non-genuine
arrangements that are put in place, essentially for the purpose
of obtaining a tax advantage.
This is to be interpreted as a situation where Luxembourg
resident companies have or retain "significant people
functions" in managing assets of a CFC.
The rules refer to transfer pricing (TP) concepts, including
those developed under the BEPS Action Plan, demonstrating
Luxembourg's full alignment with the OECD TP principles that
already are reflected in its domestic legislation.
Under the CFC rules, a Luxembourg taxpayer is required (as a
general rule) to include in its taxable basis the net income of
a foreign collective undertaking, or a foreign permanent
establishment (PE) that qualifies as a CFC for the purposes of
the application of the CFC rules. A foreign collective
undertaking or PE qualifies as a CFC if:
- The Luxembourg taxpayer, alone or together
with associated enterprises, directly or indirectly: (i)
holds more than 50% of the voting rights, (ii) holds more
than 50% of the capital, or (iii) is entitled to receive more
than 50% of the profits of the foreign collective
- The actual corporate income tax (CIT) paid
by the foreign collective undertaking/PE on its income is
lower than the difference between the CIT that would have
been paid on the same profits in Luxembourg, and the actual
CIT paid in the CFC country; and
- The income of the foreign CFC is not
taxable or is tax exempt in Luxembourg.
Municipal business tax is excluded from the scope of the
application of the CFC rules, so it is disregarded for purposes
of the "subject to tax" test performed to assess whether a
foreign entity/PE qualifies as a CFC.
Similarly, a net CFC income inclusion at the level of a
Luxembourg taxpayer is subject only to CIT, and not to the
municipal business tax.
The net CFC income is to be included in the taxable basis of
a Luxembourg taxpayer in the financial year during which the
relevant financial year of the foreign CFC ends, proportionally
to the ownership percentage (deemed to be) held by the
Luxembourg taxpayer in the CFC.
The net income inclusion is also limited to the revenue
generated by the assets and risks located in the CFC, but
controlled by the significant people functions located at the
Luxembourg taxpayer, and is determined based on the
A tax credit is provided for foreign tax paid by the CFC on
the portion of the net CFC income included in the taxable basis
of the Luxembourg taxpayer.
Christophe De Sutter (firstname.lastname@example.org) and Peter Kovacik (email@example.com)