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 recipient of the interest or royalties is a collective entity (as indicated in Article 159 of the LITL, which per se does not include partnerships). If the recipient is not the beneficial owner, the actual beneficial owner of the payments will be taken into account for the analysis.
- The recipient is a related party within the meaning of Article 56 of the LITL (dealing with Luxembourg transfer pricing rules). Two entities will generally be deemed to be related parties where one company controls, actively helps manage or holds a certain portion of the share capital of the other company. One company will generally be deemed to be controlled by another company where more than 50% of its share capital is held by that company, or where that company has the majority of voting rights at its general meeting of shareholders.
- The recipient is established in a country or territory appearing on a list of non-cooperative countries for tax purposes. The government will propose the first list together with the annual budget legislation during the second half of 2020. It should be based on the EU list of non-cooperative jurisdictions for tax purposes at the time of the proposal. Thus, if the government makes the proposal in November 2020, it should in principle take into consideration the updated EU list that is expected to be issued in October 2020.
The current EU list, which was last revised in February of this year1, includes the following jurisdictions: American Samoa, Cayman Islands, Fiji, Guam, Oman, Palau, Panama, Samoa, Seychelles, Trinidad and Tobago, the US Virgin Islands and Vanuatu. Following commitments made by the Cayman Islands government in this respect, Cayman Islands is expected to be delisted in October of this year.
This list will be updated once a year upon proposal of the government to the Parliament in the context of annual budget legislation (if the EU list has been updated). Each new list will be based on the EU list of non-cooperative jurisdictions as published in the EU Official Journal at the time of the proposal.
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.
Entry into force
The proposed measures should enter into force for interest or royalties accrued or paid as from 1 January 2021.
Concluding remarks
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.
