On October 15th, 2014 the Minister for Finance announced the Luxembourg Budget 2015. The announcement followed the presentation made the day before by the Prime Minister Xavier Bettel who presented a policy statement entitled "Package for the Future" which provides some overall public finances policy statements for the period 2015 – 2018.
For international business operators using Luxembourg, the package of measures will be welcomed.
There is finally, at last, a firm committment by the Luxembourg government to adress the recurring public deficits (since 2008) in order to contain the public debt at internationally very low level (below 30% of GDP). The adjustments that were much needed consist in a mix of reduction of spendings impacting individuals as well as an increase of the VAT standard rate from 15% to 17%, still preserving Luxembourg enviable position of the EU member States with the lowest VAT rate. An additional package of 250 measures aiming at improving over time the financial situation of Luxembourg will be gradually implemented over the next three years.
Corporate taxpayers will not be impacted by the measures, since the corporation tax rate and the rules for computing the tax base will remain unchanged. The committment of the Luxembourg government to preserving its tax ruling policy also remains unaffected as is its commitment to apply the OECD transfer pricing rules.
This information letter will only consider the tax aspects of the Luxembourg Budget 2015.
VAT Rate 17%
Luxembourg had traditionally the lower VAT rate in the European Union, which presumably helped it attract the B2C e-commerce activities. Some of this revenue will however start to decrease starting 2015, as a result of the VAT being due in the country of residence of the consumers. In order to offset this shortfall of revenue, the VAT rates will increase as of January 1st, 2015: the standard rate moves from 15% to 17%; the reduced rate from 6% to 8%; and the intermediary rate from 12% to 14%.
Tax Ruling Practice
Brussels has opened investigations into Luxembourg's tax ruling practice, as is the case for Ireland and the Netherlands, too. The proposals made under the Luxembourg Budget 2015 demonstrate Luxembourg's commitment to maintain this policy in the future, as it provides much needed tax certainty to corporate taxpayers wishing to operate via Luxembourg, by confirming them in advance the applicable statute provisions.
It is proposed to introduced a specific section in the Tax Code aiming at formalising the past practice in Luxembourg's tax ruling practice being:
- The tax authorities being bound by law to apply applicable statute provisions to taxpayers, tax rulings may not grant tax reliefs and tax concessions to taxpayers. This is not a change from the past, although this point appears not to be well understood by the Brussels Commission which erroneously believes that sweet heart deals could get struck under tax rulings. The only objective of tax rulings is to provide upfron certainty to taxpayers on transactions they contemplate to undertake.
- Tax rulings are binding upon the tax authorities, subject to all relevant facts having been fully disclosed. This, too, is a mere codification of both the practice until now and common sense really.
The Luxembourg tax authorities do not want businesses to suffer disproportionate compliance costs as regards their transfer pricing methodology, albeit they equally do require the taxpayers to prepare and retain such documentation as is reasonable given the nature, size and complexity (or otherwise) of their business or of the relevant transaction (or series of transactions) and which adequately demonstrates that their transfer pricing meets the arm's length standard. Transfer pricing documentation consists of a mixture of records and other information in relation to a period covered by a tax return, and may be created at various times.
A new section introduced into the Tax Code does not introduce specific transfer pricing methods into Luxembourg tax laws, but rather confirms that the OECD methods already followed in practice in the past continue to be the relevant benchmark going forward.
The onus on the maintaining of appropriate records under the new tax section understandably rests with the taxpayer. In case of cross-border transactions whereby the risks of an undue profit shifting to abroad may be demonstrated by the tax authorities, as a results of various facts and circumstances, the income declared by the taxpayer may be revised upwards by the tax authorities in order to comply with the arm's length principle.
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.