ATOZ NEWS: Tax, ATOZ and Taxand Intelligence | January 2012

Greetings!

A month in 2012, the global and local tax trends set in motion last year are in full force. We are seeing increased level of scrutiny illustrated by additional tax compliance measures and proposals for structured approach to sharing and exchanging information across governments. A similar tendency of process streamlining is also taking place at a Luxembourg level, as you will note in the articles below. The long term impact is yet to be clearly articulated. In the near term, however there are individual concerns to be addressed.

In addition to providing you with a comprehensive tax update, in this issue of the ATOZ Newsletter we’d like to draw your attention to the recent VAT related developments. As you will see herewith, Luxembourg continues to raise the bar when it comes to VAT benefits. We encourage you to consider how you can take advantage of them.

Lastly, with this being the first edition of 2012, allow us to declare our new year’s resolutions to increase our participation in the European and International Tax policy discussions as well as engage our key constituents (clients, colleagues and friends of the firm) in best practice sharing. We hope that you will support us in our endeavours.

Regards,

Fatah Boudjelida, Partner

 

SUMMARY

 

TAX NEWS

The 2012 budget law of 16 December 2011 introduces a few tax changes, which apply 1 January 2012 onwards. These changes are presented by Keith O’Donnell and Anne Muller.

The 2012 budget law does not foresee any major tax reform and this is probably explained by the current economic context prompting for cautious budgetary decisions at State’s level. Nevertheless, apart from the purely technical measure consisting in the revaluation coefficients for the valuation of business assets and participation, the two other main tax measures are positive for Luxembourg employees and enterprises and can be viewed as support to Luxembourg’s economy.

The Law of 17 December 2010 introduced tax measures in connection with the financial and economic crisis, including a "crisis contribution" of 0.8% to be levied in 2011 and 2012. The crisis contribution applied on all income types: salary, rental income, dividends, etc. On salary income, as far as non-qualified workers were concerned, an amount corresponding to the social minimum wage was exempt. As far as self-employed individuals were concerned, the exempt income was limited to ¾ of the social minimum wage.

The 2012 budget law has abolished the 0.8% crisis contribution 1 January 2012 onwards.

The Law of 24 December 1996, as subsequently amended, introduced a tax credit for the hiring of an unemployed person. It consists of a monthly tax credit amounting to 15% of the monthly deductible gross wage, paid for each unemployed person concerned, for a period of 36 months starting the month of employment and conditional upon full employment during said period. In the hands of the employer, the tax credit is deductible from the income tax due for the financial year during which the wage was paid. In case the employer has not sufficient corporate income tax liability in a given year, the remaining tax credit may be brought forward for the 10 following years.

Given the current economic trends and considering that the above tax credit is an appropriate measure to encourage the professional integration of unemployed persons, the Luxembourg government decided that this provision had to be extended beyond the original deadline (the latest one was set at 31 December 2011, as per the 2009 budget law). The tax credit for the hiring of an unemployed person will therefore be granted until 31 December 2014.

In Luxembourg the provisions of article 102 (6) of the Luxembourg income tax law enable immunization of the monetary capital gain realized upon sale of a business or from termination of a business activity, in the case said capital gain includes a capital gain on real estate. The monetary capital gain, which may be exempted, is equal to the difference between the adjusted book value and the book value. The adjusted book value corresponds to the purchase or production cost less all previous amortizations and depreciations, to which coefficients are applied. These coefficients depend upon the year-end of the financial periods, during which the real estate was acquired or built, and during which the amortizations and depreciations were booked.

These coefficients are revised every two years to take into account the evolution of the consumer price index. The last revision took place in 2010, so that a new coefficient table for the purpose of article 102 (6) of the Luxembourg income tax law had to be established.

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As of 1 January 2012, all entities, required by law to file their accounts with the Luxembourg Trade and Companies Register, have to do so electronically. This new mandatory procedure, which has been introduced by a Grand-Ducal regulation dated 14 December 2011, is detailed below.

All entities, whether regulated or non-regulated, and individuals performing commercial activities now have to file, what is termed an “accounting package”, with the Luxembourg Trade and Companies Register electronically.

The accounting package comprises of data relevant to a specific accounting year, which has to be filed with the Luxembourg Trade and Companies Register, in accordance with the law. The accounting package includes:

1. Balance sheet, profit and loss account and trial balance based on the standard chart of accounts;

2. Any other related information which has to be filed based on the law: appendix to the accounts, management report, audit report, etc.

The new rules apply to all accounting data, which has not been filed yet, regardless of the financial year to which the accounting data relates. This means that it is no longer possible to file any accounting data manually.

The information provided has to be complete and accurate. Amendments can be done subsequently, in which case, the complete amended accounting package, i.e. not only the amendments, will have to be re-filed with the Luxembourg Trade and Companies Register: https://www.rcsl.lu/

The language used (i.e. French, German, etc) has to be the same for all data provided.

Any data considered part of the accounting package must be filed electronically via the website of the Luxembourg Trade and Companies Register.

Before filing the accounting package with the Luxembourg Trade and Companies Register, some specific entities have to standardize some of their accounting data, i.e. make sure that the data follows certain formal requirements, on the eCDF platform of Luxembourg: https://ecdf.b2g.etat.lu/ecdf/.

Entities concerned are those which are required to prepare a trial balance, based on the standard chart of accounts, which explains why the accounting information that these entities have to provide to the Luxembourg Trade and Companies Register has to follow a specific format.

Entities and individuals required to prepare a trial balance based on the standard chart of accounts are individuals, who perform a commercial activity, as well as entities within the meaning of article 8 of the commercial code:

Sociétés en commandite simple and Sociétés en nom collectif are however exempt from the requirement to prepare a trial balance based on the standard chart of accounts if their turnover (VAT excluded) does not exceed EUR 100.000.

Regulated entities such as banks, insurance and reinsurance companies are also exempt. Finally, entities with accounts in IFRS are also exempt.

The accounting data, which has first to be standardized via this platform, includes only the Balance Sheet, the Profit & Loss Account and the Trial balance based on the standard chart of accounts. The remaining data will be filed electronically with the Luxembourg Trade and Companies Register in the same way as for entities not subject to the eCDF platform requirements.

Since companies are required to prepare a trial balance based on the standard chart of accounts only as of 2011, the obligation to use the eCDF platform only applies to the accounting years 2011 and following.

The new rules are good news for the Luxembourg authorities since they will ensure that the information provided follows certain standards and that late filing can be better monitored. The aim of this new electronic filing procedure is also to share the accounting information filed with other Luxembourg authorities, like the tax authorities, which in turn may increase tax audits.

For entities concerned by the new procedure, the new rules have for sure been published very shortly (2 weeks) prior to entering into force, which means that the persons and entities concerned will have to adapt to the new requirements very quickly. This may be costly and time consuming during the months of implementation of the new process.

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The past year has seen a number of new treaties or related amending protocols signed by Luxembourg. Today, Luxembourg has 64 double-tax treaties in force, following the entry into force of two new treaties concluded with Barbados and Panama. The table below presents the state of play as of 1 January 2012 and indicates the 25 countries with which Luxembourg has now a procedure of exchange of information, in line with the OECD standards.

 It is worth noting the following:

* Regarding the double tax treaty with Belgium, the related exchange of information protocol signed on 16 July 2009 has been ratified by both Luxembourg and Belgium. However the exchange of instruments of ratification is still pending, so that the procedure of exchange of information in line with the OECD standards could only be effective on 1 January 2013 at the earliest.

** As far as the protocol regarding the exchange of information in line with the OECD standards concluded between Luxembourg and Hong Kong on 11 November 2010 is concerned, it is effective 1 January 2012 with respect to Luxembourg and 1 April 2012 regarding Hong Kong.

*** The exchange of information protocol in line with the OECD standards signed by Luxembourg and Portugal on 7 September 2010 has only been ratified by Luxembourg and not Portugal to date, so that it could only become effective on 1 January 2013 at the earliest.

**** The exchange of information protocol in line with the OECD standards signed by Luxembourg and the United States on 20 May 2009 has only been ratified by Luxembourg and not the United States to date. Once ratified, it will become effective with retroactive effect for tax years beginning on or after 1 January 2009.

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During the course of 2011, the Luxembourg direct Tax Authorities issued two Circulars, which deal with the tax treatment of intra-group financing transactions. The purpose of the initial Circular was to confirm the application of the OECD transfer pricing guidelines to intra-group financing, and to formalise the procedure for applying for an Advance Pricing Agreement (APA). Since the initial Circular gave no date for its entry into force, a second Circular was released. The later states that from 1 January 2012, the Tax Authorities are no longer bound by APAs obtained before 28 January 2011 (date of the initial Circular) in relation to intra-group financing transactions, which would otherwise fall within the scope of the initial Circular.

This means that as of 1 January 2012, APAs obtained prior the Circulars are no longer valid and that if tax payers wish to obtain a new APA, they will have to follow the requirements of the initial Circular. You can find additional details in our Atoz Newsletter of 3 February 2011.

For each individual intra-group financing transaction, the practical impact of the Circulars depends on the facts and tax payers have 2 possibilities (already described in the ATOZ Newsletter of 4 May 2011):

As far as the second possibility is concerned, ideally, the request for a new APA should have been filed before 31st December 2011, or at least, any modifications to the financing structure should have been made by this date or shortly afterwards. As of today, that is still an option and tax payers can still submit a new request and/or adapt their finance structure.

These two Circulars can be seen in the light of the desire of the Luxembourg Tax Authorities to reiterate their Advance Pricing Agreement (APA) practice with OECD transfer pricing principles and are thus a positive development for Luxembourg. Tax payers who now want to benefit from an APA have to make sure that they follow the new guidelines of the Circulars. Even though the process of obtaining a new APA on existing financing structures has not been finalized as of the end of last year and tax payers can still keep on introducing new APAs today, we recommend that tax payers review their individual situation with their tax advisor as soon as possible to ensure that they are in line with the Circulars.

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Until the end of 2011, the standard Luxembourg VAT rate (15%) applied to the sale of eBooks subject to Luxembourg VAT, whereas physical books benefited from the super reduced VAT rate of 3%. Things have now changed: as of January 1, 2012, both physical and digital books benefit from the super-reduced VAT rate (3%).

The distinction between physical and digital books originally arose from the fact that eBooks were considered as electronically supplied services from a VAT point of view and that these electronically supplied services were not, and are still not, included in the list of goods and services that may benefit from reduced VAT rates.

However, in its communication in December 2011 (COM (2011) 851) on the modernisation of the VAT system, the European Commission stated that "similar goods and services should be subject to the same VAT rate and progress in technology should be taken into account in this respect, so that the challenge of convergence between the on-line and the physical environment is addressed".

In a move to strengthen Luxembourg’s number one position in Europe to establish e-commerce businesses, the Luxembourg government decided that physical distinction should no longer be made between digital and physical books and that both should therefore benefit from the super-reduced VAT rate (3%). The decision of the Luxembourg government was reflected in Circular n°756, as issued by the VAT Authorities on December 12, 2011.

Sources at the European Commission have now reminded that eBooks were not on the list of services allowed to benefit from a reduced VAT rate and that the EU commission does not agree with this measure. Luxembourg is however not the only Member State concerned, as the decision of the Luxembourg government follows a similar decision in France. The VAT rate applicable to eBooks in France (7%) is however higher than in Luxembourg.

Discussions between the EU Commission and the governments concerned should be held in the coming weeks/ months. Considering that eBooks respond to the same needs as paper books, the VAT system should match the global evolution towards a more digital world. A different position would be wrong as it would be against the principle of tax neutrality.

Back in 2008, the Luxembourg VAT Authorities issued a circular clarifying the VAT treatment of telecommunication credits (usually sold under the form of prepaid cards). In this circular, the VAT Authorities stated that the sale of credits is to be considered as out of scope of VAT, but that the VAT treatment had to be determined in accordance with the actual use of credits, which can be different from mere phone calls (purchase of games, ringtones, etc.)

The Circular also defined the VAT treatment applicable to expired and not reactivated credits. In this respect, the VAT Authorities took the view that the income derived from expired credits was the consideration of services consisting in putting telecommunication networks at the disposal of users. VAT (15%) was therefore due on expired credits.

This position has now been changed by means of Circular 736 bis, in which the VAT Authorities state that expired and not reactivated credits should not be viewed as the consideration for a supply of services and are therefore out of scope of VAT. This is good news for telecom operators.

 

ATOZ NEWS

Luxembourg is about to introduce a third possibility of securities’ issuance, next to the nominal and bearer forms: the dematerialized form. Aside from the advantages that will arise from this new form itself, it will increase the realm of possibilities for issuers and investors as the bill does not hint to any abandonment of the bearer form.

On August 3, 2011 the government filed a new bill with the Chamber of Deputies, for the purpose of creating a specific regime regarding dematerialized securities in Luxembourg. It should be noted that the original bill filed in August was annulled and replaced by a second bill on October 18, 2011. Thus, considering the recent nature of this bill and the fact that neither the State Council, nor any professional bodies have had the opportunity to comment on it, its content should still be considered provisional, or at least subject to amendments.

The creation of a regulated regime for dematerialized securities under Luxembourg is a most welcome addition, such as greater flexibility, increased speed for transfers and a wider choice for issuers, since the bearer form will be preserved.

While the project certainly is a positive change, some reservations can still be mentioned. For one, a large part of the legal practitioners in Luxembourg considers that creating dematerialized securities has always been allowed under the principle of autonomy of private will. Moreover, as beneficial as the concept is, it is hardly an innovation from an international perspective: France has created and regulated dematerialized securities since 1981 and Belgium since 1995.

The general consensus among professionals and clients with respect to dematerialized securities is that this form offers the highest flexibility and the most celerity for transfers. As mentioned above, Luxembourg corporate practice had already created de facto dematerialized securities, however this possibility was only derived from the methods of conservation of said securities rather than by their intrinsic nature. Moreover, this kind of practice lacked some certainty as it was not based on any formal legal text.

As to the anticipated features of the Luxembourg rules governing dematerialized securities, they are largely inspired by the Belgian rules applicable in this regard. Dematerialized securities will only exist through an inscription on a securities account. The keepers of such accounts shall have to be licensed by the authority placed in charge by the new legal text.

As anticipated, the Commission de Surveillance du Secteur Financier (“CSSF”) has been designated to serve as regulating authority. While this designation is quite sensible, one cannot help but wonder whether this new responsibility will not further increase the response times of the CSSF. Efficiency and timely progress are often at the core of regulated activities and the reactivity of the regulator is thus of prime concern and it would be unfortunate if the celerity and efficiency gained on one side were to be lost on another.

Any company wishing to dematerialize the securities it has issued shall have to designate an accounts’ keeper; this designation will be subject to publication in a local newspaper and in the official gazette (Mémorial).

Any issuer of securities which shall have inserted such process in its bylaws and complied with the conditions mentioned above, shall be able to impose the dematerialization of the securities it has issued, going so far as having such dematerialization enforced by the law, since securities not converted within the imposed delay shall have their voting and economic rights suspended.

All of the features mentioned so far match or closely resemble the regimes implemented in France and Belgium in particular. One major difference must however be mentioned: while the neighbouring countries have largely favoured the dematerialization process, this tendency has had the total and compulsory suppression of bearer shares as a corollary. Luxembourg has elected to maintain the possibility to issue bearer shares which means that issuers of securities will have three possibilities for issuing such securities: bearer form, nominative form or dematerialized form.

Professionals and investors handling securities on a regular basis or in large quantities can be satisfied, since this reform will bring increased flexibility, allow faster transfers and even if some would consider that these possibilities already existed, this new legal basis will have the benefit of providing additional security and regulation.

Although it will not be a revolution in the world of Luxembourg securities, the introduction of specific rules governing dematerialization will definitely be an evolution, but a Luxembourg style evolution: as it brings new material but preserves all the currently standing possibilities, favourable to professionals and investors, no matter what the opinions of its neighbours might be.

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The ATOZ Chair for European and International Taxation of the University of Luxembourg will issue its second book focused on “State Aid and Tax Law”. The book will be edited by Professor Alexander Rust and will include extended versions of the contributions, given at a conference on the matter at the University of Luxembourg back in November 2011.

In their contribution to the book, Keith O’Donnell and Anne Muller present the Taxpayer’s perspective on Fiscal State Aid. Although the Taxpayer is the ultimate beneficiary of Aids granted by States, its position seems often overlooked or simply ignored and the discussions on the matter take place at Member States and EU Commission levels. Based on this observation, Atoz’ focus in the article is how the complex procedure implemented by the EU Commission and various Judgments of the European Court of Justice create uncertainty for the Taxpayer. Indeed, in the authors’ view, State Aid appears to be an all-catching notion, subject to a complex assessment procedure by the EU Commission. Case law and jurisprudence have not yet been able to provide all answers and have even, at times, contributed to reducing the level of legal certainty for the Taxpayer. In the last section of their article, the authors also provide some suggestions regarding areas for improvements. In their view, a number of clearly articulated measures will help the Taxpayers (and their Advisers) achieve the level of certainty that is necessary to the conduct of business under acceptable conditions. These measures include a clearer definition of and limits to the concept of State Aid, further clarification of the right of actions for the Taxpayers and the introduction of a statute of limitation regarding recovery of incompatible Aid.

For additional information and a calendar of upcoming seminars of the Atoz Chair for European and International Taxation, please contact Keith O’Donnell at keith.odonnell@atoz.lu or Mira Ilieva-Leonard at mira.ilieva-leonard@atoz.lu.

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On December 12, 2011 Atoz organized a seminar, titled „Luxembourg and Germany: Tax Legal and Regulatory Update“. The objective of this seminar was to offer a comparison between the German and Luxembourg legal system and tax rules for German-speaking clients and to provide a networking platform. With more than 50 participants, this event proved to be success with the clearly defined interest in the technical content as well as the subsequent discussions between the participants. Within the framework of this event, several experts presented the following topics:

Peter Kleingarn, Partner at Atoz gave the audience an overview of the advantages of the Luxembourg tax system in comparison to the German tax system. His presentation covered among others the participation exemption regime, CFC rules and the recent ECJ decision “National Grid“. Moreover Peter commented on the draft bill amending the law of 11 May 2007 on the Luxembourg « SPF» and on the Transfer Pricing Circular n° 164/2 and § 164/2 bis issued by the Luxembourg Tax Authorities.

The presentation by Prof. Dr. Alexander Rust who holds the ATOZ Chair for European and International Tax Law offered an introduction to the functioning of double tax treaties (“DTT”), especially the provisions in the DTT between Germany and Luxembourg with regard to cross-border workers. Based on this, Dr. Rust commented on the recent mutual agreements concluded between Germany and Luxembourg.

Max Welbes, Partner at Luther Luxemburg gave the audience an overview on the Luxembourg fund structures and service providers. In his presentation, Max explained the draft bill 6318 amending the Luxembourg law of 13 February 2007 related to Specialized Investment Funds and the objectives of the “Directive on Alternative Investment Fund Managers” (‘AIFMD’), outlining critical points such as the rules concerning the remuneration and the assessment of assets.

Paloma Schwarz, PhD student at the University of Luxembourg and employee at Atoz Luxembourg gave a comprehensive overview of the main features of the Luxembourg IP tax regime as well as proposals for tax optimized structures in order to be in line with German CFC rules.

Harald Strelen, Head of the Funds Conception department at Hauck & Aufhäuser, presented how illiquid assets can be turned to liquid and marketable ones. On the basis of some practical examples from the field of renewable energies and real estate, Harald pointed out the advantages of SICAV-SIF funds and securitization vehicles.

The presentation concerning the US “Foreign Account Tax Compliance Act” (FATCA) by Christoph Kromer, partner at Luther Germany caused heated discussions among the audience. In his presentation Christoph outlined the provisions of this highly controversial act and explained the requirements, which will be imposed in the financial sector in order to be in line with FATCA.

Olivier Vergniolle, partner at Arsenne Taxand explained to his audience the recent developments in French tax law and how French tax law is influenced by other European legislations. His presentation covered especially the new provisions regarding the interest barrier, the flat rate withholding tax and the limitation of loss carry backs.

 

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