3 avril 2020 Droit fiscal
On 30 March 2020, the Luxembourg government filed Bill of law No 7547 implementing
certain guidelines approved by the EU Council on 5 December 2019 related to
the non-tax deductibility of interest and royalty payments made to entities located
in jurisdictions appearing on the EU list of non-cooperative jurisdictions.
The new measure would apply to accruals and payments made to related parties as of 1 January 2021, based on a list of jurisdictions to be proposed by the Luxembourg government during the second half of 2020. This list will take into consideration the EU list of non-cooperative jurisdictions at the date of the proposal. Where a taxpayer provides evidence that a transaction was made for valid business reasons that reflect economic reality, such accruals or payments will theoretically remain tax deductible.
Under the proposed measure (which will take the form of a paragraph added to Article 168 of the Luxembourg income tax law (“LITL”)), interest or royalty accruals or payments (the draft law gives a similar definition of interest and royalty to that in Article 2 of Council Directive 2003/49/EC and in tax treaties concluded by Luxembourg) should be non-tax deductible, at the level of the Luxembourg paying entity, if all of the following conditions are met:
The addition of jurisdictions will be taken into account with effect on accruals or payments made as of 1 January of the following year. The delisting of jurisdictions will be taken into account with effect on accruals or payments made from the date of publication of the EU list in the Official Journal of the European Union (or an earlier version of the EU list during the same year) that withdrew the relevant jurisdictions.
Where the taxpayer provides evidence that a transaction was made for valid business reasons that reflect economic reality, such accruals or payments will theoretically remain tax deductible.
Payments outside the scope of this rule may nevertheless become non-tax deductible by application of other domestic rules, such as the limitation on interest or the anti-hybrid rules.
Finally, the tax circular2 of 7 May 2018 stating the measures to be taken by the tax authorities where a Luxembourg company has transactions with listed non-cooperative jurisdictions continues to apply. Please refer to our newsflash for more details on the circular.
The proposed measures should enter into force for interest or royalties accrued or paid as from 1 January 2021.
Taxpayers performing transactions with related entities located in jurisdictions included on the EU list of non-cooperative jurisdictions will need to assess the impact of this new measure on their operations, bearing in mind that the EU list may be updated in the course of 2020 and in subsequent years.
The draft bill of law will now follow the normal legislative process. The final vote on the law is expected to be held in the coming months.
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