On 26 July 2016 the Luxembourg Government submitted the draft law no. 7020 to the Luxembourg Parliament. The draft law includes a number of direct and indirect tax measures, most of which will impact individual and corporate taxpayers as from 1st January 2017.
Most of the measures covered in the draft law were outlined by the Luxembourg Government on 29 February 2016, and included in our Tax Alert of March 2016.
This Tax Alert summarises some of the main changes covered in the draft law. Further information on the draft law as it goes through the legislative process will be fed in due course in subsequent Tax Alerts throughout 2016.
1. DIRECT TAXATION
Corporate Tax
- Reduction of the corporate income tax (“CIT”) rate from 21% (currently) to 19% in 2017 and 18% as from 2018.
This excludes the unemployment surcharge of 7% (computed on the CIT rate) and the municipal business tax (“MBT”) of 6.75% in the municipality of Luxembourg (i.e. current aggregate CIT and MBT rate of 29.22% in the municipality of Luxembourg).
For companies established in the municipality of Luxembourg, the headline CIT and MBT rate will therefore decrease from 29.22% (currently) to 27.08% in 2017 and 26.01% as from 2018.
- In order to help innovative start-up companies, reduction of the CIT rate from 20% (currently) to 15% in 2017 for companies with an annual taxable income not exceeding EUR 25,000. Introduction of an intermediary tax rate for companies with an annual taxable income between EUR 25,000 and EUR 30,000.
- Introduction of a time limit of 17 years for the carry forward of tax losses. This limitation applies only to tax losses incurred after 31 December 2016. As such, tax losses incurred between 1st January 1991 and 31 December 2016 can be carried forward without time limitation. The oldest tax losses shall be deducted first.
- Increase of the tax credit on additional investments on qualifying assets from 12% to 13% and the tax credit on qualifying global investment from 7% to 8% (for the investment bracket not exceeding EUR 150,000).
The draft law confirms that the investment tax credit shall also apply to investments made in another EEA country, as indicated in a circular-letter issued by the Luxembourg tax authorities (circular-letter 152bis/3 LIR of 31 March 2011). This is as a result of the judgment of the Court of Justice of the European Union of 22 December 2010 in case C-287/10 (Tankreederei I). Here, the court held that “a provision of a Member State pursuant to which the benefit of a tax credit for investments is denied to an undertaking which is established solely in that Member State on the sole ground that the capital goods, in respect of which that credit is claimed, are physically used in the territory of another Member State” is contrary to Article 56 of the Treaty of the Functioning of the European Union.
- Increase of the minimum annual net wealth tax (“NWT”) applicable to “Soparfis” (i.e. holding and financing companies) from EUR 3,210 (currently) to EUR 4,815 as from 1 January 2017.
- Introduction of an optional deferral and carry forward of the yearly deduction for depreciation until the end of the depreciation period of the asset.
- Tax deferral on capital gains on immovable property held by companies in order to facilitate family business transfers to a next generation (subject to conditions).
- Agricultural operations can deduct 30% of the first part of new investments not exceeding EUR 250,000 and 20% for the part exceeding said amount.
- Mandatory electronic filing of corporate tax returns (i.e. CIT, MBT and NWT returns) as from 2017 tax year. Processing of tax files should be automated and quickened. Penalties for late filing increased up to EUR 25,000 and possibly levied every 3 months.
- Introduction of several measures in direct and indirect tax law to fight against tax fraud and money laundering.
Individual Tax
- Abolition of the temporary 0.5% budgetary compensation tax.
- Revision of individual tax brackets in a spirit of solidarity, including the introduction of a new tax bracket of 41% on the part of annual income between EUR 150,000 and EUR 200,004, and a new maximum tax bracket of 42% on the part of annual income exceeding EUR 200,004.
- Increase of the final withholding tax on interest payments made by Luxembourg paying agents to Luxembourg resident individuals (RELIBI) from 10% to 20% (provided the total annual interest income exceeds EUR 250 per individual and per paying agent).
- Introduction of an optional individual taxation for resident or non-resident married couples and registered partners.
- Revaluation of the taxable benefit in kind for company cars: revaluation of the current taxable monthly benefit in kind of 1.5% of the vehicle’s initial purchase price depending on CO2 emissions.
- Introduction of several measures in direct and indirect tax law to fight against tax fraud and money laundering.
2. INDIRECT TAXATION
VAT
- Increased liability of the person(s) in charge of the management of the VAT payer (i.e. the manager, the director or any other person acting de facto or de jure) and the liquidator or beneficiary holding the rights of the VAT payer (ayant droit):
> The person in charge of the management of the company shall be required by law to ensure that the VAT payer complies with its VAT obligations and pays the VAT; or the person could be held personally and severally liable for paying the VAT.
> The liquidator or beneficiary holding the rights of a VAT payer shall be required by law to make sure that any VAT due is paid and disclose any omission or mistake made in VAT returns filed with the VAT authorities. If the disclosure obligation is not complied with, the liquidator or beneficiary shall be considered personally liable for paying the VAT due. He/ she could also be held personally and severally liable for the payment of the VAT if he/ she did not ensure payment of VAT due.
- Introduction of the possibility for the VAT authorities to call for a guarantee (for the VAT due by the VAT payer) from the person in charge of the management - de facto or de jure - or the liquidator or beneficiary holding the rights of the VAT payer. The introduction of this guarantee call procedure is not a surprise since this measure already exists for income tax purposes.
- General increase of tax penalties.
- Increased criminal penalties, including criminal fines and prison sentences.
- Introduction of several measures in direct and indirect tax law to fight against tax fraud and money laundering.
Once voted, the above VAT measures may have major consequences for the persons in charge of the management (and the liquidators and beneficiaries) of VAT payers (based in or outside Luxembourg). For practical reasons, and by referring to judicial procedures regarding income tax, it is to be expected that Luxembourg-based managers and directors will first be affected by these measures.
Registration duties
- Abolition of the 0.24% registration duty due upon the contribution of a debt claim to the capital of a Luxembourg company when evidenced by means of a deed executed by a public notary in Luxembourg.
- Increased tax fines and criminal penalties (including prison sentences) in specific and fraudulent situations.
Authors:
Jean-Luc Dascotte – Partner (jean-luc.dascotte@tiberghien.com)
Valérie Bidoul – VAT Senior Associate (valerie.bidoul@tiberghien.com)
