By Danny Beeton, Arendt and Medernach, Luxembourg
With effect from 1 January 2019, the Anti-Tax Avoidance Directive (ATAD) I intra-EU hybrid mismatches rules were introduced into Luxembourg’s domestic law.
On 8 August 2019, the government published draft legislation which would introduce the third country hybrid rules from ATAD II, mainly with effect from 1 January 2020. There would be exclusions for the banking and fund sectors.
The legislation would only apply to arrangements between “associated enterprises” (companies or permanent establishments) or structured arrangements, which have the effect of producing a double income tax deduction or a deduction for one party without a corresponding income inclusion for the other party.
Such effects could arise from the use of hybrid entities or instruments. “Associated enterprises” are defined by a general 50% threshold (voting rights/capital/profit share), except in the case of hybrid instruments (25%), or where there is significant influence over the management of the other party.
Luxembourg has chosen to adopt the exclusions offered by ATAD II in order to provide a pragmatic solution for its important banking and funds industries.
Thus, financial instruments which have been issued with the sole purpose of satisfying the loss-absorbing capacity requirements applicable to the banking sector will be excluded from the deduction/non-inclusion legislation, and Undertakings for Collective Investment in Transferable Securities (UCITS) and non-UCITS “Part II” funds, Specialised Investment Funds (SIFs) and Reserved Alternative Investment Funds (RAIFs), and also other Alternative Investment Funds (AIFs) if they are widely held, hold a diversified portfolio of securities and are subject to investor protection obligations will be excluded from the reverse hybrid legislation.
Also, the commentaries to the Bill indicate that only situations with a substantial risk of tax evasion will be addressed.
Luxembourg taxpayers with cross-border operations with non-EU countries should consider how the draft legislation (and any amendments up to the end of 2019) will affect their activities, taking into account the special Luxembourg features.
They should have in mind that they will be required to hand over, if requested, documents demonstrating that the provisions of the legislation should not apply to their arrangements.
These could include the relevant tax legislation of the other jurisdictions involved and calculations of the tax results of the arrangements.
–Danny Beeton is of counsel in the tax department of Arendt & Medernach, Luxembourg and London.
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