Since a new law which entered into force on 1 October 2018, applications for subsidies from commercial SMEs and industrial SMEs are subject to the same rules, supervised by the Ministry of the Economy.
In addition to the merger of two set of rules (commercial SMEs / industrial SMEs), the main impact of the new law is to change the deadlines for applying for aid. Previously, the application for a subsidy was to be made within 2 years from the disbursement of the expenditure for which the aid was requested.
The new rules distinguish between the application for aid (application to be made before making the investment) and the payment of the aid (application to be made by the investor after the project has been completed). There is an « incentive effect » involved.
More specifically, the application for a subsidy must be made:
- before the beginning of the construction work connected with the investment,
- or before the first legally binding commitment to order equipment (signed purchase order / signed contract),
- or before any other commitment making the investment irreversible,
whatever occurs first.
Note: The purchase of land and preparations such as obtaining authorisations and conducting feasibility studies are not regarded as the beginning of the work.
The application for payment of the aid is to be made in principle after full completion of the investments approved at the time of the prior request, after payment of the invoices, and within a maximum period of 5 years after this payment.
The new rules did not, however, reform the intensity of the aid (10-20% for SMEs). Likewise, the de minimis scheme is maintained for companies exceeding the thresholds for qualifying as an SME.
2) VAT Group
The VAT group was introduced following the reform of the scheme of the independent group of persons, which allowed companies in the financial sector to re-invoice themselves for support services exclusive of tax and thus avoid increasing the burden of non-deductible VAT.
Since this scheme is now reserved for services of general interest, the legislator has introduced the VAT group, which entered into force on 31 July 2018.
This system enables members of the VAT group to invoice themselves for services / deliveries of goods exclusive of tax, since invoicing including tax has the disadvantage of increasing the burden of non-deductible input VAT for persons who are partially liable to VAT or not liable at all.
In addition, on the case of re-invoicing where VAT is applied:
- the amount of VAT which is non-deductible for the group,
- in the case of partially taxable persons (banks / insurance companies / real estate companies),
- was all the greater because of the application of a margin during re-invoicing,
- since the margin was subject to VAT.
The purpose of the VAT group is therefore to allow (re) invoicing free of tax between companies of the same group and thus avoid a non-deductible VAT charge. It also allows taxable persons with a rate of deduction of 100% to optimise their cash management where invoicing with tax leads to a recurring VAT credit, which has to be applied for and repayment awaited.
- received from a third party by a group company
- or issued by a group company for the attention of a third party
are subject to VAT.
Unlike the independent group of persons, the VAT group covers all activities / all types of companies (taxable persons subject to a 100% deduction or subject to a limited deduction as well as non-taxable persons) / all types of goods or services.
However, it can only be implemented between companies closely linked in the following respects (cumulative conditions):
financial (shareholding holding the majority of voting rights: situation to be certified annually by a chartered accountant or an auditor on the basis of criteria identical to those of the financial consolidation)
economic (similar activities, complementary activities or activities exercised in whole or in part for the needs of the economic activities of the other members)
organisational (control / management by the same person, directly or indirectly; coordination at the level of the activities
The member companies must be resident in Luxembourg; there is therefore no international VAT group, even though Luxembourg subsidiaries of foreign companies may join. In addition, each company may be a member of only one VAT group at a time, and must remain a member of it for at least two calendar years.
If a VAT group is set up, all companies meeting the eligibility criteria must be part of the group:
- unless certain companies forgo belonging to the group,
- and provided that those companies outside the VAT group are not interposed in the economic circuit between the members of the group,
- and provided that the fact that certain members forgo belonging to the group does not generate a VAT saving (which would not have been obtained as a result of their having been part of the VAT group).
A single VAT number is assigned to the group for its relations with the Registration Duties, Estates and VAT Authority and for the single VAT return to be submitted by the group. This group VAT return summarises all the operations of group members with third parties (within the field of application of VAT) as well as intra-group transactions (exclusive of tax).
The other companies in the group no longer make a VAT return. Their VAT numbers become ancillary numbers, to be used for transactions with third parties as well as for intra-group “invoices” free of tax.
The members of the VAT group are jointly and severally liable for VAT, fines and default interest. The deduction of input VAT remains based on the system of direct allocation or, failing that, on a general pro rata basis: the general rules on deduction therefore remain applicable.
The VAT group, however, has a profound effect on the relations between head office and branch. If:
- a branch (or the head office) belongs to a VAT group,
- the relationships between the head office and the branch,
- in principle out of the scope of VAT in the absence of a VAT group,
- fall within the scope of VAT because the VAT group is seen as a different taxable person.
3) Gift vouchers
Previously, vouchers / gift cards were always considered not to be subject to taxsince their sale was regarded as being without any counterpart for lack of delivery of goods / provision of services at the time when the voucher was purchased.
Since 1 March 2018, the VAT scheme differs depending on the type of gift card. A distinction is made between:
- A single-purpose voucher for which the rate of VAT on the product or service is already known when the voucher is issued (e.g. perfumery / relaxing massages: 17% VAT applicable on all items / services). In this case, VAT is applied to the voucher even in case of a transfer between companies of the group. The purchase of the voucher by the consumer is inclusive of tax (perfume shop gift card inclusive of 17% VAT).
- A multi-purpose voucher, for which the rate of the VAT on the product or service is not known when the voucher is issued (the VAT rate on adult clothing and children’s size clothing, sold by the same shop, are different). In this case, VAT is not applied to this voucher in case of transfer between companies of the group / in case of purchase by the consumer (voucher exclusive of tax).
4) VAT transfer pricing
VAT transfer pricing legislation entered into force on 31 July 2018. It allows the VAT administration, in the event of a transaction between related parties, to rectify the VAT taxable basis / the deductible VAT / the VAT deductible proportion if the price is not consistent with the market value, particularly in the case of partially taxable persons or non-taxable persons who cannot deduct the whole of the VAT.
B) Measures which entered into force on 1 January 2019 (ATAD 1)
The new tax measures connected with the transposition of the Anti-Tax Avoidance Directive (ATAD 1) entered into force on 1 January 2019, with the exception of those related to the transfer of the head office. This Directive is the response of the European Union to the BEPS plan (Base Erosion and Profit Shifting) initiated by the OECD. This consists of a series of measures designed to counter aggressive tax planning.
There are 5 major flagship measures of ATAD 1:
- Interest limitation rule,
- Introducing new anti-abuse rules concerning Controlled Foreign Companies (CFC rule),
- Strengthening existing anti-abuse measures, by incorporating the text of the Global Anti Abuse Rule (GAAR) into §6 StAnG, which is the text serving as the legal basis for the notion of abuse of law in Luxembourg,
- Introducing new rules to counter hybrid instruments (in addition to those already existing for the parent company / subsidiaries scheme),
- Replacing the payment deferral, in the event of the transfer of the head office of a Luxembourg company abroad, by a scheme of payment in instalments (reform of the exit tax system, which will enter into force, by way of derogation, on 1 January 2020).
1) Interest limitation rule (Article 168 bis ITL)
As from 1 January 2019, the deductibility of interest expenses is limited to the highest amount of either:
- 30% of EBITDA (earnings before interest, tax, depreciation and amortisation)
- or € 3 000 000.
SMEs are therefore not concerned by this measure, which primarily targets multinationals (for example € 3 000 000 of interest corresponds to an interest rate of 2% for € 150 million of debt / or 6 % for € 50 million of debt).
The definition of interest is particularly broad since the law uses the concept of “borrowing costs”, which includes “interest expenses on all forms of debt, other costs economically equivalent to interest and expenses incurred in connection with the raising of financ(ing)”.
The interest concerned is that related to:
- Intra-group loans
- and bank loans.
According to a non-exhaustive list of examples referred to in the law, this definition also covers:
- interest on bonds / convertible bonds,
- financial leasing,
- capitalised interest included in the balance-sheet value of assets,
- profit participating loans,
- arrangement fees / guarantee fee for raising debt.
Concept of exceeding borrowing costs
Only net interest expenses (interest expenses – interest income) are included: they are categorised as exceeding borrowing costs by the law.
This approach automatically excludes financing companies making an interest margin / back-to-back financing activities, since in this case what is involved is net interest income and not net expenses.
Tax-exempt revenue (for example, dividends / capital gains exempted under the participation exemption regime) are not taken into account in calculating EBITDA (referred to as “fiscal” EBITDA). This approach may reduce the result taken into account for the purposes of calculating EBITDA and therefore decrease the amount of interest deductible.
Double carry forward system
There is also a double carry forward system:
- Interest which is non-deductible because it exceeded the threshold of 30% of EBITDA and € 3 000 000 can be carried forward, without any limitation in time,
- in respect of unused interest capacity.
Unused interest (deduction) capacity means exceeding borrowing costs/ net interest which exceed the amount of € 3 000 000 but remain below the threshold of 30% of EBITDA and may be carried forward over 5 years.
The following are not concerned by the interest (deduction) limitation:
- Loans which were concluded before 17 June 2016, provided that their stipulations are not significantly modified thereafter (duration, interest rate, etc.),
- Companies pursuing a financial activity: banks, insurance / reinsurance companies, UCITS and Alternative Investment Funds, regulated securitization companies,
- On request, companies forming part of a group having to prepare consolidated accounts, provided that the ratio of their equity over their total assets is equal to or greater than the equivalent ratio of the consolidated group,
- Standalone entities: that is to say, companies which are not part of a consolidated group and do not have an associated enterprise (direct or indirect shareholding / voting rights / profit participation rights ≥ 25%) or a permanent establishment in a State other than Luxembourg,
- Loans used to fund long-term public infrastructure projects (subject to conditions): this point concerns more particularly public works companies operating under a system of Public Private Partnership / concession agreement with the State
Tax consolidation is not taken into account for purposes of calculating the deductibility of interest, which is calculated at the level of each consolidated company taking into account its individual EBITDA. However, it is likely, given government announcements, that a law will amend this point in the course of 2019, with retroactive effect from 1 January, and that the consolidated group will be taken into account, instead of taking into account each consolidated company individually.
Participation exemption regime
At this stage, the interaction of this new measure with the recapture rules of the participation exemption regime is not clarified by law. Again, clarifications should be forthcoming in the course of 2019.
From a practical point of view, however, it would seem logical, for the purposes of the calculation of non-deductible interest in accordance with the provisions of ATAD 1, to exclude the interest already subject to recapture under the participation exemption regime so as not to lead to a double non-deduction.
2) Controlled Foreign Company Rule (Article 164ter ITL)
With the transposition of ATAD 1, Luxembourg is acquiring CFC (Controlled Foreign Company) rules, which aim to tax the income of a subsidiary, located in an offshore or low-tax jurisdiction, at the level of its Luxembourg parent company, even if no dividend is distributed.
The case in question is that of a foreign subsidiary with little or no substance, whose economic functions (or at least essential functions) are in reality performed by the Luxembourg parent company controlling it and which does not have the assets required to perform the functions assigned to it and therefore does not bear the risks (non-genuine arrangement). It is then the income related to these functions, artificially outsourced and related to the essential role of the parent company – but not necessarily all the income of the CFC – which is taxable in Luxembourg, in an approach consistent with the transfer pricing rules.
The categorisation of a foreign entity as a CFC nevertheless satisfies a number of specific criteria, both regarding the notion of control / holding and its level of taxation in the foreign State. Derogations are also provided for.
The notion of control
To prevent the artificial splitting of voting rights / shares from circumventing the measure, it is the control by the Luxembourg taxpayer but also by its associated enterprises which is taken into account.
Associated enterprises mean a parent company holding – directly or indirectly – at least 25% of the voting rights, capital or profit-participation rights of its subsidiary or sub-subsidiary. It should be noted that both natural persons and transparent companies can also be associated enterprises.
If the Luxembourg parent company holds, directly or indirectly, alone or on aggregate with associated enterprises, more than 50% of the voting rights or the share capital or the profit-participation rights of the foreign company, then it controls that entity.
Rate at which the CFC is taxed
In addition to the control criteria, the foreign company falls under the classification of a CFC only if it is subject to effective tax which is less than half of what it would have paid in Luxembourg by being submitted to CIT (taking into account the rate of CIT but also the taxable basis).
That is to say, what is compared is not the nominal tax rate of the State of the CFC, but the tax actually paid by the CFC.
The fact that the foreign company does not pay taxes simply because of losses carried forward is taken into account, and does not automatically lead to its categorisation as an CFC.
Determination of the CFC income taxable in Luxembourg
The proportion of the net income of the CFC to be taxed in Luxembourg by way of CIT (but not by way of MBT corresponds to the share of the value created by the Luxembourg company on account of the functions performed, the risks borne and the assets held in Luxembourg but having generated income at the level of the CFC. So it is an analysis consistent with the transfer prices that has to be carried out.
Once the net taxable income in Luxembourg has been determined, it is still necessary to allocate it to the company which has exercised the key functions, according to the proportion of its participation (percentage of the voting rights, of the capital, of the profit-participation rights). The Luxembourg CIT linked to this taxable basis is further reduced by the amount of foreign tax paid by the SEC, in proportion to the participation of the Luxembourg company in the CFC.
Companies whose commercial profit is:
- less than € 750 000,
- or less than 10% of the operating costs (excluding the costs of goods sold outside their State of residence and excluding payments to associated enterprises)
are not affected by these measures.
3) General anti-abuse rule / GAAR (§6 StAnG)
The transposition of ATAD 1 has given rise to a modernisation of the anti-abuse provisions of Luxembourg law, which had not been updated since their adoption in 1934. It mainly involves adapting the initial provisions of the paragraph to take account of the requirements of the directive, while ensuring consistency between the old and the new provisions / interpretations.
The new text thus makes the connection between the initial concept, introduced by the 1934 provision, on abuses of forms and institutions of law / notion of inappropriate route with the new notion of arrangements / non-genuine route. The concept of artificial construction with a mainly fiscal purpose, already existing in the 1934 text, is specified through the new concept of absence of valid commercial reasons which reflect the economic reality.
Consequently, the legislator has also made a choice of continuity, which maintains the validity of the previous case law on the application of §6 StAnG, as emphasised by the parliamentary commentaries.
If a tax advantage contrary to the object or purpose of tax law is recognised, then the taxes are to be established as they should have been if the legal route used had been genuine. So the abusive arrangement is ignored and the situation as it should have been is restored.
Lastly, the scope of §6 StAnG extends to all direct taxes, not just to the CIT. In addition, this clause applies in intra- and extra-EU situations and to legal persons and natural persons alike. The general anti-abuse rule transposed into Luxembourg law therefore goes further than the original scope of the European directive.
It may be emphasised that the General Anti-Abuse Rule only applies when the other specific anti-abuse provisions do not apply: the specific anti-abuse rule for the application of the participation exemption regime, the anti-hybrid rules or the CFC rules take precedence over the GAAR.
4) Hybrid mismatches (Article 168 ter ITL)
The aim of the scheme is to combat the differences in the legal categorisation of a financial instrument between two Member States, resulting:
- in a double deduction: deduction of expenses in Luxembourg and in the other Member State which is at the origin of the operating expenses. These operating expenses then become non-deductible in Luxembourg.
- or in a deduction in Luxembourg, which is at the origin of these payments, without their being included in the other Member State (income not included in the result in the other Member State): in this case these payments become non-deductible in Luxembourg. This is the case, for example, of a Profit Participating Loan covered by the commentaries of the draft law (payments treated as interest by one Member State and as dividend in another Member State).
The type of operating expense (interest, bonuses, profit-sharing, etc.) is immaterial, only the state of double deduction / deduction without inclusion in the other State matters.
5) Exit tax and end of payment deferral (Article 38 ITL and § 127 AO)
Scheme applicable in 2019: tax payment deferral
The existing system allows a company or a permanent establishment transferring its head office outside the Grand Duchy to benefit, subject to certain conditions, from a payment deferral concerning the tax amount fixed on the unrealised capital gains, this operation being treated as if it were a liquidation.
The amount of the tax is known at the time of the transfer of the head office, but this will be due only in case of the sale of the assets following the transfer of the head office abroad. As long as the assets to which the Luxembourg tax rating is linked are not sold, no tax is to be disbursed.
Scheme applicable from 1 January 2020: payment deferral replaced by payment of tax in instalments
From 1 January 2020, this payment deferral is replaced:
- by payment of the tax in linear instalments, on request, over a maximum period of 5 years, without interest,
- in the event of the transfer of the head office or of isolated assets forming part of the net invested assets of an undertaking / a permanent establishment,
- provided that the transfer of the head office or the transfer of the assets is made to an EU Member State or – subject to agreement on the mutual assistance for the recovery of tax claims – to a State of the European Economic Area (EEA)
By way of derogation, the temporary transfer (12 months maximum) of assets in connection with:
- the financing of securities or assets given as collateral
- prudential rules for own funds or for liquidity management purposes
remains without tax impact (no disclosure of unrealised capital gains).
Calling the payment period in question
On the other hand, the payment period is called in question when:
- the transferred assets or activity is sold (except in the case of a contribution from an undertaking or a branch of activity in another EU Member State),
- the assets or the head office are again transferred to a non-EU State or to an EEA State that does not have an agreement on the mutual assistance for the recovery of tax claims,
- the taxpayer goes bankrupt or is put into liquidation,
- does not respect the payment obligations related to tax payment in instalment,
- does not document annually that there has been no new transfer of the assets/ head office.
It may be noted that payment deferrals granted up until 31 December 2019 will not be called in question by the entry into force of the new rules on 1 January 2020. Taxpayers considering a transfer of assets / head office therefore still have one year to benefit from a payment deferral rather than payment in instalments.
It is pointed out that the mechanism of payment deferral / payment in instalments is not, however, of interest in the event that there is no capital gain, taxable capital gain offset by tax losses or in event of an exempt capital gain based on participation exemption regime for example.
Lastly, symmetrically, articles 35 ITL and 43 ITL are amended so that, in the event of the transfer of the head office / assets of a company from abroad to Luxembourg, Luxembourg recognises the market value established by the State of departure (step-up).