After many years of reforms encouraged by the OECD's BEPS Action plan, it seems as if Luxembourg is now on the home stretch of the BEPS reform marathon.
In December, the Luxembourg parliament passed the last of the BEPS-inspired reforms in the pipeline: ATAD 2 and tax dispute resolution mechanisms. The adoption of the DAC 6 law, which has not been passed at the time of writing of the present Insights, should follow very soon. In these Insights, we describe the implications of the new Luxembourg rules implementing the EU Anti-Tax Avoidance Directive regarding hybrid mismatches with third countries (ATAD 2). We then provide an overview of the new Luxembourg procedure to resolve situations of double taxation between Luxembourg and one or more EU Member States based on the EU Directive on tax dispute resolution mechanisms. We also present the future new obligations of Luxembourg intermediaries in relation to the rules on mandatory automatic exchange of information in the field of taxation with reference to reportable cross-border arrangements (DAC 6).
In the run-up to the year-end events, the Luxembourg legislator also passed the 2020 budget law which introduces a handful of tax measures. The most significant tax measure of the 2020 budget states that tax rulings granted prior to 1 January 2015 will no longer be valid as from the end of tax year 2019. We present the implications of this measure.
At the international level, the OECD made proposals that aim at addressing the specific tax challenges created by the digitalisation of the economy. The proposals seek to answer how taxing rights on income generated from cross-border activities in the digital age should be allocated among jurisdictions and how to address ongoing risks from structures that allow MNEs to shift profit to jurisdictions where they are subject to no or very low taxation. Should they be adopted, these proposals may lead to changes far beyond the digital economy and may impact all kinds of industries and businesses. We describe the main features of the OECD proposals.
From a VAT point of view, Luxembourg implemented the EU Quick Fixes on harmonisation and simplification of VAT for cross-border trade. We describe the aim of these Quick Fixes. We also take the opportunity in this issue of Insights to describe the rules applicable for the VAT deduction on overhead costs through the analysis of the recent decision of the CJEU in the Cambridge University case.
Lastly, in our final article, we provide you with a summary of the Luxembourg key corporate implementation developments in 2019 and 2020.
Luxembourg implements ATAD 2
OUR INSIGHTS AT A GLANCE
- On 19 December 2019, the Luxembourg legislator passed the law implementing ATAD 2, the directive which provides for a comprehensive framework to tackle hybrid mismatches.
- These new rules will replace the existing hybrid mismatch rules which have been introduced as part of the 2019 tax reform implementing ATAD and extend their scope to transactions involving non-EU countries.
- Luxembourg has made the right choices, adopting all available implementation options which limit the scope of the new rules for the benefit of Luxembourg taxpayers and avoid unintended collateral damage for the Luxembourg fund industry.
- The hybrid mismatch rules are characterised by an extreme complexity which requires a good understanding of the overall investment structure and the foreign tax treatment of payments, entities, financial instruments, etc.
- Given that the burden of proof regarding the non-application of the hybrid mismatch rules is on the taxpayer, a hybrid mismatch analysis will become an integral and necessary part of each and every tax analysis.
On 19 December 2019, the Luxembourg legislator passed the law implementing EU Directive 2017/952 of 29 May 2017 (the "Anti-Tax Avoidance Directive 2" or "ATAD 2") which provides for a comprehensive framework to tackle hybrid mismatches. These new rules will replace the existing hybrid mismatch rules which had been introduced as part of the 2019 tax reform implementing EU Directive 2016/1164 of 28 January 2016 (the "Anti-Tax Avoidance Directive" or "ATAD") and extend their scope to transactions involving non-EU countries.
Hybrid mismatches typically result from a different tax treatment of an entity or financial instrument under the laws of two or more jurisdictions and may result in deduction without inclusion outcomes or double deductions.
The hybrid mismatch rules target a number of different situations including direct hybrid mismatches between associated enterprises, structured arrangements between third parties, imported hybrid mismatches and tax residency mismatches. Payments that may come within the scope of the hybrid mismatch rules may include payments under financial instruments and, in some cases, other deductible payments such as royalties, rents and payments for services.
While the primary objective of the hybrid mismatch rules is the elimination of double non-taxation, these rules should also not result in economic double taxation. The latter is ensured through a number of carve-outs and limitations that cancel the application of the hybrid mismatch rules.
ATAD 2 follows the recommendations of the OECD in regard to Base Erosion and Profit Shifting ("BEPS") Action 2 that aim at neutralising the effects of hybrid mismatch arrangements through the application of linking rules that align the tax treatment in two or more jurisdictions. ATAD 2 explicitly states that the explanations and examples in the Final Report on Action 2 may be a source of interpretation to the extent they are consistent with the provisions of the Directive.
1. Hybrid mismatch rules
1.1 Scope of the hybrid mismatch rules
- Relevant hybrid mismatches
Article 168ter of the Luxembourg Income Tax Law (LITL) addresses four categories of hybrid mismatches:
- hybrid mismatches that result from payments under a financial instrument, including hybrid transfer;
- hybrid mismatches that are a consequence of differences in the allocation of payments made to a hybrid entity or permanent establishment ("PE"), including as a result of payment to a disregarded PE;
- hybrid mismatches that result from payments made by a hybrid entity to its owner or deemed payments between the head office and PE or between two or more PEs; and
- double deduction outcomes resulting from payments made by a hybrid entity or PE.
Article 168ter of the LITL generally applies in case of mismatch outcomes which include deductions without inclusions and double deductions.
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