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24 January 2023

Luxembourg's 2023 tax and legal forecast provided

  • 2023 will bring some changes in the direct tax and legal landscape of Luxembourg and the European Union (EU).
  • The Luxembourg Budget Law 2023 clarifies the application of the Reverse Hybrid Entity Rule.
  • Several EU Directives are currently going through the Luxembourg transposition process, e.g., the Mobility Directive and DAC7. In addition, the EU Directive on ensuring a global minimum level of taxation for multinational groups in the Union (Pillar Two Directive) and Public Country-by-Country Reporting will have to be implemented in domestic law by 31 December 2023.
  • Work in the area of taxation also continues at the EU level. While the Pillar Two Directive has been adopted, important dossiers such as the work on the prevention of the misuse of shell entities (UNSHELL) or the Debt-Equity Bias Reduction Allowance (DEBRA) are still under discussion.

The year 2022 has ended with some laws being adopted, other pieces of legislation still pending in front of Parliament, and more legislation to come in 2023. Given that the next legislative elections will take place in October 2023, it will be interesting to see what draft laws the outgoing Government will introduce and what priorities the next Luxembourg Government will have in fiscal policy terms.

Budget Law 2023 | Clarification of Reverse Hybrid Entity Rule and other measures

On 15 December 2022, the Budget Law 20231 was approved by the Luxembourg Parliament. In addition to the extension for filing the annual corporate income and municipal business tax returns, and net wealth tax returns from the current due date of 31 March to 31 December as from tax year 2022 and 2023, respectively, it clarifies that the Reverse Hybrid Entity Rule will only apply if the non-taxation of the income attributable to a nonresident investor that is an associated enterprise in a Reverse Hybrid Entity is due to hybridity.

Moreover, the Law excludes investments in the fossil gas and nuclear energy sectors from the benefit of the reduced subscription tax (applicable to undertakings for collective investment) as introduced by the Budget Law 2021.

Amendment to the interest limitation rule | Removal of securitization entities from financial undertakings definition

On 9 March 2022, the Luxembourg Minister of Finance submitted a draft law (Draft Law) to the Luxembourg Parliament to amend the interest limitation rule as incorporated into Luxembourg tax law to remove securitization entities from the definition of financial undertakings for the purpose of applying the rule. This removal follows the reasoned opinion sent by the European Commission (the Commission) to Luxembourg, in which the Commission considered that the list of types of financial undertakings within the meaning of article 2(5) of Council Directive (EU) 2016/1164 of 12 July 2016 establishing rules against tax avoidance practices that directly affect the functioning of the internal market is of a "static" nature and therefore cannot be extended to other types of regulated entities in the financial sector. The Draft Law is still pending before the Parliament.

Modernization of the investment tax credit

In his speech on the State of the Nation held in October 2022, Prime Minister Xavier Bettel announced a modernization of the investment tax credit to encourage investments in the digital, energy or ecological transition. It is expected that draft legislation will be issued in 2023 with the aim of bringing it into force in 2024.

Double Tax Treaties update

Luxembourg has continued the extension of its Double Tax Treaties network, with the ratification in 2022 by the Luxembourg Parliament of the treaties signed with Ethiopia, Ghana, and Rwanda. The three treaties will enter into force after the Contracting States have notified each other that the procedures required by law for the entry into force have been satisfied.

A further Double Tax Treaty was signed in 2022 with Colombia.2 In addition, Luxembourg and the United Kingdom signed a new Double Tax Treaty3 on 7 June 2022, which, once in force and effective, will replace the existing Treaty of 1967, as subsequently amended. The legislative process for approving these two treaties has not yet been initiated by Luxembourg.

Tax transparency rules for digital platforms | Implementation of DAC7

Luxembourg's Minister of Finance submitted on 13 June 2022 a draft law4 to Parliament aimed at transposing Council Directive (EU) 2021/514 of 22 March 2021 (DAC7) amending Directive 2011/16/EU on administrative cooperation in the field of taxation (DAC).

DAC7 introduces a reporting obligation for digital platforms whether located inside or outside the EU and an automatic exchange of information between EU Member States' tax administrations on revenues generated by sellers on these platforms as of 1 January 2023. In addition to this new reporting obligation for digital platforms, DAC7 introduces a number of generic changes to the DAC not limited to digital platforms, including a delineation of the internationally agreed standard of foreseeable relevance and a legal framework for the conduct of joint audits between two or more Member States.

The provisions will enter into force on the first day of the month following the month of the publication of the law in the Official Gazette, except as regards the provisions on joint audits that will enter into force on 1 January 2024. Reporting Platform Operators will have to register with the Luxembourg Tax Authority by 31 December 2023 at the latest and the first reports will have to be filed with the Luxembourg Tax Authority by 31 January 2024.

Transposition of the Mobility Directive

On 27 July 2022, the Luxembourg Minister of Justice submitted a draft law to Parliament aimed at transposing Directive (EU) 2019/2121 of the European Parliament and of the Council of 27 November 2019 amending Directive (EU) 2017/1132 with respect to cross-border conversions, mergers, and divisions (Mobility Directive). The transposition deadline is 31 January 2023, but it seems unlikely that the draft law will become law by that date.

The Mobility Directive introduces several procedures intended to facilitate cross-border conversions, mergers, and divisions for EU companies, all the while integrating mechanisms to safeguard the interests of the various stakeholders affected by a cross-border operation. As a matter of fact, a provision was introduced giving a right of withdrawal in return of fair remuneration benefiting the minority shareholders opposed to an operation. A mandatory anti-abuse control was also put in place to allow Member States' authorities to fight against abusive or fraudulent cross-border operations. The upside of the Mobility Directive on cross-border conversions is that those EU countries that so far have not allowed EU conversions (such as Ireland), will now be forced to accept them. The downside is that the new EU cross-border conversion regime will be more complex to handle from a Luxembourg standpoint, with additional documents to draft compared to the current regime. Non-EU conversions from Luxembourg will remain as simple as they are under the current practice.

In the Draft Law, new provisions on EU cross-border mergers and divisions were isolated in a separate section of the Chapters II and III of Title X of the Luxembourg Company Law to limit their scope of application. To that effect, the new concepts of "European cross-border merger" and "European cross-border division" were introduced. These separate sections will form a special regime derogating from the ordinary law of both domestic and cross-border mergers and divisions and will therefore not be extended to other cross-border operations such as cross-border transformations involving third countries or cross-border divisions by absorption. As for cross-border transformations, new provisions were transposed into a new Chapter VI of Title X of the Luxembourg Company Law, and the concept of "European cross-border transformation" was introduced.

The Draft Law also intends to expand both national and cross-border mergers, divisions, and contributions to special limited partnerships (société en commandite spéciale (SCSp)). SCSps were originally excluded from benefiting from these operations due to their formal absence of legal personality. However, they actually do enjoy all the attributes of a legal entity, such as a corporate name, a domicile, a nationality and a certain form of assets. With a view to further enhance the attractiveness of this form of legal entity, the legislator deemed it appropriate to give an SCSp the possibility of carrying out these kinds of reorganization operations without having to first undergo a transformation into an entity which benefits of such legal personality, like a limited partnership.

Minimum Taxation of Multinational Enterprise Groups | EU Pillar Two Directive

On 15 December 2022, the Council of the EU unanimously adopted the Directive ensuring a global minimum level of taxation for multinational enterprise (MNE) groups and large-scale domestic groups in the EU5 (the Directive). The Directive provides a common framework for EU Member States to implement into their national laws the Model Rules on the Pillar Two Global Minimum Tax (GloBE),6 as agreed by the G20/Organisation for Economic Co-operation and Development (OECD) Inclusive Framework on Base Erosion and Profit Shifting (BEPS) and released on 20 December 2021. It is intended to ensure the GloBE rules are implemented in a coordinated manner throughout the EU, as adjusted to comply with EU law and taking into account the specifics of the EU Single Market.

The Directive introduces minimum effective taxation for large multinationals with annual revenues of at least €750 million. It sets forth a system consisting of two interlocked rules - the Income Inclusion Rule (IIR) and the Under-Taxed Profits Rule (UTPR), referred to collectively as the GloBE rules - through which an additional amount of tax (called a "top-up tax") should be collected each time that the effective tax rate (ETR) due on the income of an MNE group in a given jurisdiction is below 15%. The scope of the Directive also extends to large-scale purely domestic groups to ensure compliance with the fundamental freedoms.

Given that EU Member States have until 31 December 2023 to transpose the Directive into national legislation with the rules to be applicable for fiscal years starting on or after 31 December 2023 (with the exception of the UTPR which is to be applicable for fiscal years starting on or after 31 December 2024), a draft law implementing the Directive is expected to be published first half of 2023.

Public Country-by-Country Reporting (CbCR) Directive

On 21 December 2021, the Public Country-by-Country Reporting (CbCR) Directive7 entered into force and EU Member States have to transpose the Directive into national legislation by 22 June 2023.

The rules set forth in the CbCR Directive require both EU-based MNEs and non-EU based MNEs doing business in the EU through a branch or subsidiary with total consolidated revenue of more than €750 million in each of the last two consecutive financial years to disclose publicly the income taxes paid and other tax-related information such as a breakdown of profits, revenues, and employees per country. Such information needs to be disclosed for all 27 EU Member States and all jurisdictions included in the Annex I and Annex II of the Council conclusions on the EU list of non-cooperative jurisdictions for tax purposes (so-called EU black list and gray list). For all other jurisdictions, it is sufficient for aggregated data to be disclosed.

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For additional information with respect to this Alert, please contact the following:

Ernst & Young Tax Advisory Services S.à r.l., Luxembourg City

Ernst & Young LLP (United States), Luxembourg Tax Desk, New York

Ernst & Young LLP (United States), Luxembourg Tax Desk, Chicago

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ENDNOTES

1 See EY Luxembourg Tax Alert, Luxembourg Budget Law 2023 enacts clarification to Reverse Hybrid Entity Rule | EY Luxembourg, published on 19 December 2022.

2 See EY Luxembourg Tax Alert, Colombia and Luxembourg sign double tax treaty | EY Luxembourg, dated 5 April 2022.

3 See EY Luxembourg Tax Alert, Luxembourg and the United Kingdom sign new double tax treaty | EY Luxembourg, dated 21 June 2022.

4 See EY Luxembourg Tax Alert, Luxembourg publishes draft tax transparency rules for digital platforms, dated 28 July 2022.

7 See EY Global Tax Alert, EU Public CbCR Directive enters into force on 21 December 2021 | EY - Global, dated 2 December 2021.

Document ID: 2023-0147

 

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