On March 30, 2020, the Bill n°7547 (hereafter the “Bill”) amending article 168 of the Corporate Income Tax Law (hereafter “CIT”) was introduced to the parliament in order to implement the European Council’s guidelines of 5 December 2019 (which encourage all EU Member States to adopt legislative defensive measures) into the Luxembourg law.
The purpose of the Bill is to deny the deductibility of certain financial expenses incurred by a Luxembourg company and to combat in a targeted manner certain operations which are carried out with related companies established in countries or territories considered to be non-cooperative from a tax perspective.
As a general principle, all operating expenses exclusively caused by the activities of a company are tax-deductible. However, certain specific expenses described under article 168 CIT are not deductible for tax purposes.
The Bill proposes to add under article 168 CIT a new paragraph according to which certain interest and royalties would not be tax-deductible if the following criteria are fulfilled:
- They are recorded in the Profit and Loss account as an expense, whether paid or accrued; and
- the recipient is a collective undertaking under the meaning of article 159 CIT (i.e. excluding “tax transparent” entities) and is the beneficial owner on the interest or royalties. If the recipient is not the beneficial owner, only the latter should be taken into consideration for the purpose of applying the new provision; and
- the recipient is related to the Luxembourg entity within the meaning of Article 56 CIT (i.e. companies are related where a company participates directly or indirectly in the management, control or capital of another company, or where the same persons participate directly or indirectly in the management, control or capital of two companies); and
- the recipient is established in a country or a territory appearing on the list of non-cooperative jurisdictions for tax purposes issued by the European Council (i.e. territories which are late with the implementation of the tax reforms to which they had committed or do not cooperate with the EU process); and
- the Luxembourg entity fails to demonstrate that such interest or royalties are justified by genuine business reasons and reflect the economic reality.
The definition of interest and royalties in the Bill is consistent with article 2 of the EU Directive 2003/49/EC and with articles 11 and 12 of the OECD Model Convention:
Interest expense means any amounts paid or accrued “related to debt-claims of every kind, whether secured by a mortgage or not and whether or not carrying a right to participate in the debtor’s profits” (e.g. expenses related to securities and from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures). Penalty charges for late payment shall not be regarded as interest.
Royalties expense means “amounts of any kind paid or accrued as a consideration for the “use of”, or the right to use certain goods” (e.g. payment for any copyright of literary, artistic or scientific work, including cinematography films and software, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience; payments for the “use of”, or the right to use, industrial, commercial or scientific equipment shall be regarded as royalties).
If the Bill is voted, the new provision will be applicable as from, 1 January 2021. The list of non-cooperative jurisdictions applicable will be the latest version of the list as published in the EU official journal.
The current EU list (as revised on 18 February 2020) shows the following territories: American Samoa, Cayman Islands, Fiji, Guam, Oman, Palau, Panama, Samoa, Seychelles, Trinidad and Tobago, US Virgin Islands, and Vanuatu. The list should be updated in October 2020.
It is not excluded that the governments of the territories above would have taken the necessary steps to fulfill their commitments in the meantime and therefore some would probably be removed from the next updated list.
Going forwards, the list of territories concerned by the new provision will be updated on a yearly basis as specified in the Bill.
Where the Luxembourg taxpayer can demonstrate the existence of sounds business reasons taking into account all the facts and circumstances, interest or royalties will remain tax-deductible, subject to the application, where applicable, of other articles of the CIT which may lead to a rejection of the deduction (e.g. the application of the recapture rule) or a limitation of the deduction (e.g. the application of the interest limitation rule).
For the fiscal year 2021, and assuming the Bill is approved by the parliament in 2020, only interest and royalties expenses due or accrued as from January 1, 2021, and of which the recipient is located in non-cooperative jurisdictions based on the latest list prior to 1 January 2021, will be relevant for the application of the new provision in the relevant corporate income tax returns.
As regards the fiscal years 2019 and 2020, the Luxembourg tax authorities will continue to apply the defensive administrative measures put in place since 2018 and which oblige the Luxembourg entities to disclose in their corporate income tax returns all transactions realized with related enterprises located in non-cooperative jurisdictions based on the latest EU list available at the end of the relevant fiscal year.
The Bill will now be discussed at the level of the parliament. We will continue to follow up and to keep you to informed as the discussions on the Bill unfold.
Should you have further questions please contact us https://www.avocats-sagnard.com/contact-us/.
SAGNARD & ASSOCIES