Net Wealth Tax (NWT)
Both Luxembourg resident companies and Luxembourg branches of non-resident companies are subject to NWT. As of January 1, 2016, a new scale of rates has been introduced as follows:
- 0.5 percent up to EUR500 million and
- 0.05 percent over EUR500 million.
Interest deduction limitation
In practice, the tax administration uses a debt-to-equity ratio of 85:15 for the financing of participations. Luxembourg has introduced an interest limitation rule in the context of the transposition of ATAD. As from January 1, 2019, exceeding borrowing costs (ie, tax-deductible borrowing costs which exceed underlying interest income and economically equivalent income) are only deductible up to the higher of 30 percent of earnings before interest, taxes, depreciation and amortization (EBITDA) of the taxpayer and EUR3 million.
Exceeding borrowing costs which are not deductible in a tax period may be carried forward without time limitation. Unused interest capacity in a given tax period may be carried forward for 5 years.
The interest limitation rule is not applicable to exceeding borrowing costs:
- On loans concluded before June 17, 2016, so long as the loans are not subsequently modified;
- On loans to finance EU long-term public infrastructure projects; or
- On loans incurred by standalone entities and "financial undertakings."
Intra-EU hybrid mismatches
As from January 1, 2019, hybrid mismatch provisions apply in an intra-EU context as a result of ATAD.
The rule aims at preventing hybrid mismatches which result in a double deduction (ie, a deduction of the same expenses both in Luxembourg and in the other EU member state) or a deduction without inclusion (ie, a deduction of expenses in Luxembourg and no corresponding inclusion of the income in the taxable basis of the other EU member state).
The anti-tax avoidance directive provisions provide that when a structure includes a hybrid mismatch with double deduction, the deduction shall only be granted in the EU member state where the payment has its source. When a structure includes a hybrid mismatch with deduction without inclusion, the EU member state of residence of the payer shall deny the deduction of such payment.
Hybrid mismatches with third countries (ATAD 2) and covering a wider range of intra-EU mismatches have been implemented and came into force on January 1, 2020, with the additional “reverse hybrid” measures applying from the 2022 tax year.
Payments to EU black-listed entities
Interest or royalties paid or due to related enterprises as of 1 March 2021 are not tax deductible in Luxembourg if the recipients are corporate entities established in countries that are 'black-listed' as being 'non-cooperative' for tax purposes (based on the so-called EU blacklist adopted by the EU Council in 2017, as revised).
DAC 6
On March 25, 2020, the Law implementing the Council Directive (EU) 2018/822 (on administrative cooperation in the field of taxation, of May 25, 2018) introduces an obligation on a wide range of intermediaries to disclose cross-border tax arrangements to the tax authorities.
A reportable cross-border arrangement means any cross-border arrangement that contains at least one of the hallmarks foreseen by DAC 6, which refer to characteristics, features and examples of cross-border arrangements that present an indication of potential risk of tax avoidance. In principle, a cross-border arrangement becomes reportable if it meets one or more hallmarks, while certain hallmarks can only be triggered if a main benefit test (MBT) is also satisfied (ie, when the main benefit or one of the main benefits that a person can reasonably expect to obtain from the arrangement, taking into account all relevant facts and circumstances).
When a relevant taxpayer has to report a cross-border arrangement, such reporting has to be made within 30 days beginning on the day after the reportable cross-border arrangement (i) is made available for implementation to that relevant taxpayer,(ii) is ready for implementation by the relevant taxpayer, or (iii) when the first step of implementation has been taken in relation to the relevant taxpayer, whichever occurs 1st.
There are 2 reporting periods covering (i) transactions whose first step of implementation has occured between June 25, 2018 and July 1, 2020 (phase 1) and then (ii) transactions put in place between July 1, 2020 and December 30, 2020, and transactions put in place as from January 1, 2021 (phase 2). Transactions part of phase 1 were reportable until February 28, 2021 (instead of August 30, 2020 as initially scheduled by the directive) and phase 2 are subject to a regular reporting as from January 31, 2021 (instead of October 31, 2020).
Proposed EU Directive to fight against the misuse of shell entities for tax purposes
On December 22, 2021, the EU Commission published a proposed Directive, to tackle legal entities with no or minimal substance and no economic activities that are used for improper tax purposes (ATAD 3).
The Directive introduces reporting requirements for EU tax-resident companies with certain mobile and passive income streams and inadequate operational substance. In certain cases of inadequate substance, the benefits of tax treaties and EU Directives may be denied, resulting in an increased withholding tax burden as well as potential penalties for failure to report or incorrect reporting. Currently, ATAD 3 is still in draft version and remains open to further discussions and possible amendments.
