Comparative Guides
Welcome to Mondaq Comparative Guides - your comparative global Q&A guide.
Our Comparative Guides provide an overview of some of the key points of law and practice and allow you to compare regulatory environments and laws across multiple jurisdictions.
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Results: 4 Answers
Corporate Tax
5.
Anti-avoidance
5.1
Are there anti-avoidance rules applicable to corporate taxpayers – if so, are these case law (jurisprudence) or statutory, or both?
 
Luxembourg
Anti-avoidance rules applicable to corporate taxpayers are statutory (ie, Section 6 of the Tax Adaptation Law; Articles 166 and 147 of the Income Tax Law; the principle purposes test in double tax treaties), but they must be applied in the light of Luxembourg and EU case law that specifies their interpretation and scope.

For more information about this answer please contact: Romain Tiffon from ATOZ Tax Advisers
5.2
What are the main ‘general purpose’ anti-avoidance rules or regimes, based on either statute or cases?
 
Luxembourg
According to the Luxembourg General Anti-Avoidance Rule (GAAR) contained in Section 6 of the Tax Adaptation Law, applicable to all types of Luxembourg taxes and to all types of Luxembourg taxpayers, an abuse is considered to exist if:

  • a specific legal route is selected for the main purpose or one of the main purposes of obtaining a tax advantage;
  • which defeats the object or purpose of the applicable tax law; and
  • which is not genuine having regard to all relevant facts and circumstances.

The legal route chosen may comprise more than one step or part, and will be regarded as non-genuine to the extent that it is not put into place for valid commercial reasons which reflect economic reality.

Where an abuse in accordance with this GAAR can be evidenced, taxes will be determined based on the legal route that is considered as the genuine route - that is, based on the legal route which would have been put into place for valid commercial reasons that reflect economic reality.

In practice, the scope of the abuse of law provision should be limited to clearly abusive situations and, in an EU context, to wholly artificial arrangements considering relevant jurisprudence of the Court of Justice of the European Union.

For more information about this answer please contact: Romain Tiffon from ATOZ Tax Advisers
5.3
What are the major anti-avoidance tax rules (eg, controlled foreign companies, transfer pricing (including thin capitalisation), anti-hybrid rules, limitations on losses or interest deductions)?
 
Luxembourg
No participation exemption applies to dividends received from or paid to EU collective entities in case of non-genuine arrangements put into place for the main purpose or one of the main purposes of obtaining a tax advantage which defeat the object or purpose of the EU Parent-Subsidiary Directive.

The Luxembourg controlled foreign corporation (CFC) rule allows the taxation of a Luxembourg corporate taxpayer on undistributed income from an entity or permanent establishment which qualifies as a CFC if it is derived from non-genuine arrangement implemented with the main purpose to obtain a tax advantage. In this case, an arrangement or a series thereof shall be regarded as non-genuine to the extent that the CFC would not own the assets which generate all or part of its income and would not have undertaken the related risks if it were not controlled by a Luxembourg taxpayer where the significant people functions linked to these assets and risks are carried out and are instrumental in generating the CFC’s income. The CFC rule does not apply if the accounting profit of the CFC does not exceed €750,000 or 10% of its operating costs for the tax period.

According to the current anti-hybrid rules (to be amended by the so-called “Anti-Tax Avoidance Directive 2”), when a hybrid mismatch results in a double deduction, the deduction shall be given only in the member state where the payment has its source. When a hybrid mismatch results in a deduction without inclusion, the deduction shall be denied in the payer’s jurisdiction.

In addition, if a dividend paid to the Luxembourg corporate entity is tax deductible in the EU member state of the subsidiary - that is, in the country of source - it remains taxable at the level of the Luxembourg parent company, meaning that the EU participation exemption regime is denied.

Subject to certain conditions and limitations, ‘exceeding borrowing costs’ shall be deductible only up to 30% of the corporate taxpayer’s earnings before interest, tax and amortisation, or up to an amount of €3 million, whichever is higher. Taxpayers that can demonstrate that the ratio of their equity over their total assets is equal to or higher than the equivalent ratio of the group can (under certain conditions) fully deduct their exceeding borrowing costs.

Although there are no general rules on thin capitalisation, in practice the tax authorities apply a debt-to-equity ratio of 85:15 for the holding of participations (as well as for real estate assets located in Luxembourg). Excessive interest payments may be treated as hidden profit distributions.

For more information about this answer please contact: Romain Tiffon from ATOZ Tax Advisers
5.4
Is a ruling process available for specific corporate tax issues or desired domestic or cross-border tax treatments?
 
Luxembourg
Yes. Since 1 January 2015, an advance tax clearance (ATC) request must include a detailed description of:

  • the taxpayer and the other parties involved;
  • their activities; and
  • the contemplated operation(s).

It must also include confirmation that the information provided to analyse the request is complete and accurate.

ATC requests relating to company taxation issues are first submitted for opinion to the Commission des décisions anticipées, which may hear, at its own discretion, the requesting taxpayer (or its representative/adviser) to obtain additional information, if needed. The commission will provide its opinion to the tax inspector in charge, who will take the final decision. It is not possible to appeal an ATC decision. ATC decisions are published in synthetic and anonymised form in the annual report of the direct tax authorities.

The ATC is valid for five tax years and has binding effect on the tax authorities, unless:

  • the situation/operations described are inaccurate;
  • the essential features of the contemplated operations change; or
  • Luxembourg or international tax law, or the case law interpreting the rules based on which the ATC has been issued, changes.

The fees due per request range from €3,000 to €10,000, depending on the complexity and the amount of work needed to deal with the request. The fees are payable within one month.

For more information about this answer please contact: Romain Tiffon from ATOZ Tax Advisers
5.5
Is there a transfer pricing regime?
 
Luxembourg
Luxembourg has no integrated transfer pricing legislation. Instead, transfer pricing adjustments aimed at restating arm’s-length conditions can be made based on different tax provisions and concepts applicable under Luxembourg domestic tax law.

The arm’s-length principle is explicitly stated in Article 56 of the Income Tax Law, which serves as a legal basis for upward adjustments as well as for downward adjustments when a Luxembourg company receives an advantage from an associate enterprise. Article 56-bis of the Income Tax Law complements Article 56, formalises the authoritative nature of the Organisation for Economic Co-operation and Development Transfer Pricing Guidelines, and provides some definitions and guiding principles in relation to the application of the arm’s-length principle.

In addition to Articles 56 and 56-bis of the Income Tax Law, the concepts of hidden dividend distributions (Article 164(3) of the Income Tax Law) and hidden capital contributions (Article 18(1) of the Income Tax Law) play an important role in ensuring that associated enterprises adhere to the arm’s-length standard.

On 27 December 2016, the Luxembourg tax authorities released a circular on the tax treatment of intra-group financing activities. The circular follows the introduction of Article 56-bis of the Income Tax Law and provides guidance on the practical application of the arm’s-length principle to intra-group financing activities. The term ‘intra-group financing transaction’ is to be interpreted very broadly and includes any activity involving the granting of loans (or advancing of funds) to associated enterprises, irrespective of whether these loans are financed by internal or external debt (eg, intra-group financing, bank loans, public issuances). Under the new transfer pricing regime, Luxembourg finance companies must assume the risks in relation to their financing activities and actively manage these risks over the lifetime of the investment. This requires that a Luxembourg finance company have control over the risk and the financial capacity to assume the risk. Therefore, the amount of equity financing should be sufficient to cover the risk in relation to the financing activity (ie, the equity at risk). The amount of equity at risk should further be remunerated with an arm’s-length return on equity. The amount of equity at risk and the arm’s-length character of the remuneration must be substantiated in a transfer pricing study.

For more information about this answer please contact: Romain Tiffon from ATOZ Tax Advisers
5.6
Are there statutory limitation periods?
 
Luxembourg
Yes. The statutory limitation period is five years following the end of the relevant tax period. However, the limitation period is extended to 10 years if the tax return filed by the taxpayer is found to be incomplete or inexact, with or without the intention of fraud.

For more information about this answer please contact: Romain Tiffon from ATOZ Tax Advisers