Bill of law n°7020 amends and confirms the new tax measures previously announced:
1. Corporate income tax (CIT)
1.1 Introduction of a 17 year limitation on the use of tax losses as from 2017
The limitation will apply from 2017. Tax losses generated until December 31, 2016 can continue to be carried forward indefinitely. The oldest tax losses would be offset first.
The current proposal for the limitation in time to 17 years is good news as it was initially announced that tax losses generated after 2016 would be useable for a shorter period of time (10 years) and only up to a certain percentage (e.g. 80%) of the taxable profit per year. Even if the draft bill may still be subject to amendments, we believe that the limitation of the use of the tax losses to a certain percentage of the taxable profit will be very likely abandoned.
1.2 Reduction of the corporate income tax rate to 19% in 2017 and 18% in 2018
As announced, the corporate income tax rate will be reduced from 21% to 19% from 1 January, 2017 and 18% from 1 January, 2018 for companies having an annual taxable income of more than €30,000. Assuming that the contribution for the employment insurance of 7% and the municipal business tax in Luxembourg of 6,75% remain unchanged, the combined corporate tax rate in Luxembourg City will drop from 29.22% to 27.08% in 2017 (19x1.07+6.75) and 26.01% as from 2018 (19x1.07+6.75).
The reduced rate of 20% currently applicable for companies with an annual taxable profit of up to €15,000 has been decreased to 15% and the taxable profit threshold will be €25,000.
As the 19% rate for 2017 (18% as from 2018) will apply to companies having taxable profit higher than €30,000, an intermediate taxation level is provided for taxpayers with a taxable income between €25,000 and €30,000. The tax due will be equal to €3,750 (15% of €25,000) + 39% of the taxable income exceeding €25,000 for 2017 and €3,750 + 33% of the taxable income exceeding €30,000 for 2018.
The Luxembourg Government confirmed that it will closely follow the European and International situation in light of the implementation of the OCED's BEPS rules to envisage, if need be, an additional adjustment. The commentaries on the draft bill also recall Luxembourg's intention of maintaining a competitive international tax environment.
1.3 Extension of the tax deferral regime for currency gain or loss regime provided by article 54 bis LITL
A new version of article 54 bis LITL will allow a tax deferral on capital gains or capital losses realized by all corporate taxpayers that have a share capital in another currency than Euro.
The rule will be retroactively applicable as of 1 January, 2016. Currently, the neutralization of exchange gains is reserved to certain entities (financial institutions, professional custodians, and insurance/re-insurance companies). A request will have to be filed at least 3 months before the end of the first tax year for which the benefit of the tax neutralization is expected.
1.4 Increase of tax credit for investments
The tax credit regime for investments will improve as follows:
- The tax credit for additional investments will increase from 12% to 13% of the investment.
- The tax credit for global investments will increase from 7% to 8% for investments up to €150,000. The current 2% rate for investments exceeding €150,000 would remain unchanged.
- The tax credit for investment in assets approved for the special depreciation regime will increase from 8% to 9% for investments up to €150,000. The current 4% rate for investments exceeding €150,000 will remain unchanged.
Finally, in line with the Luxembourg administrative practice in force since the Tankreederei I case law (C287/101) of the European Court of Justice, the investment tax credit will also apply to investments made in another Member State of the European Economic Area (EEA) (i.e. EU member states, Iceland, Liechtenstein, and Norway).
1.5 Implementation of a deferral mechanism for deduction for depreciation
Taxpayers will be allowed to defer and carry forward the annual amount of depreciation on an asset.
1.6 Implementation of a tax deferral mechanism for family businesses
Latent gains in relation to real estate assets that are part of the net assets transferred will be deferred as long as they are still held and the business is continued
2. Net wealth tax (NWT)
2.1 Minimum NWT increased
The minimum NWT for SOPARFIs (taxable holding companies) will be increased to €4,815 per year.
The minimum NWT has replaced the minimum corporate income tax since 1 January, 2016.
2.2 Clarification relating to the maintenance of the NWT reserve
The NWT reserve allows a reduction of the NWT liabilities provided that the reserve is maintained in the accounts of the taxpayer for 5 years. The draft bill will formally allow keeping the benefit of the NWT reduction if the NWT reserve is effectively maintained up to 5 years when transferred into another entity in case of liquidation, merger and migration out of Luxembourg.
3. Procedure /tax compliance
3.1 Modernization and strengthening of criminal tax provision with the aggravated tax fraud offence and the inclusion of aggravated tax fraud and tax swindling into the list of primary money laundering offenses
Based on the draft bill, there will be three types of offences applicable for direct and indirect tax purposes:
- Simple tax fraud, which would be an administrative offence prosecuted by the Luxembourg tax authorities (with administrative court recourse for direct taxes and civil court recourse for indirect taxes).
- Aggravated tax fraud when the amount of the tax evaded is substantial, which would be a criminal offence prosecuted by the public prosecutor;
- Tax swindling which is also a criminal offence (remains unchanged).
The Luxembourg criminal code will also be amended to include aggravated tax fraud and tax swindling as primary money laundering offences.
3.2 Company direct tax returns: electronic filing will become compulsory and penalties will be introduced or reinforced
- The electronic filing of direct tax returns (corporate income tax, net wealth tax, and net wealth tax) will be compulsory for companies as from 2017.
- The filing of a deliberately incomplete or incorrect direct tax return and the non-filing of direct tax returns should be subject to an administrative fine. The fine depends on the amount of the understated tax (or unduly reimbursed tax) and should range between 5% and 25% of that amount (also applicable for individual taxpayers).
- Penalties for late filing of direct tax returns will be increased to a maximum amount of €25,000 that could be charged every 3 months (also applicable for individual taxpayers).
3.3 Self-employed persons ("professions libérales") earning €100,000 or more in annual turnover will no longer be exempt from keeping accounting records.
4. Individual taxpayers:
- The final withholding tax on interest paid to Luxembourg individual resident will be doubled to 20%.
- The 0.5% temporary tax to balance the state budget will be removed in 2017.
- Progression rates will be adapted and an income tranche taxed at 41% (as from €150,000) and another one taxed at 42% (as from €200,000) will be introduced.
- An option to file for individual or joint taxation tax returns for non-resident/resident married couples will be introduced.
- Other tax allowances for individuals are proposed in relation to, among others, pension and home savings.
5. Indirect taxes
- The ipso jure or de facto directors/managers, right holders (in case of decease or dissolution without liquidation), liquidators, and trustees will be jointly and personally liable for the value added tax (VAT) payment of the taxable persons and the Luxembourg VAT authorities will be entitled to issue a call in guarantee decision ("décision d'appel en garantie").
- Repeal of the 0.24% ad valorem registration duty (for the use of debt/receivable)
Currently, an agreement under private seal such as a loan agreement is not mandatorily subject to registration and registration duties resulting from such registration. However, when the receivable is used (e.g. in a notarial deed for a contribution in kind or produced in justice in front of a court or an official authority in Luxembourg), such document needs to be registered, triggering a 0.24% registration duty on the amount of the receivable.
The draft bill proposes to solely register those used documents, which must be mandatorily registered by law. Consequently the use of loan agreements and receivables will be no longer subject to registration and the 0.24% ad valorem registration duty.
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