Luxembourg Reshapes Its Tax Regime: What Consequences for Companies and Individuals?
1. Corporate Tax Regime Amendments
A Progressive Net Wealth Tax rate
The Net Wealth Tax (NWT) regime will be amended and a progressive rate will be introduced.The current uniform 0,5% rate shall remain applicable for a NWT base under the threshold of 500 million euros, while NWT bases exceeding 500 million euros will be taxed at a rate of 0,05%.
Repeal of the minimum corporate income tax regime
Bill n°6891 sets forward the abolition of the current minimum corporate income tax regime.
It will be supplanted by a minimum NWT charge applicable to all Luxembourg companies (that is, entities whose place of central administration or statutory seat is located within the Grand-Duchy). A minimum 3,210 euros charge shall be applicable to all companies whose financial assets, transferable securities and cash deposits exceed 90% of their total gross assets and, cumulatively, 350.000 euros. All other Luxembourg entities shall be taxed following a progressive scale ranging from 535 euros to 32.100 euros, depending on the entity’s total gross assets at the end of the fiscal year.
End of Exemption for Securitization Vehicles, SICARS
Bill n°6891 amends the current tax regime applicable to securitization vehicles and SICARs. Consequently, those entities will become subject to the minimum NWT regime set out hereinabove.
The New IP Box Regime
Article 50 bis of the Luxembourg Income Tax Law (L.I.R.) implemented an 80% tax exemption on the net income derived by a company from royalties, capital gains and damages from the use/exploitation, or from the sale/alienation of IP rights in Luxembourg. As such, the effective taxation amounted to 5,84% on qualifying IP rights.The OECD adopted a consensus on the modified nexus approach on 20 February 2015 and the final BEPS Action 5 on 5 October 2015, which proposes that benefits enjoyed from IP should be proportional to the R&D expenditures incurred by the company in the same jurisdiction. The expenditure in the context of outsourcing and acquisitions that can benefit from an IP tax regime is limited to 30%, and this expenditure must have actually taken place.The legislative procedure to amend the Luxembourg IP Box regime has been set in motion by Bill n°6900.The current IP regime will be abolished: – as from 1 July 2016 for both the corporate income tax and the municipal business tax – as from 1 January 2017 for the net wealth tax.
But this change will not take place at one stroke, as the current Luxembourg IP Box Regime also enjoys a 5-year grandfather clause, which will enable companies currently benefiting from this regime to enjoy it until 30 June 2021.
New entrants may also benefit from the current IP regime until 30 June 2021 for IP rights:
– developed or acquired from unrelated parties before 1st July 2016 (including improvements to those IP rights completed before 1st July 2016) ;
– acquired (including under any tax neutral transactions) from any related party before 31st December 2015 ;
– acquired (including under any tax neutral transactions) from any related party between 31st December 2015 and 1st July 2016 which were already eligible for the current IP regime at the time of their acquisition or which benefited in a foreign country from an IP regime similar to the current IP regime in Luxembourg. As such, there is only limited time to implement an IP holding structure benefiting from the current regime.
The details of the new IP regime have not been set out in the new Bills and are expected to be announced in the upcoming months.However, as is already the case in other member states implementing such regimes, this reformed regime will most likely be closely modeled after the current one, which was already focused on attracting investment accompanied by real and substantial business activity.Based on the European and OECD developments, it is likely that the new IP Box will apply to a narrower category of IP (trademarks will likely be excluded) and emphasis will be placed on the existence of a substantial economic activity. Companies will need to ascertain and track their R&D expenditure more closely. To compete with other IP Boxes, the taxation of the qualifying IP income should remain at a favorable rate, preferably averaging 6%.
Exchange of information
The Luxembourg tax authorities will also automatically disclose the identity of taxpayers benefiting from the current IP regime to the competent authorities of foreign countries, pursuant to:
– a bilateral double tax treaty,
– a bilateral Tax Information Exchange Agreement (TIEA),
– the law of 29 March 2013 on administrative cooperation on tax matters (as amended), implementing the EU Directive 2011/16/EU
– or the law of 26 March 2014 approving the OECD Mutual Assistance Convention on Tax Matters.
It must also be noted that Luxembourg has been recognized by the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes on 30 October 2015 as a “largely compliant” country in its application of tax standards, and as such, is no longer black-listed. If enacted, these measures would take effect from 1 January 2016.
2. New Step-Up Mechanism for Individual Taxpayers
The new highly tax-efficient step-up mechanism allows foreign tax residents who transfer their tax residence to the Grand-Duchy to revalue the purchaseprice of their securities to their market value at the time of their transfer of residence, provided that they hold a substantial participation in the company (i.e. holdings amounting to more than 10% of the share capital of the company).bAs such, only capital gains accrued in the period following the transfer of tax residence to Luxembourg will be subject to taxation. If enacted, these measures would take effect for the 2015 tax year.
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