Luxembourg adopts EU Anti-Tax Avoidance Directive

Luxembourg transposed the OECD and European Union’s tax avoidance measures into domestic law in December 2018, addressing hybrid mismatch rules, CFC rules, and interest limitation rules, among others. As the world’s second largest fund hub,  Pierre-Régis Dukmedjian and Alejandro Dominguez explore the potential impact for taxpayers.

This article was originally published in International Tax Review- Special feature – March/April

The OECD’s BEPS final report contained a number of action plans to deal with base erosion and profit shifting. Published
on October 5 2015, these include neutralising the effects of hybrid mismatch arrangements (Action 2), computation of controlled foreign company income rules (Action 3), limiting base erosion involving interest deductions and other financial payments (Action 4), and preventing the artificial avoidance of permanent establishment (PE) status (Action 7).

The EU Council stressed the need to find solutions at an EU level consistent with the OECD’s BEPS conclusions. Accordingly, EU directives were considered as the “preferred vehicle” to implement such conclusions.

As a result, these action plans are reflected in the EU Council Directive 2016/ 1164 of July 12 2016, laying down rules against tax avoidance practices that directly affect the functioning of the internal market (ATAD).

Accordingly, Luxembourg recently transposed the ATAD into domestic law (ATAD Law) on December 21 2018. This law also includes some additional measures not specifically mentioned in the ATAD.

This article considers the main measures adopted in the ATAD Law and what they mean in practice for taxpayers.

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