OUR INSIGHTS AT A GLANCE
- On 14 February 2023, the EU Finance Ministers decided to add the BVI, Costa Rica, the Marshall Islands and Russia to the EU list of non-cooperative jurisdictions for tax purposes.
- The new list was published in the Official Journal of the European Union on 21 February 2023, which is the date as from which the new list came into force.
- The update of the list is an important step as it directly impacts the scope of application of three different Luxembourg tax measures: the measure denying the corporate income tax deduction of interest and royalty expenses due to entities located in non-cooperative tax jurisdictions, the requirement to disclose transactions with entities located in non-cooperative jurisdictions in the tax returns and the mandatory disclosure rules applicable to certain cross-border arrangements (DAC6).
On 14 February 2023, the EU Finance Ministers decided to add the BVI, Costa Rica, the Marshall Islands and Russia to the EU list of non-cooperative jurisdictions for tax purposes. The new list was published in the Official Journal of the European Union on 21 February 2023, which is the date as from which the new list came into force. The update of the list is an important step as it directly impacts the scope of application of three different Luxembourg tax measures: the measure denying the corporate income tax deduction of interest and royalty expenses due to entities located in non-cooperative tax jurisdictions, the requirement to disclose transactions with entities located in non-cooperative jurisdictions in the tax returns and the mandatory disclosure rules applicable to certain cross-border arrangements (DAC6).
The EU list of non-cooperative jurisdictions for tax purposes
The list of non-cooperative tax jurisdictions (the "Blacklist") is determined at EU level. It is a result of a thorough screening and dialogue process with non-EU countries to assess them against agreed criteria for good governance relating to tax transparency, fair taxation, the implementation of OECD BEPS measures and substance requirements for zero-tax countries.
The Blacklist is updated twice a year, taking into consideration the evolving deadlines for jurisdictions to deliver on their commitments and the evolution of the listing criteria that the EU uses to establish the list. Given these regular updates, the scope of application of all Luxembourg measures which refer to those jurisdictions will constantly evolve over time.
As of 21 February 2023 (date of publication of the Blacklist in the Official Journal of the European Union, see Annex I), following the listing of the BVI, Costa Rica, the Marshall Islands and Russia, the Blacklist now includes the 16 following jurisdictions (the "Blacklisted Jurisdictions"):
- American Samoa
- Anguilla
- The Bahamas
- The British Virgin Islands
- Costa Rica
- Fiji
- Guam
- The Marshall Islands
- Palau
- Panama
- Russian Federation
- Samoa
- Trinidad and Tobago
- Turk and Caicos Islands
- US Virgin Islands
- Vanuatu
In addition to the Blacklist, a list of jurisdictions with pending commitments to implement tax good governance principles (the "Greylist") is determined at EU level and also updated twice a year at the same time as the Blacklist. The evolution of the Greylist should be followed closely since Greylisted tax jurisdictions may become Blacklisted tax jurisdictions if they do not fulfil the commitments they took within the agreed time line.
As of 21 February 2023 (date of publication of the Greylist in the Official Journal of the European Union, see Annex II), the Greylist includes the 18 following jurisdictions:
- Aruba
- Albania
- Armenia
- Belize
- Botswana
- Curaçao
- Dominica
- Eswatini
- Hong Kong
- Israel
- Malaysia
- Montserrat
- Jordan
- Qatar
- Seychelles
- Thailand
- Turkey
- Vietnam
Impact on the measure denying the corporate income tax deduction of interest and royalty expenses due to entities located in non-cooperative tax jurisdictions
Based on Article 168-5 of the Luxembourg Income Tax Law ("ITL"), since 1 March 2021, under certain conditions, interest and royalties due to entities located in Blacklisted Jurisdictions are not deductible for corporate income tax purposes. As a matter of principle, additions of countries to the Blacklist only have an effect as from the next calendar year whereas a removal of a country out of the Blacklist may have an immediate effect under certain circumstances.
For 2024, the measure denying the deduction of interest and royalties applies based on the latest version of the Blacklist available as of 1 January 2024. Therefore, it will be necessary to await the update of the list to take place in October 2023 in order to see whether interest and royalties due to entities located in the BVI, Costa Rica, the Marshall Islands and Russia might be non-deductible based on Article 168-5 of the ITL. Should one of these jurisdictions be removed again from the Blacklist at the occasion of the October 2023 update, interest and royalties due to entities located in that jurisdiction will not be impacted. On the contrary, should these jurisdictions remain on the list after the October 2023 update, the deduction of interest and royalties to these jurisdictions will be denied as from 1 January 2024, provided that the other conditions of Article 168-5 of the ITL are met.
For a detailed explanation of the scope of the measure provided by Article 168-5 of the ITL, its conditions and its timing aspects, please read our article "New guidelines on Luxembourg defensive measures against non-cooperative jurisdictions for tax purposes" in our July 2022 ATOZ Insights.
Impact on disclosure requirements based on Circular L.I.R. n° 168/2 of 31 May 2022
Based on Section 4 of Circular L.I.R. n° 168/2 of 31 May 2022, the Luxembourg tax authorities ("LTA") systematically review transactions entered into by Luxembourg corporate taxpayers with related parties (within the meaning of article 56 of the ITL) located in Blacklisted Jurisdictions in order to assess whether the terms and conditions of the transactions reflect the arm's length principle. Detailed information on these transactions has to be reported by Luxembourg corporate taxpayers in their corporate tax return.
The Circular states that the latest Blacklist available as of the 0522 Copyright © ATOZ 2023 end of the accounting year concerned is key for determining whether reporting is required or not. Therefore, since most companies have an accounting year corresponding to the calendar year, reference generally has to be made to the list reflecting the October update of the year concerned. However, one should keep in mind that for companies with an accounting year which differs from the calendar year (e.g. for companies with an accounting year starting on 1 March), reference may have to be made to the list reflecting the February update. Thus, for these companies, the new list in force as of 21 February 2023 might be relevant. In such case, transactions with entities located in the BVI, Costa Rica, the Marshall Islands and Russia would have to be disclosed in the 2023 corporate tax returns.
Impact on disclosure requirements under DAC6
The listing of a jurisdiction as non-cooperative may also have an impact on the reporting obligations applicable according to the Luxembourg Law of 25 March 2020 implementing Council Directive (EU) 2018/822 of 25 May 2018 amending Directive 2011/16/EU regarding the mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements ("DAC6").
Hallmark C.1.b) ii) of the Annex to the Law of 25 March 2020 implementing DAC6 covers deductible cross-border payments made between two or more associated enterprises where the recipient is resident for tax purposes in a jurisdiction which has been assessed as being non-cooperative. This hallmark is not subject to the main benefit test.
The question arises as to the list to be taken into account to assess whether the recipient is resident in a noncooperative jurisdiction. In this respect, the FAQ released by the LTA on DAC6 provides that "non-cooperative jurisdictions within the meaning of Hallmark C.1. are those which appear on the list (as published in the Official Journal of the European Union) on the date of the triggering event of the reporting obligation." Here, in our view, reference should be made to the list in force at the time the arrangement was implemented so that the listing or delisting of a jurisdiction after the arrangement was implemented should not have any retroactive effect. Should this approach be followed, reporting would only be required if the arrangement with the entity located in the jurisdiction was implemented at the time when this jurisdiction was on the Blacklist.
As a consequence, only those arrangements implemented with the BVI, Costa Rica, the Marshall Islands and Russia on or after 21 February 2023 (but only as long as these jurisdictions remain on the Blacklist), may have to be reported under Hallmark C.1.b) ii).
Finally, one should keep in mind that as soon as article 168-5 of the ITL applies (provided all its conditions are met), payments to these Blacklisted jurisdictions are not tax deductible so they no longer fall within the scope of Hallmark C.1.b) ii).
Implications
Luxembourg taxpayers with investments into and from noncooperative jurisdictions should seek advice from their tax advisers in order to analyse the potential tax impact of the update of the EU list of non-cooperative jurisdictions on their investments and the potential reporting requirements. The evolution of the legislation of jurisdictions under the radar of the EU Council (both those on the Blacklist and those on the Greylist) should also be closely monitored to anticipate an addition to or a removal from the EU list of non-cooperative tax jurisdictions in the future and thus a change in the scope of application of the Luxembourg measures.
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.
