Luxembourg: Luxembourg amends participation exemption regime
International Tax Review is part of Legal Benchmarking Limited, 4 Bouverie Street, London, EC4Y 8AX
Copyright © Legal Benchmarking Limited and its affiliated companies 2024

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

Luxembourg: Luxembourg amends participation exemption regime


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.


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 (

Atoz – Taxand

Tel: +352 26 940 235


more across site & bottom lb ros

More from across our site

Argentina, Brazil, Mexico and South Africa are among the countries the OECD believes could benefit from the simplified TP rules
It comes despite an offshore enabler penalty existing in the UK throughout the entire period
It is extraordinary that tax advisers in the UK can offer their services without having to join a professional body. This looks like it is coming to an end, Ralph Cunningham writes
Meet the esteemed judges who are assessing the first-ever Social Impact Awards
The ‘big four’ firm has also vowed to spend more on nurturing junior talent; in other news, Blick Rothenberg has hired a pair of tax partners
However, making APAs harder to reach could ‘pose problems’ for UK businesses
Microsoft's director of benefits taxation tells ITR about having no normal days, family inspiration and what makes tax cool
The 61-year-old has run the firm’s UK business since 2020
The report, which again demanded PwC release more information related to the scandal, 'did not go far enough', Australian Greens Senator Barbara Pocock told ITR
Resources needed to manage new compliance and financial reporting requirements will be significant, BDO also said
Gift this article