Luxembourg: Luxembourg Bills Implementing ATAD II And DAC6 Published Today

Last Updated: 13 August 2019
Article by Jacques Wantz and Julie Hecklen LLM

On 8 August 2019, two new Bills (No 7465 and No 7466) were introduced to the Luxembourg Parliament (Chambre des Députés). They will transpose Directive 2017/952/EU on hybrid mismatch arrangements (ATAD II) and Directive 2018/822 on mandatory tax disclosure rules (DAC 6) into Luxembourg law.

The ATAD II Bill has two provisions which are of particular relevance for the Luxembourg investment funds industry.

First, the Bill carves out "collective investment vehicles" (CIVs) from the application of the reverse hybrid mismatch rule (article 9a of ATAD II).

The reverse hybrid mismatch rule would require Luxembourg to treat certain tax transparent entities, such as a common or special limited partnership, as tax opaque entities and tax them on income which is not otherwise subject to taxation, in the event that a certain proportion of investors view such entities as tax opaque in their jurisdiction. While the introduction of a carve-out for CIVs from this rule was expected, it was not clear whether the scope of the carve out would be limited to retail funds or also include other types of funds.

The commentary to the Bills specifies that the reverse hybrid mismatch rule does not apply to: Specialised Investment Funds (SIF), Reserved Alternative Investment Funds (RAIF), Undertakings for Collective Investment governed by the 2010 law (UCITs and Part II UCIs) and, under certain conditions, to unregulated Alternative Investment Funds within the meaning of AIFMD (AIF). The implementation of the current wording of the Bill would therefore be a welcome development for such alternative funds in Luxembourg.

Second, the Bill clarifies how the concept of "persons acting together" should be applied to investment funds.

This 'persons acting together' concept was introduced by the OECD BEPS report on hybrid mismatches and has led to concerns that all investors in a fund would be "persons acting together". As the interests of all persons acting together are aggregated, a single investor could then have triggered certain anti-hybrid rules, irrespective of the size of the interests which it holds.

The Bill introduces a rebuttable presumption that a person or entity holding, directly or indirectly, less than 10% of fund interests and entitled to less than 10% of fund profits, is deemed not to act together with the other investors in the fund. This 10% threshold would alleviate the concerns of the investment funds industry to some extent.

In relation to DAC 6, the Luxembourg legislator has remained very close to the initial text of the Directive, using essentially the same hallmarks as the Directive.

A much debated topic in relation to DAC 6 was whether lawyers would be caught by the intermediary reporting obligations or not. The Bill proposes an intermediate solution, under which Luxembourg lawyers are carved out from reporting obligations themselves as long as they act within the limits of their profession, but have an obligation to inform other relevant intermediaries or taxpayers that they are subject to reporting obligations. Luxembourg lawyers would however be subject to certain reporting obligations (but without disclosing the identity of the relevant taxpayer) if information needs to be filed with the competent authorities of more than one Member State and Luxembourg is the first Member State in the relevant list provided for this purpose.

The Bill also introduces penalties for non-compliance of up to EUR 250,000, which is aligned with the maximum penalties for non-compliance with FATCA/CRS or Country-by-country reporting obligations.

It goes without saying that the Bills remain subject to amendments throughout the legislative process.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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