a. Context and purposes of country by country reporting
Luxembourg adopted on 23 December 2016 the law on country by country reporting (the “CbCR Law”), implementing the Council Directive (EU) 2016/881 of 25 May 2016 amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation.
The CbCR Law applies to information to be reported as from fiscal year 2016 and which will need to be filed before 31 December 2017.
The CbCR Law aims at reinforcing the control of the transfer pricing of multinational enterprise groups (“MNE Groups”) by the participating jurisdictions (including EU Member States and jurisdictions that are for instance party to the OECD Multilateral Competent Authority Agreement on the Exchange of CbC Reports ratified by Luxembourg on 27 January 2016).
b. Scope of CbCR
Ultimate parent entities -as defined within the CbCR Law -of MNE Groups with a consolidated group turnover of at least EUR 750 million during the immediately preceding fiscal year, are required to file a country
by country report (“CbC Report”) with the Luxembourg tax authorities (“LTA”) within 12 months following the last day of the relevant fiscal year.
Luxembourg tax resident entities may also be appointed to (under the so-called “surrogate mechanism” or under the so-called “secondary mechanism”) file a CbC Report with the LTA in case the jurisdiction of tax
residence of a non-Luxembourg ultimate parent entity of an MNE Group does not apply or does not apply in an effective manner the CbC rules.
In Luxembourg, the CbC Report will mandatorily and exclusively be filed through an online platform that is expected to be set up soon by the LTA, but is not available at the moment.
c. Content of the report
The CbC Report must contain, for each jurisdiction in which the MNE Group carries out its activities, inter alia information pertaining to the entities composing the MNE Group and their jurisdictions of incorporation and of tax residency, aggregate information regarding the turnover, accounting profit before tax, income tax paid, income tax due, equity, undistributed income, number of employees and tangible assets except cash.
d. Potential sanctions and status notification
Sanctions of up to EUR 250,000 may apply to MNE Group entities required to file a CbC Report with the LTA failing to comply with their obligations, or to declare their status within the MNE Group they belong to, i.e. whether they are an ultimate parent entity, a surrogated entity, or an entity subject to the secondary mechanism, the so-called “Status Notification”.
e. Timing for Status Notification
As a rule, the Status Notification should be made by the Luxembourg resident entity member of an MNE Group on the last day of the relevant fiscal year at the latest.
Because of the recent introduction of these new provisions into Luxembourg law, the LTA posted on their website in a FAQ section, that for fiscal year 2016, such notification may be made until 31 March 2017 without incurring the risk of a fine.
Further, the LTA is expected to publish additional guidance and clarification shortly via its online FAQ section.
Considering the short deadline, it is recommended that taxpayers review the CbCR status of their entities in Luxembourg as soon as possible so as to timely file their Status Notification which has to be done for every Luxembourg entity subject to CbCR rules.
f. What about investment entities/funds?
Regarding the particular sector of investment funds, the OECD Guidance on the Implementation of Country-by-Country Reporting published in December 2016 specifies that there is no general reporting exemption for investment funds and that it is recommended to follow the accounting consolidation rules applicable to the investment entity in its jurisdiction.
Most regulated investment vehicles such as risk capital companies (“SICAR”) or Specialised Investment Funds (“SIF”) and Reserved Alternative Investment Funds (“RAIF”) are expressly exempted from the obligation to consolidate their investment subsidiaries. Hence these should not be subject to CbCR.
Unregulated private equity investment entities may under Luxembourg accounting rules, be exempt from the obligation to consolidate their investment subsidiaries in their commercial accounts provided that they comply with certain conditions, as laid down in the Opinion of the Commission for Accounting Standards (the “Opinion”) (Avis CNC 2-1 of 18 December 2009). The Opinion is itself based on Article 317 (3) c) of the Law of 10 August 1915 on Commercial Companies (the “Company Law”), which states that “an enterprise does not need to be consolidated if: […] c) the shares or interests of this enterprise are held exclusively with the aim of a future sale.”
The conditions mentioned in the Opinion are those characterising a venture capital/private equity enterprise. The opinion further states that article 317 (3) c) of the Company Law can be invoked by any Luxembourg company, thereby not ruling out other investment entities. We therefore submit that other unregulated entities, such as real estate funds or debt funds, could invoke the same exemption if they have an investment policy similar to venture capital/private equity funds and if they should meet the same conditions.
The impact of CbC reporting obligations may therefore in practice be limited on the private equity and investment fund sector. This should however be assessed in a case by case analysis.
This being said, Luxembourg investment funds or companies may be invested in by a Luxembourg holding company which itself is in the head of an MNE Group and which will thus be subject for its group to the CbCR rules. Since, in practice, many acquisitions by investment entities/funds have been structured through a so-called Luxembourg top holding company, it will need to be analysed whether such a company needs to consolidate its subsidiaries and hence file the CbCR as the head of the MNE Group or can, in accordance with the opinion of the Commission for Accounting Standards, avail itself of the consolidation exemption as a company acting exclusively on behalf of the investment entity/fund meeting the conditions of the exemption.
