Luxembourg: Updates on ATAD 1, interest limitation, MLI and tax treaty

19 December 2018

Updates about tax legislative developments in Luxembourg include the following:

  • The parliament on 18 December 2018 passed legislation for the transposition of the EU Anti-Tax Avoidance Directive (ATAD 1) into Luxembourg domestic tax law.
  • A bill concerning interest limitation rules (to be applied at the level of fiscal unity and not on a stand-alone basis) and concerning fiscal unity is expected to be introduced in 2019, and with a possible retroactive effective date of 1 January 2019.
  • The parliament is expected in 2019 to vote on bills for ratification of an income tax treaty between Luxembourg and France and for ratification of the Multilateral Instrument (MLI).

ATAD 1 legislation

The bill transposing the ATAD 1 into Luxembourg domestic law includes provisions related to five main topics:

  • Interest limitation
  • Exit taxation
  • A general anti-abuse rule (GAAR)
  • Controlled foreign companies (CFCs)
  • Intra-EU hybrid mismatches

There are two additional measures—revisions of the rules on tax neutrality applicable to the conversion of debts, and amendments to the definition of “permanent establishment.” These new measures will apply to financial years beginning on or after 1 January 2019 (except for the exit tax, which will apply to financial years beginning from 1 January 2020).

Interest limitation and fiscal unity bill expected next year

The Luxembourg Finance Commission stated on 14 December 2018 that the Luxembourg government is committed to introducing in 2019 an interest limitation rule that would broadly restrict an entity’s net interest expense deduction to the greater of 30% of its tax EBITDA* or €3 million at the level of a fiscal unity and no longer on a stand-alone basis. It is expected the effective date would be retroactive, from 1 January 2019.

*Earnings before interest, tax, depreciation and amortization

Ratification of tax treaty with France not expected in 2018

Bill 7390 concerning the ratification of a pending income tax treaty between France and Luxembourg would not be expected to be subject to a vote by parliament in 2018. The State Council is expected to issue an opinion on the bill in 2019. The treaty would enter into force on 1 January of the year following the date of its ratification by Luxembourg and France. If ratified in 2019 by both countries, the treaty provisions would apply as of 1 January 2020. The French Senate approved the treaty on 17 December 2018, and the treaty has been sent to the French National Assembly for its consideration.

Ratification of MLI not expected in 2018

A parlimentary vote on Bill 7333 concerning ratification of the MLI is not expected until next year. Luxembourg signed the MLI (the agreement developed by the OECD to integrate base erosion and profit shifting (BEPS) measures into existing income tax treaties) in June 2017. After the bill’s ratification, its application for “covered tax agreement” (i.e., income tax treaties to which the MLI would apply) would depend on MLI ratification by the other contracting state and on the type of tax agreement concerned (for example, treaty measures on withholding tax or other taxes).

Read a December 2018 report prepared by the KPMG member firm in Luxembourg


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