Comparative Guides

Welcome to Mondaq Comparative Guides - your comparative global Q&A guide.

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4. Results: Answers
Corporate Tax
Are there anti-avoidance rules applicable to corporate taxpayers – if so, are these case law (jurisprudence) or statutory, or both?

Answer ... 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
What are the main ‘general purpose’ anti-avoidance rules or regimes, based on either statute or cases?

Answer ... 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
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)?

Answer ... Special rules limiting the application of the participation exemption regime:

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. 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.

CFC rules:

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.

General anti-hybrid rules:

Article 168ter of the Income Tax Law implements EU Directive 2017/952 of 29 May 2017 (the “Anti-Tax Avoidance Directive 2”) and provides for a comprehensive framework to tackle hybrid mismatches. These rules apply since 1 January 2020 and replace the existing hybrid mismatch rules which were introduced as part of the 2019 tax reform when implementing EU Directive 2016/1164 of 28 January 2016 (the “Anti-Tax Avoidance Directive”). 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. To neutralize the mismatch outcomes, according to the primary rule, the deduction of a payment is denied to the extent that it is not included in the taxable income of the recipient or is also deductible in the counterparty jurisdiction. When the primary rule is not applied, the counterparty jurisdiction may apply a defensive rule, requiring the deductible payment to be included in the income or denying the duplicate deduction, depending on the nature of the mismatch. When a hybrid mismatch involves a third state, the responsibility to neutralise the effects of hybrid mismatches is placed on the EU Member State.

Article 168ter further provides for rules that target imported hybrid mismatches that shift the effect of a hybrid mismatch between parties in third countries into the jurisdiction of EU Member States through the use of a non-hybrid instrument. Finally, Article 168ter provides for rules that neutralize double deduction outcomes in case of tax residence mismatches (that is when an entity is resident for tax purposes in two or more jurisdictions).

Article 168quater implements also the Anti-Tax Avoidance Directive 2 and provides a so-called reverse hybrid rule which will enter into force as from tax year 2022. A reverse hybrid is an entity that is treated as 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). The reverse hybrid mismatch rule aims at eliminating double non-taxation outcomes through the treatment of reverse hybrids as resident taxpayers.

Limitation to the deduction of interest:

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.

Transfer pricing principles

Article 56 of the Income tax law provides a legal basis for transfer pricing adjustments where associated enterprises deviate from the arm’s length standard. In other words, where a Luxembourg company shifts advantages to another group company, the Luxembourg tax authorities may increase the company’s taxable income (upward adjustment). Conversely, where a Luxembourg company receives an advantage from an associated company, the taxable income of the Luxembourg company may be reduced by a downward adjustment.

Furthermore, Article 164(3) of the Income Tax Law provides that hidden distributions (i.e., direct or indirect advantages granted by the company to its shareholder which, absent the shareholding relationship, would otherwise not have been granted) are non-deductible from the taxable basis of the company.

Thin-capitalisation rules

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
Is a ruling process available for specific corporate tax issues or desired domestic or cross-border tax treatments?

Answer ... 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.

ATCs which were granted prior to 1 January 2015 (which, in most case, had an unlimited period of validity) lost their binding effect as from tax year 2020. If a taxpayer would like to get a new ATC for taxation years subsequent to 2019, the taxpayer will have to file a new request, in accordance with the procedure in force.

For more information about this answer please contact: Romain Tiffon from ATOZ Tax Advisers
Is there a transfer pricing regime?

Answer ... 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
Are there statutory limitation periods?

Answer ... 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
Corporate Tax