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Luxembourg: Luxembourg amends participation exemption regime

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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

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