Tax NewsflashJanuary 6, 2014The New Program of Luxembourg’s Coalition Government
coalition government, led by Prime Minister Xavier Bettel, released its comprehensive
political program on December 2, 2013. With
respect to finances, the strategy of the government is to re-balance the public
budget via a two pronged initiative by both reducing government spending and
promoting measures (including tax measures) aimed at stimulating the growth of
legislation supporting the program remains to be issued (the government just
took office earlier this month). We will
continue to monitor the status of these important reforms going forward.
Summary on tax measures
its policy, the new government emphasized predictability and stability as
essential components for maintaining Luxembourg’s international competitiveness. The coalition declared that it will focus on
stimulating economic growth as the means to increase tax revenue, rather than
simply increasing tax rates. According to its program, this growth can be
supported by further improving the tax environment in Luxembourg in order to
attract new business (headquarters are specifically mentioned) while minimizing
any tax increases to have the least impact (increase of the VAT rate but still maintaining
the lowest VAT rate in the European Union).
Direct tax measures
such as a new notional deduction on equity, as well as modernizing both the
intellectual property tax regime and the “participation exemption regime” are
mentioned. In addition, the agenda includes:
An affirmation of the political
will to further improve Luxembourg as the international platform to structure
investments and financing (including further developing its double tax treaty
Confirmation to implement changes
in line with the trends in the OECD and European Union, i.e., additional corporate
governance and substance rules, as well as transfer pricing rules in line with
internationally applied standards;
Intention to take measures to
attract private equity funds (including measures improving the Luxembourg
“carried interest” rules);
Various tax procedural reforms,
to increase transparency
and timely collection of revenue.
Program Highlights: Focus
on Tax Measures
Corporate Income Tax
Modernization of the Luxembourg
intellectual property regime.
AMMC additional comments: Such modernization harmonizes with further
increasing Luxembourg’s economy in both ICT and bio-tech which Luxembourg has seriously
developed in the past years in terms of infrastructure and attracting major
high tech giants (Amazon, eBay, PayPal, iTunes, etc.) as well as encouraging
start-ups (incubators, pro-active support for entrepreneurs, recruiting key talent
to Luxembourg, etc.).
Notional interest deduction on
equity to encourage investors to fund Luxembourg companies with equity rather
AMMC additional comments: This
should support the development of Luxembourg as a location for centralizing
group treasury, which would help to attract headquarters in Luxembourg.
However, the details of the proposed measure will be of importance, such as: the
determination of the amount of the notional deduction, assets that can be
financed with equity carrying notional deduction, qualification (or not) of
such equity as debt for debt/equity purposes, etc.
Intention to maintain
Luxembourg’s attractiveness for international investments and financing. The
government intends to introduce a legal and tax framework for group financing
(reference is made to “cash pooling”).
Modernization of the Luxembourg’s
“participation exemption regime”.
AMMC additional comments: The
Luxembourg “participation exemption regime” allows a Luxembourg resident
company (e.g. SARLs), under some conditions, to exempt dividends and capital
gains derived from shares in a subsidiary. On the other hand, a Luxembourg
resident company can, under conditions, distribute profit without withholding
Corporate governance and
substance rules to assure that Luxembourg companies have sufficient presence in
Luxembourg to be introduced. Transfer pricing legal provisions should also be
AMMC additional comments: These
regulations and laws should (1) reinforce the position of Luxembourg as a key
on-shore location to carry investments, financing or hold and manage
intellectual property and (2) support the development of Luxembourg, as prime
location for establishing group headquarters while done in harmony with OECD
and EU tax principles.
Codification of functional
currency rules allowing tax returns in a foreign currency.
AMMC additional comments: Luxembourg
companies establishing their statutory financial statements in a foreign
currency (e.g. USD) would, under such a new lawbe
entitled to file their tax returns in that same currency. The result of this
measure should in principle be that no forex would arise from the conversion of
(for instance) assets denominated in the currency in which the financial
statements are established (e.g. USD) into EUR when preparing Luxembourg tax
returns (EUR is currently the default tax currency)
For small and medium size
companies, a mechanism allowing tax deferral is contemplated.
More systematic application of
penalties, fines and respect of deadlines is mentioned and the will to enhance
the fight against tax fraud is expressed.
Commitment not to increase the
subscription tax applicable to UCITS and SIF funds and to maintain the tax
regime applicable to SICARs.
AMMC additional comments: UCITS (Undertaking for Collective
Investment in Transferable Securities) are mutual funds that can be distributed
to the public throughout the EU (EU passport).
SICAR (Société d’Invstissement en
Capital à Risque) is a vehicle designed to invest in capital carrying a certain
level of risk (e.g., in start-up). While it is generally subject to corporate income
tax, income from transferrable securities (as well as income derived from cash under
certain conditions) is exempt.
SIF (Special Investment Fund) can be
set up as a company or in a contractual form. It is not subject to income tax
but to a subscription tax (in principle 0.01%) computed on the Net Asset Value
of the Fund.
the SICAR and the SIF are set up as investment vehicles, often by private equity
players. The SIF is used as well by the real estate funds and hedge funds industry
to structure investments. The SIF-SICAV (SIF-Société d’Investissement à Capital
Variable) is the corporate form of the SIF and may benefit from some of the
double tax treaties concluded by Luxembourg.
With respect to the automatic
exchange of information, Luxembourg will continue to participate to the work
carried out at EU and OECD levels aimed at developing international standards
in that area but implementation and timing of such rules should not jeopardize
the stability and competitiveness of the financial sector.
See below in the Individual tax
sub-section as to “carried interest” in connection with the funds industry.
Intention to promote
diversification of activities and diversification of potential investors.
Luxembourg will continue to support establishment of Chinese financial players
(banks amongst others) in Luxembourg and the development of Luxembourg as the
first center for Renminbi (Chinese
official currency) outside China. Middle East states (“Persian Gulf” countries)
are as well referred to in the program to confirm that Luxembourg will continue
to reinforce links with those countries and wish to position itself as the first
non-Muslim country for Islamic finance (the government should shortly vote a law
authorizing issuance of Luxembourg sovereign sukuks).
AMMC additional comments: Recently,
three top Chinese banks have established a subsidiary in Luxembourg (besides
Chinese branch presence). The government intends to build on that success to
attract further Chinese banks (and probably additional non-EU based financial
relying on the advantages of Luxembourg (high end service providers, efficient and
flexible regulatory and tax environment, long standing experience as to
international / cross border transactions, etc.).
The same intention of the
former government not to apply the European Financial Transaction Tax (FTT) is re-confirmed
by the new coalition government.
AMMC additional comments: On 14 February 2013, the
European Commission issued a proposal for a Council Directive concerning the
implementation of the FTT. The FTT is a tax applied to financial transactions consisting
of the exchange of securities, bonds, shares and derivatives between banks or
other financial institutions. The proposed minimum tax
rates are 0.1% for shares and bonds, units of collective investment schemes,
money market instruments, repurchase agreements and securities lending
agreements and 0.01% for derivative products. Each party is separately liable
for the tax, so transactions between two financial institutions may be taxed
twice. Germany, France, Italy, Spain, Belgium, Estonia, Greece, Austria,
Portugal, Slovenia and Slovakia decided to implement the FTT.
Acknowledgement that attracting
key professional talent to Luxembourg is a top priority and personal tax will
be reviewed carefully for optimal improvements in this respect.
AMMC additional comments: As we enter into the “BEPs” world of
international tax. Key personnel and
functions may play an increasingly important role in determining where profit
is to be located for tax purposes. The government
is aware of this and so further enhancers (not just tax measures) to encourage
key personnel to relocate to Luxembourg should be an integral part of the
overall policy of attracting new business and increasing tax revenue.
In connection with the fund
industry, enhancement of the tax regime of “carried interest”, which would
apply to all new funds set up in Luxembourg without limit in time.
Within the framework of the
development of Luxembourg as a Private Banking center, the government made it
clear that it is not the intention to apply net worth tax to individuals or to
change the current regime on inheritance tax (in Luxembourg there simply is no inheritance
tax on transfers between parents and children).
The taxable tranches, tax rates
and personal allowances will be reviewed.
Confirmation of the intention
to increase the general VAT rate, but still keeping it the lowest in the European
practice and regulation of tax advisors
New procedures for Advance Tax
Confirmation letters to assure transparency and consistency in application of
international and EU standards.
Modernization and simplification
of the tax procedure rules.
A tax consultative committee
will be set up within the Ministry of Finance. This committee should be
composed of tax experts of both the public and private sectors and will advise
the Ministry of Finances on the evolution of the tax laws, attractiveness and
competiveness of Luxembourg.
AMMC additional comments: The government is already reaching out to
Luxembourg’s financial services and international business community.
Introduction of a regulation,
authorization and supervision for the profession of tax advisor.
Contacts at AMMC Law:
Senior Tax principal/Head of Tax
Tel: +352 26 27 22
firstname.lastname@example.orgXavier is leading the Tax Practice of AMMC Law. After
one year at the bar in Belgium, he acquired more than 18 years of experience as
tax advisor in Luxembourg, initially in PWC and thereafter for 11 years in EY
Luxembourg, out of which more than 7 years as Tax Partner. Over his career
Xavier focused on international tax structuring for Multinationals, Funds (i.e.
Private Equity and Real Estate Funds, Sovereign Wealth Funds and Hedge Funds),
and Financial Institutions based in USA, Canada, UK and China and Middle East
amongst others. Xavier acquired over
those years an in depth expertise in mergers and acquisition transactions,
holding, financing and intellectual property structures as well as in
structuring tax efficiently investments
for Funds located across continents.
Tel: +352 26 27 22
email@example.comJames is an American tax lawyer with over 11 years of
international tax experience in Luxembourg and 14 years total. James has advised Fortune 500 companies,
start-ups, and institutional investors on a broad range of Luxembourg tax
planning solutions including IP management, cross-border financing, M&A,
and many restructuring projects. Prior
to joining AMMC, James was a Director of International Tax at KPMG in
Luxembourg. He has multiple published articles on
Luxembourg tax aspects.
details on foreign exchange aspects, please refer to: IFA, Cahier de droit
fiscal International, Volume 94b, 2009, “Foreign exchange issues in
international taxation”, Luxembourg chapter, by Xavier Hubaux and Jean-Yves
In that respect, according to a report dated December 2013 from the
Luxembourg Ministry of Finances, as of the date of the report, Luxembourg would
count 147 banks (107 subsidiaries and 38 branches) from 26 different countries,
including: Germany (37), France (14), UK (9), USA (6), China (6), Japan (5),
Brazil (4), Qatar (3), Canada (2), Russia (1), etc.
In that respect, according to the report from the Luxembourg Ministry of Finances
mentioned above, Luxembourg is AAA rated by the three main rating agencies; the
Public Debt in 2012 is 21.7% (i.e. < 60%) and the General Government Deficit
in 2012 was only -0.6% (