20 December 2010
ATOZ NEWS: Tax, ATOZ and Taxand Intelligence | December 2010
by: The Atoz Team
As the close of 2010 is rapidly approaching, we are reminded to look back and evaluate another interesting year. It is also a good time to look forward to 2011 and prepare for the opportunities and challenges that will come our way. This issue of our newsletter is designed to give you a taste of both. We’d encourage you to focus on the TAX News section, which will provide you with an overview of the upcoming changes to the tax code.
Allow us to take this opportunity to also express our appreciation to you: our clients, partners and friends. Thank you for your dedication and support throughout the past year. We look forward to continue serving you in 2011.
Happy Holidays and Best Wishes for a prosperous New Year!
The ATOZ Team
On the 2nd of December, the Parliament voted a law that introduced the following tax measures, which aim at restoring budgetary balance:
Minimum taxation for SOPARFIs
A minimum corporate income tax of EUR 1.500 is introduced for unregulated collective undertakings for which the sum of fixed financial assets, transferable securities and cash at bank represents more than 90% of total assets. Entities that perform activities subject to a business license or requiring an approval by a supervisory authority (like investment funds) are out of the scope of this minimum tax. The entities concerned are thus SOPARFIs with mainly a holding activity.
There are a number of points that need clarifying in the law and we will be working on these with the relevant authorities over the next months.
Solidarity surcharge increased by 1%
The solidarity surcharge due by companies is to be increased by 1%, from 4% to 5%. This means that the global tax rate for companies (i.e. Corporate Income Tax + Municipal Business Tax) is brought from 28.59% (current rate) to 28.80%, meaning a slight increase of 0.21% as of next year:
CIT = 21% + (21*5% solidarity tax) = 22.05%
MBT = 6.75%
Investment tax credit increased
The 12% investment tax credit (“bonification pour investissement complémentaire”) is to be raised to 13%. This tax credit is available for investments in specific amortizable tangible assets (excluding buildings). The tax credit on new investments (“bonification pour investissement global”) is to be raised from 6 to 7% for investments up to a ceiling of EUR 150.000 and from 2 to 3% for investments exceeding EUR 150.000.
Energy saving investments
The depreciation rules applicable to energy saving investments are amended in order to spur this type of investment. For this purpose, the maximum special depreciation is to be increased from 60 to 80%.
Tax deductibility of exit payments limited
Exit payments (so-called “golden parachutes”) will now only be tax deductible up to an amount of EUR 300.000.
Tax measures for individuals
Top marginal income tax rate increased to 39%
A new top marginal tax rate is introduced, which applies to taxpayers with taxable income of EUR 41.793 (EUR 83.586 for a household of 2 persons) and more.
Solidarity surcharge increased to 4 or 6%
The solidarity surcharge of 2,5%, due by individuals with taxable income of ≤ EUR 150.000 (EUR 300.000 for a household of 2 persons) is to be increased to 4% and to 6% for individuals with a taxable income of > EUR 150.000 (EUR 300.000 for a household of 2 persons).
Crisis contribution of 0.8% introduced
A "crisis contribution" of 0.8% will be levied in 2011 and potentially in 2012. The plan is by the end of 2011 to re-discuss whether the levy of this tax should be extended or not to the year 2012, which will be based on the economic situation at that stage. The crisis contribution applies on all income types: salary, rental income, dividends, etc. On salary income, as far as non-qualified workers are concerned, an amount corresponding to the social minimum wage is exempt. As far as self-employed individuals are concerned, the exempt income is limited to ¾ of the social minimum wage.
For questions and comments, please contact Keith O’Donnell at firstname.lastname@example.org.
On December 16th the Parliament voted the law implementing the “UCITS IV” Directive into Luxembourg law. This law introduces some positive tax measures for investment funds and management companies.
Olivier Remacle presents these changes and the opportunities they may create.
Non-resident investors are no longer taxable in Luxembourg on capital gains on significant (i.e. > 10%) shareholdings in UCIs
As of 2011, capital gains realised by non-residents on the sale of shares in SICAVs/SICAFs/SIFs will no longer be taxable in Luxembourg. So far, taxation could occur in case of a sale of a 10% (minimum) shareholding within 6 months following the acquisition of the shares, to the extent there was no treaty granting the exclusive taxation right to the country of the investor. In practice, this was a very unlikely pattern. However, with the expected rise of “Master-feeder” fund structures in UCITS IV, there was an increasing concern, which now has been addressed.
Management Company or central administration in Luxembourg does not create a Luxembourg tax residence of non-resident UCIs
The UCITS (Undertakings for Collective Investment in Transferable Securities) IV Directive introduces a full passport for UCITS Management Companies, which allows a UCITS established in one EU Member State to be managed by a Management Company in another Member State.
Based on the place of effective management criteria, often used to determine tax residence, having a UCITS established in one country, with its Management Company established in Luxembourg, may create a residence of the UCITS in the country of the Management Company. In order to remove this tax barrier to the management company passport, the law introduces a new article, which provides that non-resident UCIs will be exempt from income and wealth taxes in Luxembourg, should they have their place of effective management or their central administration in Luxembourg.
Exchange Traded Funds become exempt from subscription tax
Exchange Traded Funds ("ETFs") will be exempt from the 0,05% subscription tax (taxe d’abonnement) currently levied on their Net Asset Value.
Multi-employer pension pooling vehicles become exempt from subscription tax
Multi-employer pension pooling vehicles will also become exempt from the 0,05% subscription tax. So far, this exemption was applicable only to Specialised Investment Funds and did not apply to funds, set up under the Law of December 20, 2002 (the exemption applied only to single-employer vehicles).
For questions and comments on any of the above mentioned points, please contact Olivier Remacle at email@example.com.
The Law of October 26 2010 removes some legal uncertainties from the Chamber of Commerce Law, dated April 4 1924, in particular regarding persons that are subject to the Chamber of Commerce contribution. The law confirms that SOPARFIs are liable to the contribution and defines specific rules regarding the amount of contribution that these specific entities will have to pay.
The new computation rules apply as of 2010 and are based on the 2008 profits, as the Chamber of Commerce contribution is computed based on the profits of the penultimate year.
Jean-Michel Chamonard presents the changes introduced by this new law.
Legal uncertainty of the assessments of the chamber of commerce
Since 2007, the legality of the Chamber of Commerce contribution has been challenged in front of the Luxembourg courts. If the growing number of litigations illustrates the uncertainty of the regime applicable, the situation has remained unclear until the issuance of the new Law. The ground for the judges to consider these assessments as illegal was that no Grand Ducal regulation had been adopted in order to define the procedure for the issuance of assessments by the Chamber of Commerce. Now that the Law has been amended and a Grand Ducal Regulation dated 4 November 2010 has been passed, this legal uncertainty is removed so that the notice of assessments of the Chamber of Commerce can in principle no longer be challenged.
Amount of the contribution - general rules
The contribution is computed based on the commercial profit within the meaning of the Luxembourg income tax law but before deduction of any tax losses carried forward. The amount of profit is based on the information provided by the tax authorities to the Chamber of Commerce. The profit, which is taken into account, is the profit of the penultimate year, i.e. the contribution 2010 is computed based on the profit 2008.
Based on the regulation of the Chamber of Commerce dated 12 November 2010 that defines the computation rules, the amount of the contribution will vary depending on the amount of profit. A digressive taxation rate applies as follows:
|Amount of commercial profit||Applicable rate|
|≤ EUR 49.500.000||0,2%|
|> EUR 49.500.000 until EUR 86.500.000||0,15%|
|> EUR 86.500.000 until EUR 99.000.000||0,1%|
|> EUR 99.000.000 until EUR 111.500.000||0,05%|
To illustrate with an example, if a Company has a taxable profit of EUR 100.000.000, then
- 49.500.000 will be subject to the 0,2% rate
- 37.000.000 will be subject to the 0,15% rate
- 12.500.000 will be subject to the 0,1% rate
- 1.000.000 will be subject to the 0,05% rate
The contribution will therefore be
49.500.000 * 0,2% = 99.000 EUR
37.00.000 * 0,15% = 55.500 EUR
12.500.000 * 0,1% = 12.500 EUR
1.000.000 * 0,05% = 500 EUR
Total = 167.500 EUR
Grand Ducal regulation dated November 4, 2010 has a fixed minimum annual contribution amounting to:
- EUR 14 for individuals;
- EUR 70 for partnerships and private limited liability companies (S.à r.l.) and
- EUR 140 for entities subject to corporate income tax other than S.à r.l.
Amount of the contribution – specific rules applicable to SOPARFIs
The above mentioned rules do not apply to entities that qualify as SOPARFIs. For these, based on the above mentioned regulation, a fixed contribution of EUR 350 is due, regardless of the amount of profit realized by the Company. Even if this amount is much lower than the maximum of EUR 3.000, which was foreseen in the amended Law, this amount is still much higher for many companies than under the old regime, where many SOPARFIs were only subject to the EUR 70 minimum contribution applicable to Sàrl.
The EUR 350 fixed contribution could however be good news for entities, which depreciated their assets over the past or recorded some provisions, as many entities did during the financial crisis. Indeed, the reversal of such provisions or depreciation will no longer be subject to the contribution in the case of SOPARFIs because they will only be subject to the EUR 350 fixed contribution. The issue remains however in the context of entities other than SOPARFIs, since they cannot deduct their losses carried forward from the profit taken as basis to compute the contribution so that the reversals will impact the contribution due.
The concept of SOPARFI for Chamber of Commerce contribution purposes is defined in the Law. SOPARFIs are companies with main purpose of holding of financial participations. To qualify as a SOPARFI, the SOPARFI has also to be registered as such, i.e. to have been granted the NACE code 64.202 by the NACE. The NACE Code is granted by the STATEC based on the information provided upon its incorporation.
The information to be completed by entities and to be submitted to the STATEC after their incorporation has to be carefully monitored, as the content of the information will have an impact on the amount of Chamber of Commerce contribution to be paid by the entity. We recommend that groups with a large number of Luxembourg companies, with mainly holding activity, consider reviewing their current and/or future situation in regards to the Chamber of Commerce contribution.
For additional details, questions or comments, please contact Jean-Michel Chamonard at firstname.lastname@example.org.
The EU Council recently reached political agreement on a draft directive aimed at strengthening administrative cooperation in the field of direct taxation so as to enable the EU member states to better combat tax evasion and tax fraud.
The aim of the Directive is:
- to ensure that the OECD model tax convention (already applied in Luxembourg) is implemented in the EU in regards to the exchange of information on request;
- to introduce limited automatic exchange of information as of 2014.
Atoz has been following closely the recent international and local developments in this area and is the author of a major report published in October 2009 on banking secrecy and exchange of information in tax matters. Below he presents the changes to be introduced by the directive and explains what these changes mean for Luxembourg.
Exchange of information upon request
Until 2014 an exchange of information upon request will apply, to taxes of any kind except VAT and excise duties. As a result, information may only be requested if such information has foreseeable relevance. The draft directive clarifies that this standard of foreseeable relevance (which is the standard applied under the OECD Model Tax Convention), is intended to provide for an exchange of information in tax matters to the widest possible extent, while stopping short of granting member states the right to engage in “fishing expeditions” or to request information that is unlikely to be relevant to the tax affairs of a given taxpayer.
Automatic exchange of information
For the years starting in 2015, the Council agreed on a step-by-step approach aimed at eventually ensuring unconditional exchange of information for 8 categories of income and capital. These categories are: income from employment, directors’ fees, dividends, capital gains, royalties, certain life insurance products, pensions, and ownership of and income from immovable property.
In a first step, EU member states will communicate automatically as from 2015, information relating taxable periods starting 1st January 2014. The following 5 categories of income are concerned:
- income from employment;
- director’s fees;
- life insurance products not covered by other Community legal instruments on exchange of information and other similar measures;
- ownership of and income from immovable property.
By 1 July 2017, the EU Commission will provide a report and, if needed, a proposal examining the possibilities for extending the number of categories from 5 to 8.
The directive clearly aims at making an automatic exchange of information the rule in regards taxation.
Even if this directive currently does not cover all types of income, the aim is still to achieve an automatic exchange of information in regards to all types of taxes and income within the EU. Other types of income like income from savings or life insurance products are or will in future most probably be subject to similar provisions, even if by means of a separate directive.
While Minister Frieden is trying to put a brave face on these developments, he has clearly failed at establishing an exchange of information upon request as the general standard in Europe.
Whether this directive will actually enable member states to better combat tax evasion and tax fraud remains to be seen. What is surely the case is that such a directive will impose further compliance costs on businesses in Europe as this information needs to be gathered in order to be communicated.
Whether gathering such information can be reconciled with the general protection of privacy laws has not yet been adequately addressed, especially in cases (like Germany) where the gathering of all of this information is currently not necessary for internal purposes.
Finally, such a development will put the Luxembourg private banking industry at a competitive disadvantage, if similar agreements are not reached with other private banking centres outside of the EU.
“Taxpayers must pay attention to and plan carefully for, the impact of VAT on acquisitions or disposals of shares, or more generally on transactions involving holding companies.” This is what Christophe Plainchamp and Nicolas Devillers explain in the article "Holding companies - the VAT challenge". Click here, and read on for details.
For the latest issue of Taxand’s Take, presenting the latest tax changes and how they affect multinationals please click here.
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