ATAD 1 implemented in Luxembourg

ATAD 1 has been published, laying down rules against tax avoidance practices that directly affect the functioning of the internal market.

After the related draft law being affirmably voted by the Luxembourg Chamber of Deputies on 18 December 2018, the law of 21 December 2018 transposing the Council Directive (EU) 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices that directly affect the functioning of the internal market (ATAD 1) was adopted and published.

As expected ATAD 1 was transposed by the Law within the deadline contained in such Directive.

The Law:

  • incorporates the options and choices made by the Luxembourg Government when transposing the ATAD 1 (but does not cover the amendments, introduced by EU’s amending Directive on hybrid mismatches with third countries), and
  • covers two additional points aiming to avoid/reduce situations of double non-taxation.

The below table provides an overview of the tax matters covered by the Law.

Tax matters Description Application date
ATAD 1 Interest limitation
  • Applies to corporate taxpayers and excludes “financial undertakings” and “stand alone entities” (as defined in the Law).
  • The limitations of 30% of the taxpayer’s taxable earnings before interest, tax and amortisation or up to an amount of EUR 3m, whichever is higher, will apply to interest expenses on all forms of debt and other costs economically equivalent to interest and expenses incurred in connection with raising of finance, but not exclusively (borrowing costs) exceeding interest income and other economically equivalent taxable income.
  • The above limitation rule should not apply (i) if, under certain conditions, the taxpayer can demonstrate that the ratio of its equity to its total assets is equal to, or higher than, the equivalent ratio of the group and (ii) to loans which were concluded before 17 June 2016 (but not on ulterior modifications of such loans) or loans financing long-term infrastructure projects.
  • In certain conditions, the unused exceeding borrowing costs can be carried forward for five years.
  • A motion has been introduced so a new law is adopted in the first semester of 2019 and Luxembourg implements the option provided by ATAD 1, in the sense of applying the interest limitation rule at the level of tax consolidated groups. Indeed, the law voted did not incorporate such option.
  • Certain securitisation companies may be under the scope of the interest limitation rule. A motion has been introduced to assess the impact that the new rules will have with respect to securitisation companies.

01 January 2019

Controlled foreign company (CFC)
  • Applies to corporate taxpayers.
  • The non-genuine arrangements option in the ATAD 1 have been retained by Luxembourg. Therefore, non-distributed income of a company qualifying as a CFC which arises from non-genuine arrangements put in place with the purpose of obtaining tax advantages will be taxed in Luxembourg if such CFC is held, directly or indirectly of more than 50% of voting rights or capital or receives more than 50% of profits from CFC, by a Luxembourg controlling taxpayer alone or together with associated enterprises.
  • CFC rules should not apply if the profits of the CFC are less than EUR 750.000 or the profits of the CFC amount less than 10% of its operating costs for the tax period.
01 January 2019
Hybrid mismatches
  • Applies to corporate taxpayers.
  • Applies only to hybrid mismatches within European Union.
  • The elimination of the tax advantages arising from a hybrid mismatch, Luxembourg should deny the deduction if the payment (i) has been deducted in the source state or (ii) is not taxed in the recipient state.
01 January 2019
General anti-abuse rules (GAAR)
  • Applies to any type of taxpayers.
  • Applies to any type of Luxembourg taxes.
  • Luxembourg anti-abuse rules are replaced in order to align with the GAAR included in ATAD1. An abuse of law should exist if the main purpose (or one of the main purposes) of the legal route used was to circumvent or reduce the tax to be paid and the route is contrary to the purpose of the tax law, is not authentic to the ensemble of the facts and circumstances. The legal route is not authentic if it is not used for valid economic reasons which reflect the economic reality.
01 January 2019
Exit tax
  • Applies to both corporate and individual taxpayers.
  • The transfer of assets from Luxembourg should be done at fair market value and any gains derived on such transfer should be taxed accordingly. The exit tax may be paid in instalments over a period of five years on the transfer done within EEA.
01 January 2020
Additional amendments Tax neutral exchanges
  • Applies to both corporate and individual taxpayers.
  • This tax measure updates article 22 bis of the Luxembourg income tax law (rollover) which provides for a deferral of tax upon the conversion of the convertible debt into capital. As from 2019 the conversion of a convertible debt into capital will no longer be considered as tax neutral, Therefore, this conversion should be considered as a sale of the convertible debt followed by an acquisition of the shares at fair market value.
01 January 2019
Permanent establishment
  • Applies to both corporate and individual taxpayers.
  • The definition of the permanent establishment is updated by introducing a new paragraph. The purpose of this paragraph is to resolve conflicts of interpretation on the existence of a permanent establishment as a result of the interpretation of the domestic law and a relevant double tax treaty. In this case, the criteria used to determine if a permanent establishment exists, in a country with which Luxembourg has a double tax treaty, are the criteria defined in such a tax treaty.
  • Luxembourg may ask for a certification from other jurisdictions as to the existence of the permanent establishment to avoid double non-taxation.
01 January 2019

 For further information please contact any member of the Luxembourg tax team.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.