By Paloma Schwarz Martínez
Luxembourg’s Parliament, on 18 December 2015, adopted Bill n° 6847 to implement recent amendments to the Parent-Subsidiary Directive (PSD) concerning hybrid instruments and antiabuse measures into Luxembourg’s corporate tax code as well as to expand the Luxembourg tax unity regime to conform to the jurisprudence of the European Court of Justice. The bill also extends the exit tax’s deferral upon migration to countries outside the European Economic Area and modifies the investment tax credit for the maritime sector and the tax credit for hiring unemployed individuals.
Changes to Luxembourg participation exemption
Nowadays, Luxembourg is one of the most popular locations for setting up a holding company. According to the Luxembourg Corporate Tax Code (LCTC), dividends received by a Luxembourg corporate entity and derived from a qualifying participation may be exempt from corporate income tax. Qualifying participations may be held in a collective entity listed and covered by the PSD or an entity located in a third-country and fully subject to an income tax comparable to the Luxembourg corporate income tax. Moreover, capital gains derived from the disposal of shares may also be exempt from corporate income tax.
Apart from that, Luxembourg provides for an exemption from dividend withholding tax on dividends paid by a fully taxable Luxembourg resident company to companies listed and covered by the PSD and companies resident in a third-country provided that Luxembourg has concluded a tax treaty and that the company is subject in that country to a corporate income tax comparable to the Luxembourg corporate income tax.
On 8 July 2014, the European Council formally adopted an amendment to the Parent-Subsidiary Directive (PSD), whose objective is the prevention of double non-taxation of cross-border intragroup dividends deriving from hybrid loan arrangements.
A few months later, on 27 January 2015, the European Council enacted a mandatory general anti abuse rule (GAAR) to be included in the PSD. Under the GAAR, Member States shall not grant the benefits of the PSD to wholly artificial arrangements i.e., arrangements which have not been set up for business reasons and whose sole purpose is the receipt of a tax advantage. Member States were required to transpose both provisions into national legislation by 31 December 2015.
Bill n° 6847 transposes the above mentioned changes to the PSD. Consequently, as of 1 January, income distributed from a qualifying EU subsidiary to a Luxembourg parent company will not benefit from the Luxembourg participation exemption regime if the income led to a deduction from the tax base at the level of the distributing company.
However, the legislation does not provide for more stringent rules. Therefore, hybrid loan arrangements concluded between a Luxembourg parent company and a subsidiary located outside the EU do not seem to be covered by this change in legislation. Similarly, the antiabuse provision only appears to apply to dividends distributed and received in an EU context.
Expanding the tax unity regime
Under former Luxembourg rules, offsetting tax losses within a corporate group were only permitted provided that the parent company was a fully taxable Luxembourg company or a permanent establishment of a non-resident company, fully subject to tax corresponding to Luxembourg income tax. Furthermore, the Luxembourg corporate tax code only allowed resident companies to be part of a tax consolidation group.
Bill n°6847 has expanded the Luxembourg tax unity regime by providing for horizontal tax grouping between qualifying companies owned by the same parent company if the parent is a resident of a country in the EEA and subject to a corporate tax comparable to the Luxembourg corporate income tax.
Moreover, the bill also opens up the possibility of including a permanent establishment of a company established outside Luxembourg and subject to a corporate tax comparable to the Luxembourg corporate income tax in a tax unity group. These amendments have been structured to comply with the recent jurisprudence of the ECJ on fiscal consolidation regimes.
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