On 30 March 2020, the Luxembourg government published a bill of law with number 7547 (the “Bill”) to deny the tax deductibility of interest and royalties paid or due to associated enterprises established in a country or territory listed on the EU list of non-cooperative countries and territories (“EU Blacklist”).
The Bill is a direct result of the agreement reached by the Member States in the framework of the EU Code of Conduct Group at the end of last year to apply at least one of four defensive legislative measures against non-cooperative jurisdictions.
Pursuant to the Bill, a new paragraph 5 (“New Par. 5”) will be introduced in article 168 of the Luxembourg Income Tax Law (“LITL”) which article deals with the non-deductibility of certain expenses for Luxembourg tax purposes. This New Par. 5 will deny the tax deduction of interest or royalties if the following cumulative conditions are met:
- The beneficiary of the interest or royalties is a collective entity, as defined by Article 159 LITL (i.e. tax opaque entities). If the beneficiary of the interest or royalties is not the beneficial owner, the actual beneficial owner will have to be considered.
- The collective entity, which is the beneficial owner, is an associated enterprise within the meaning of Article 56 LITL of the Luxembourg entity owing the interest or royalties. Article 56 LITL stipulates that two undertakings are associated enterprises where one of them participates directly or indirectly in the management, control or capital of the other, or where the same persons participate directly or indirectly in the management, control or capital of both undertakings; and
- The collective entity which is the beneficial owner of the interest or royalties is established in a country or territory included on the EU Blacklist.
Interest and royalties are not denied deduction if the taxpayer provides proof that the transaction to which the interest or royalties paid or due correspond is used for valid commercial reasons which reflect economic reality.
The EU Blacklist was recently updated and currently includes American Samoa, the Cayman Islands, Fiji, Guam, Oman, Palau, Panama, Samoa, Seychelles, Trinidad and Tobago, the US Virgin Islands and Vanuatu. The relevant EU Blacklist for purposes of New Par. 5, will be the last version published on 1 January 2021. Countries and territories that are subsequently added to the EU Blacklist by the EU are to be taken into account for interest or royalties paid or due from January 1 of the following year. Withdrawals of countries and territories, on the other hand, are to be taken into account with regard to interest or royalties paid or due from the date of publication of the updated EU Blacklist in the Official Journal of the EU.
New Par. 5 will be effective as from 1 January 2021 if the Bill is approved by Luxembourg parliament.
The administrative measure of the Circular L.G. - A n° 64 of 7 May 2018, requiring Luxembourg corporate taxpayers to indicate in their tax returns if they have performed transactions with associated enterprises situated in a country or territory listed on the EU Blacklist, remains applicable.
Our tax team is available to answer any questions you may have.
