Luxembourg: ATOZ Insights - December 2022

Greetings!

As every year in Luxembourg, the fall season announces the publication of the draft budget law which in turn foreshadows the winter Holiday Season. And this time has come.

On 12 October 2022, the 2023 draft budget law was presented to Parliament. As expected, due to the current period of crisis and uncertainty, the proposed tax measures only amend existing tax provisions to modify or clarify their scope of application, such as, for example, the clarification about the reverse hybrid rule. We describe below the clarifications proposed in the 2023 draft budget law.

On 10 October 2022, another draft law was presented to the Luxembourg parliament with the aim of carrying out the long-awaited reform of the Luxembourg property tax. This reform is based on three major axes: a modernisation of the property tax itself and the introduction of two new taxes encouraging property owners to mobilise building land and uninhabited dwellings, to combat the increasing housing shortage in Luxembourg. We will explain these rules and the timing for their application.

At European level, the updated list of non-cooperative jurisdictions for tax purposes was published on 12 October 2022. This list directly impacts the scope of the Luxembourg corporate income tax deduction of interest and royalty expenses due to entities located in non-cooperative tax jurisdictions, the requirement to disclose transactions with entities located in non-cooperative jurisdictions and the DAC 6 rules. We provide an overview of the impacts of the updated list in Luxembourg.

The EU Commission is also working on various new initiatives: On 12 October 2022, the EU Commission closed a public consultation regarding a proposal for a Council Directive to tackle tax advisers and other professionals rendering tax advice that facilitate tax evasion and aggressive tax planning. We provide an overview of the questionnaire and analyse to which extent there is a real need for this initiative. Moreover, on 17 October 2022, the European Commission announced the launch of a public consultation on the so-called BEFIT, a new framework for EU corporate taxation. The initiative would introduce a common set of rules for EU companies to calculate their taxable base while ensuring a more effective allocation of profits between EU countries, based on a formula. BEFIT strongly resembles the previous Common Consolidated Corporate Tax Base proposal, which has been withdrawn. We analyse this initiative and its consequences on the EU corporate tax landscape.

From a VAT point of view, a Luxembourg draft law published on 26 October 2022 implements anti-inflation measures aiming to help households and businesses and one of the proposed measures is a Luxembourg VAT rates decrease. We describe this measure and its impact on consumers and businesses.

In a recent case, the CJEU clarified the notion of "granting of credit" for the purpose of determining the scope of VAT exempt financing activities. In this respect, the CJEU ruled that the acquisition by a securitisation vehicle of future proceeds from receivables of an originator should be assimilated to a VAT exempt financing activity. We explain the decision of the Court and its consequences in Luxembourg

On 29 April 2022, the Luxembourg District Court made a referral to the CJEU for a preliminary ruling in the case on the VAT treatment of activities carried out by a natural person as a member of the board of directors of a public limited company. The CJEU will have to arbitrate between two opposing positions on this complex question. We explain what is at stake in this case.

On 5 October 2022, the Council of the European Union endorsed and published the final compromise text of the Regulation on Markets in Crypto-Assets which is meant to "protect investors and preserve financial stability, while allowing innovation and fostering the attractiveness of the crypto-asset sector". Few days later, the European Parliament Committee on Economic and Monetary Affairs also approved a provisional deal on the Transfer of Funds Regulation that would require exchanges to report any crypto transactions to authorities. We describe these new regulations, which represent a significant milestone in the development of the crypto industry in Europe.

We hope you enjoy reading our insights.

The ATOZ Editorial Team

Budget 2023 - Tax measures

On 12 October 2022, the 2023 budget draft law (the "Draft Law") was presented to Parliament. As expected during this period of crisis and uncertainty, only some targeted tax measures will be introduced as from 2023. In addition, some existing measures will be amended in order to clarify or amend their scope of application. We provide an overview of the main tax changes to be introduced. However, the proposed measures may still evolve throughout the legislative process.

Reverse hybrid rule: scope of application clarified

With retroactive effect as from tax year 2022, the Draft Law amends the wording of article 168quater of the Luxembourg Income Tax Law ("LITL") in order to clarify the scope of application of the reverse hybrid rule.

A reverse hybrid is an entity that is treated as tax transparent under the laws of the jurisdiction where it is established but as a separate entity (i.e. opaque) under the laws of the jurisdiction(s) of the investor(s).

Based on the reverse hybrid rule of Article 168quater of the LITL (in force since tax year 2022), Luxembourg tax transparent entities are subject to corporate income tax ("CIT") on the portion of their net income that is not otherwise taxed under this law or the laws of any other jurisdiction, where one or more non-resident associated enterprises which hold in aggregate a direct or indirect interest of 50% or more of the voting rights, capital interests or entitlement to profit in such entity, are located in a jurisdiction or jurisdictions which regard the Luxembourg entity as opaque.

The Draft Law clarifies that the reverse hybrid rule will only apply if the non-taxation of the income realised by the investor through the Luxembourg entity is due to the difference in the qualification (as transparent vs. opaque) of the Luxembourg entity. The commentary to the draft law specifies further that the income realised by an investor benefiting from a subjective exemption in its state of residence will therefore be out of the scope of the reverse hybrid rule.

This clarification is very welcome and also in line with the way the rules on hybrid entities and hybrid instruments are applied. Even though the commentary only refers to the case of a non-taxation of the income due to a subjective exemption of the investor, other situations of income exemptions not due to a difference in the qualification of the Luxembourg entity (as transparent vs. opaque) should also be out of the scope of the reverse hybrid rules, such as when investors are located in a jurisdiction with no concept of tax transparency/tax opacity.

New deadline for filing tax returns: 31 December

Based on the Draft Law, the new deadline for filing individual and corporate tax returns will be 31 December instead of currently 31 March.

The change will apply for the first time in relation to:

• the 2022 income tax return, the 2022 corporate income tax return and the 2022 municipal business tax return, which will have to be filed on 31 December 2023 at the latest; and to
• the 2023 net wealth tax return (based on the net wealth as of 1 January 2023), which will also have to be filed on 31 December 2023 at the latest.

§ 167 of the general tax law will be amended accordingly.

As far as individuals are concerned, the provisions of the LITL dealing with the request to be made by partners (Article 3bis of the LITL), married resident taxpayers (Article 3ter of the LITL) and married non-resident taxpayers (157ter of the LITL) when opting for the individual vs. joint taxation will be amended. As from tax year 2022, the deadline for filing these requests will no longer be 31 March but 31 December instead.

The extension of these filing deadlines is good news. However, the Draft Law also repeals the provision included in § 167 of the general tax law which gives the tax authorities the possibility to allow extensions of the filing deadlines in specific cases.

Profit sharing bonus (prime participative): specific measure introduced for tax consolidation

The profit-sharing bonus regime (prime participative, Article 115-13a of the LITL) introduced last year will be amended to take into account the situation of employers which belong to a tax consolidated group within the meaning of article 164bis of the LITL.

Based on the regime currently in force, the total amount of profit-sharing bonus paid by the employer to its employees cannot exceed 5% of the accounting profits of the employer as of the end of the accounting year preceding the allocation of the profit-sharing bonus. The purpose of the amendment to be introduced by the Draft Law is to grant, on an annual basis, the possibility to compute the 5% threshold based on the positive algebraic sum of the results of the members of the consolidated group to which the employer belongs, provided that a tax consolidation existed during the year during which the profit-sharing bonus is granted as well as during the year immediately preceding that year.

The conditions for the application of the profit-sharing bonus regime regarding the type of income to be realised by the employer and the requirement to maintain regular accounts during the tax year when the bonus is granted as well as during the immediately preceding year, will have to be met by each member of the consolidated group. A joint request of all members of the consolidated group will have to be filed by the integrating entity.

Impatriate regime improved

To attract more talents to Luxembourg, with effect as from 1 January 2023, the Draft Law will amend Article 115- 13b of the LITL so as to extend the scope of application of the impatriate regime. The minimum annual remuneration required for an impatriate to benefit from the regime will be reduced from EUR 100,000 to EUR 75,000.

Real estate taxation measures

The application of the 4% accelerated depreciation for buildings used for rental housing will be limited to two buildings or parts of buildings used for rental housing, acquired or constituted after 31 December 2022 during the entire taxpayer's tax liability period in Luxembourg. This modification will be implemented by way of a Grand-Ducal regulation. This is a further restriction of this deduction that was widely considered to be too favourable in the context of increasing housing prices.

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