Luxembourg: Luxembourg adopts exit tax rules aligned with ATAD 1

The Luxembourg Parliament transposed the EU Anti-Tax Avoidance Directive 1 (ATAD 1) into Luxembourg legislation on December 21 2018. One of the measures of ATAD I is a requirement that EU member states adopt exit tax provisions that will apply (at the latest) from January 1 2020 (notably, exit taxation is not one of the recommendations under the OECD BEPS project but was initiated by the European Commission).

Exit tax is designed to prevent taxpayers from avoiding tax by transferring residence, activities or assets out of a country without the exit tax being imposed on deemed unrealised capital gains upon this transfer.

Prior to implementing the ATAD 1 measures, Luxembourg already had exit taxation rules, but those rules were revised to bring them in line with ATAD 1.

Articles 35 and 43 of the Income Tax Law (ITL), which already broadly addresses transfers to Luxembourg, will be amended to specifically cover a transfer of tax residence, the activities of a permanent establishment (PE) and assets from another country to Luxembourg.

With respect to such transfers, Luxembourg will use the value of the assets as determined by the departure state for tax purposes unless that value is not comparable to the fair market value as defined in the ITL. The acquisition date of the assets should correspond to the historical acquisition date, not the transfer date. This rule is designed to achieve the symmetry criterion introduced by ATAD 1, i.e. the same valuation of transferred assets between the country of origin and the country of destination.

Although the scope of the exit tax rules in ATAD 1 is limited to transfers between two EU member states, the modified Articles 35 and 43 of the ITL encompass transfers from any jurisdiction to Luxembourg.

The scope of Article 38 of the ITL relating to transfers out of Luxembourg has been extended to ensure that, in specific cases, taxpayers in Luxembourg are subject to tax on the transfer of assets (either part of an enterprise, a PE or isolated assets as part of the net invested assets) from Luxembourg to any other jurisdiction in an amount equal to the fair market value of the transferred assets at the date of exit less their tax value.

Paragraph 127 of the General Tax Law details the mechanism for deferring the payment of exit tax covered by Article 38 of the ITL. The possibility for indefinite deferral of payment of the tax liability will be abolished on January 1 2020. Instead, the payment of Luxembourg tax arising on a transfer of assets/residence outside the country may be made in instalments over five years only in cases where the transfer is made to a country within the EU or the European Economic Area (in line with ATAD 1). However, where instalment payments are made, Luxembourg has opted not to impose interest on the deferred payments or to require a guarantee to benefit from the deferral.

Although some may argue that exit tax rules may be incompatible with the fundamental EU principle of freedom of establishment, harmonising rules at the level of each member state's domestic law should facilitate the overall tax harmonisation process at the EU level. However, it may be questionable whether allowing each member state to implement exit taxation using various options could impede that harmonisation goal.