Draft Law On Exit Taxation

On March 15^th 2013, a draft law on the taxation of the latent gains in case of transfer of an enterprise or a permanent establishment outside Luxembourg (the "Draft Law") was submitted to the Luxembourg Parliament.

The Draft Law is a response to the infringement process launched by the European Commission against Luxembourg about the exit taxation applicable in Luxembourg. The European Commission recognises the right to a Member State to tax any capital gain with respect to a period during which the taxpayer was resident in Luxembourg or the assets were located in Luxembourg but the tax should not be immediately payable upon the transfer of residence or assets out of Luxembourg. Currently, taxpayers have the possibility to request a deferral of the exit tax but the conditions provided for in the law were viewed by the European Commission as too severe. The Draft Law provides for new rules on exit taxation and intends to amend the following provisions of the income tax law of December 4^th 1967 ("LITL") and the General Tax Law ("Abgabenordnung") of May 22^nd 1931:

• The current Article 38 LITL provides that the transfer of an enterprise or permanent establishment outside Luxembourg by a non-resident is taxable, i.e. the transfer is deemed to be a disposal of the enterprise at fair market value. The LITL was silent on the tax treatment applicable to resident taxpayers. In order to eliminate this different tax treatment between resident and non-resident taxpayers, the Draft Law intends to amend Article 38 and extend it to resident tax payers.
• The amendment to §127 Abgabenordnung provides that taxpayers transferring their enterprise or permanent establishment outside Luxembourg to a Member State of the European Economic Area ("EEA") benefit, upon request and without charging interest for late payment, from a deferral of payment of the tax due pursuant to Article 38 LITL (individual). The taxpayer shall provide the Luxembourg tax authorities, annually, with evidence that it continues to hold the assets that benefited from the deferral of tax payment. The taxpayer may renounce to the deferral of payment. The same deferral of the tax payment is available where a corporation transfers to a Member State of the EEA its statutory seat and effective place of management.
• The current Article 44 LITL only allows a transfer at book value of an asset from a Luxembourg resident enterprise to another Luxembourg resident enterprise of the same taxpayer. A cross-border transfer of an asset does not benefit from this tax neutral transfer at book value. The Draft Law intends to simply abolish this Article.
• The Article 54 LITL will be amended to extend the possible transfer of capital gains to reinvested assets allocated to a permanent establishment located in an EEA country provided the conditions for the application of Article 54 LITL are met.
• In case of transfer of an enterprise by succession, the use of the carried forward losses by the transferee was subject to the condition that the transferor and transferee were taxed jointly. This condition should be eliminated by the Draft Law.

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.