21 août 2019 Droit fiscal
On 8 August 2019, the Luxembourg government tabled Bill No 7466 (the « Bill« ) implementing Council Directive (EU) 2017/952 of 29 May 2017 which aims to neutralise the effects of hybrid mismatches with non-EU countries (the Anti-tax Avoidance Directive II or ATAD II). Whilst the Bill must now pass through the legislative process and is thus subject to amendment, it nonetheless provides certain useful indications, in particular for alternative investment funds.
Extended scope of the anti-hybrid rules
The anti-hybrid rules introduced by Council Directive (EU) 2016/1164 of 12 July 2016 (ATAD I) tackled only intra-EU hybrid mismatches. The new rules extend to non-EU countries and to relations involving a head office and its permanent establishment(s), two or more permanent establishments as well as taxpayers with dual tax residency.
ATAD II targets the following types of hybrid mismatches:
Reverse hybrid mismatches (i.e., mismatches involving Luxembourg tax-transparent entities) are also covered by the extended rules.
Associated enterprises and the concept of « acting together » in the context of investment funds
Outside the context of structured arrangements, the rules solely apply to arrangements between associated enterprises. The Bill develops the concept of an « associated enterprise », which will also take into account situations where an individual or entity acts together with another person in the control of an entity. One helpful clarification was however made for investment funds. The Bill specifically provides that investors holding, directly or indirectly, less than 10% of an investment fund are not deemed to be acting together (unless proven otherwise) and should in principle fall outside the scope of the new anti-hybrid rules.
As regards so-called structured arrangements which may lead to hybrid mismatches outside the context of associated enterprises, the Bill incorporates the definition provided for by ATAD II that targets arrangements expressly designed to produce a hybrid mismatch and situations in which a hybrid mismatch is priced into the terms of the arrangement.
Reverse hybrids and collective investment vehicles
Collective investments vehicles such as UCITs, SIFs, RAIFs and AIFs should, for the most part, fall outside the scope of the rules applicable to reverse hybrid entities.
Denial of tax deductions, inclusion of deducted amounts and taxation of reverse hybrid entities
Hybrid mismatches resulting in either a deduction without inclusion or a double deduction will trigger denial of the deduction (as primary rule) and possibly inclusion of the deducted amount (as secondary rule). Pursuant to the Bill, however, the latter possibility should not apply to hybrid mismatches due to differences in the allocation of payments between certain entities (or between permanent establishments of such entities) and to payments deemed made between certain entities.
Reverse hybrid entities should be subject to tax in Luxembourg on their net income pursuant to the applicable rules.
In all cases, the underlying principle is that the taxpayer bears the burden of proof.
Entry into force
The extended anti-hybrid rules will enter into effect on 1 January 2020, with the exception of those targeting reverse hybrids which will apply as from 1 January 2022.
Luxembourg taxpayers, including investment funds with a presence in Luxembourg, should prepare for the entry into force of the new anti-hybrid rules. To this end, it is important to carefully examine the impact of these rules to all structures.
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