ATOZ Insights and Taxand Intelligence April 2013

Greetings!

This edition of the ATOZ newsletter starts with the annual speech on the state of the nation that was made on April 10, 2013 by the Prime Minister. 

Luxembourg will from January 1st, 2015 move to the automatic exchange of information model under the EU Savings Directive for interest payments to EU individuals. The Prime Minister further announced an increase of VAT rate from 2015.

Exchange of information is clearly a topical issue. A decision issued recently by Luxembourg courts seemed to announce a change in the air as regards to the outcome of legal proceedings in Luxembourg in these matters.

Staying on the subject of case law, a recent Luxembourg case law on anti-abuse is currently the focus of attention for Luxembourg tax practitioners. The implications of this case law are still uncertain and will need to be carefully scrutinized. Another decision worth noting clarifies the reassessment of a tax payer in case of hidden dividend distributions.

The temporary tax credit scheme for audio-visual investment certificates is about to be repealed. A draft law recently published will abolish this scheme as of 2014 and replaces it by a financial aid regime.

Over this first quarter of 2013, we have been constantly tracking new developments and their impacts on the Luxembourg and global tax environment. We will continue to observe and report on a regular basis. We encourage you to contact us should you have questions or comments on any of the Luxembourg and international tax-related developments listed below.

Best regards,

Keith O’Donnell, Managing Partner

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TAX NEWS

State of the Nation speech

There was a time where Luxembourg was known for its strict banking secrecy rules in tax and non-tax matters. In the last few years, Luxembourg adapted its legal framework and its double tax treaty network so as to comply with the OECD exchange of information standards. Each new treaty or protocol is now in full compliance with OECD standards. Within the European Union, under the EU Savings Directive, Luxembourg was one of the few countries preferring to levy a 35% withholding tax on EU individual’s savings income, rather than to exchange information about this income. From 2015 however, automatic exchange of information will apply under the EU Savings Directive.

In addition, the Prime Minister announced, among other measures, an increase of the standard VAT rate from 2015.

EU Savings Directive: automatic exchange of information

Interest income paid by a Luxembourg paying agent to an individual resident in another EU member state currently triggers a 35% withholding tax, unless the individual opts for exchange of information. The Luxembourg Government announced that, in the light of recent international developments, such as FATCA US regulations, the “time has come to revisit the transitional coexistence of automatic exchange of information and withholding tax”. Automatic exchange of information will apply as of January 1st, 2015 to EU resident individuals falling within the scope of the EU Savings Directive. The situation of Luxembourg resident individuals will remain unchanged (final taxation at source at 10%).

Increase of VAT rate as of 2015

With a 15% standard VAT rate, Luxembourg is currently the country applying the lowest VAT rate within the European Union. Favorable VAT treatment still applies until 2015 to certain e-business transactions. With the anticipated end of this regime in 2015, expecting to generate losses in VAT revenues and considering the economical context, the government announced that an increase of VAT rate would be necessary.

The increase will occur only as from 2015 and will be implemented in such a way that Luxembourg will remain the country applying the lowest VAT rate in the European Union.

Other changes: taxation of real estate/housing amended

The Prime Minister announced an increase in the taxation of capital gains on the sale of land and the repeal of the interest subsidies for housing (bonification d’intérêts).

In order to avoid or at least reduce the number of vacant residential units, a specific tax will be also introduced.

Conclusion

The changes to banking secrecy, while sometimes portrayed as a seismic shift, are an inevitable move, given the current international environment and the economic context. There will be a need to adapt banking systems to accommodate the information flows.

The increase in VAT will be a significant revenue raiser; however, it will be of limited consequence to most businesses as it is borne principally by consumers. It will increase the importance of carefully managing VAT issues however, notably in businesses that have limited VAT recovery. 

For more information about this topic, please contact Keith O’Donnell at keith [dot] odonnell [at] atoz [dot] lu

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Further case law clarifications on exchange of information in tax matters

The Luxembourg tax authorities face increasing requests for exchange of information from foreign jurisdictions on the basis of the “exchange of information” clause of double tax treaties compliant with the OECD Model Tax Convention (“MTC”). Correlatively, they face increasing proceedings initiated by holders of information arguing about the violation of Luxembourg domestic law. Luxembourg courts issued a significant number of decisions throughout 2012 clarifying the conditions of application of the domestic procedural rules. There is no doubt that exchange of information on tax matters will keep giving Luxembourg courts food for thought in 2013. A first decision dated in 2013 has already been issued. This decision is notable as it is the first one (together with the initial decision of the lower court) that recognizes an exchange of information request as valid. This article outlines the conditions clarified by this new decision. It also reports on some decisions from 2012 that have been recently published and that highlight the principles applicable to third-party residents.

Exchange of information and third -residents: principles

The “exchange of information” clause of article 26 of the OECD MTC provides that the exchange of information procedure is not restricted to residents of both contracting states. As a consequence, a state is, in principle, allowed to request an exchange of information of its contracting state under a DTT, even if the person under investigation is a resident of a third-party jurisdiction.

This principle has been applied by the Luxembourg administrative lower court (Tribunal administratif TA 15 November 2012 n°3799) that also defined certain limits.

A Curacao trust was under tax investigation in the Netherlands. The Dutch tax authorities addressed a request to Luxembourg to obtain bank account information on the basis of the Netherlands-Luxembourg tax treaty. The Luxembourg authorities notified the content of the request to the Luxembourg bank and the Curacao trust brought the case before the Luxembourg TA. Curacao is a territory independent from the Netherlands. The trust argued that the Luxembourg-Netherlands DTT would not apply, as the trust was not a resident of the Netherlands but of a third-party jurisdiction, so that, according to the trust, no exchange of information was allowed on the basis of the Netherlands-Luxembourg DTT. The court ruled on the basis of the “exchange of information” clause of the DTT. This clause complies with the OECD principles and provides that exchange of information is not restricted to residents under the DTT. Therefore, the court concluded that the Dutch tax authorities were in principle validly allowed to apply, under certain conditions, the “exchange of information” clause that the DTT entered into with Luxembourg, even if the person under investigation is established in Curacao.

Exchange of information and third-party residents: the limits

The foreseeable relevance

In the above-mentioned case, the court ruled that a procedure involving a third-party taxpayer has to be necessary or essential for the taxation of a resident of one of the contracting state, such resident being under investigation of the tax authorities of its country of residence. If not, the request cannot be considered as foreseeably relevant. This would otherwise give the tax authorities an unlimited territorial competence.

This decision is in line with a decision of the higher administrative court (Cour administrative, CA, 24 May 2012, 30251C) issued in the context of the Sweden-Luxembourg DTT about an information request involving a Malaysian company.

The absence of specific clause in the DTT

Some DTTs provide for an “exchange of information" clause that slightly deviates from the OECD MTC. For instance, the DTT between Luxembourg and France does not contain a clause providing that the application is not restricted to residents. In such circumstances, as illustrated by the following case law, the DTT and its “exchange of information” clause can apply only to entities/persons resident of one of the contracting states.

This has been ruled by the Luxembourg TA in a case involving a Swiss tax resident (TA 25 October 2012 n°31380). The French tax authorities were willing to obtain information on a Luxembourg life insurance product subscribed by a taxpayer they were considering to be a French tax resident. The taxpayer challenged the information request arguing that at the time of the request, she was a Swiss tax resident, and that she was out of scope of the exchange of information clause of the Luxembourg France DTT.

The TA noted the absence of a provision in the France-Luxembourg DTT explicitly allowing an exchange of information about non-residents. The very issue debated before the court was therefore to determine if the tax payer was to be defined as French or Swiss tax resident. The TA defined the notion of residency by reference to the DTT, stating that a person is a fiscal resident of the country where he or she is fully liable to taxes. In the case at hand, the court considered that the French tax authorities were not giving satisfactory evidence that the taxpayer would be a French tax resident, while the taxpayer was able to evidence its title of Swiss tax resident via official documents certifying the payment of Swiss taxes.

The first practical example of a valid exchange of information request

This first practical example occurred within the context of the France-Luxembourg Double Tax Treaty (“DTT”) and concerned a French company (“French Co”) and a French individual taxpayer, both under tax investigation in France (CA, 17 January 2013 n°31295C confirming TA 14 November 2012 n°31295). The French tax authorities were willing to obtain any relevant documentation on a loan granted by a Luxembourg company (LuxCo) to FrenchCo and on the connections between LuxCo and a French individual, manager of both companies.

A request is foreseeably relevant if (i) the information requested relates to one or several specific taxation cases or to given taxpayers and (ii) the request states the identity of the person under tax investigation.

LuxCo argued that the procedure was a mere fishing expedition: The French tax authorities would allege the existence of a connection between the individual and LuxCo had the actual objective to obtain information on the French individual, while unable to demonstrate the existence of such connection.

However, the French tax authorities disclosed the following information: The individual was holding a 80% stake in French Co, was the sole manager of FrenchCo and was the sole director of LuxCo. Further, he was sole manager of a third company established in Luxembourg at the same address as LuxCo. LuxCo and the third company granted loans to FrenchCo to finance the acquisition of real estate by FrenchCo. The corporate names of the third company and of FrenchCo were similar to the family name of the individual. The Luxembourg administrative courts (lower and higher courts) both considered that the combination of these elements was sufficient to make plausible the existence of a connection between LuxCo and the French individual. The request was stating the identity of the individual, being under tax investigation in France and there was sufficient evidence of a connection between the individual and LuxCo. All the conditions of validity of the request were therefore met.

Conclusion

Holders of information or taxpayers systematically challenge the validity of exchange of information requests before Luxembourg courts. This seems to be the right strategy: The outcome of such disputes has for now been in their favor. However, the more disputes that are brought before Luxembourg courts, the more rules are defined. The regime becomes clearer and more certain. Foreign tax authorities are now in a better position to adjust the content of their requests to make them comply with the applicable requirements. The 2013 decision seems in that respect to announce a change in the air as regards the outcome of legal proceedings and there is no doubt that future case law will be carefully scrutinized by taxpayers and their advisers.

For more information about this topic, please contact Gilles Sturbois at gilles [dot] sturbois [at] atoz [dot] lu

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Abuse of law and tax losses: Luxembourg case law

A group acquired a construction company (LuxCo 2) from private investors via a Luxembourg holding company (LuxCo 1). LuxCo 1 received some debt financing from the group and lent part of the money to LuxCo 2. In 1995, the initial private investors decided to buy back their investment. LuxCo 2 was, at that time, incurring considerable losses. The group sold the shares in and a receivable on, LuxCo 1 for the amount of two Swiss Francs: one Franc as a consideration for the shares and one Franc as a consideration for the receivable. Shortly after this transaction, LuxCo 1 booked a full depreciation on its receivable in LuxCo 2.

The courts (Court administrative “CA” 7 February 2013, 31230C confirming Tribunal administratif “TA”, 12 July 2012, 28815) alleged that the structure was abusive: On its balance sheet, LuxCo 2 was keeping a liability deprived of economic reality for the sole purpose of enjoying the carry forward of tax losses. As a result, the liability had to be disregarded for tax purposes and the taxpayer was denied the right to carry forward its losses

In the case at hand, the tax authorities, the TA and the CA all concluded that the structure was abusive, but on different grounds. The tax authorities and the TA found an abuse, but failed to use the proper arguments. The CA reframed the legal disputes, defined the criteria of an abuse of law and analyzed, step by step, if the conditions were met in the case at hand. An operation is to be characterized as an abuse of law if the following four conditions are met:

1) A use of forms or institutions offered by private law

2) A reduction in the tax burden

3) An inappropriate “path”

4) The absence of valid non-tax reasons justifying the path chosen

In its judgment, the CA occasionally combines the third and fourth conditions, but for the purpose of this article, we have kept them separate.

As to the first condition, the CA considered that the purchase agreement and the application of accounting rules qualify as a use of forms offered by private law.

As to the second condition, the CA considered that keeping the liability on its balance sheet enabled LuxCo 2 to maintain the carried forward losses so as to offset them against future profits. According to the CA, this qualifies as a reduction in the tax burden.

The CA mainly elaborated on the third condition, concluding that an inappropriate path was chosen, but on different arguments than those of the tax authorities and the TA.

The tax authorities initially suspected the abuse focusing on the negligible consideration paid for the acquisition of the receivable on LuxCo 1. They considered that the purchase was actually hiding an indirect debt waiver from the private investors to LuxCo 2 via LuxCo 1. The CA rejected these: A transaction should not be considered as suspicious because of a low consideration. The CA even considered that the purchase for a negligible price was the proper attitude of a diligent acquirer, willing to risk that a third-party debtor would recover its claims and jeopardize the future of the acquired companies.

It is also worth noting that in the first instance (TA), the dispute was on transfer pricing matters. The TA qualified the operation as abusive, considering that the transaction wasn’t concluded at arm’s length. In doing so, the TA erred in law. Luxembourg tax law provides for specific transfer pricing provisions and for a specific anti-abuse provision. An operation should not be considered as abusive solely because of a violation in transfer pricing requirements.

In the CA, the representative of the government argued as follows. The private investors initially sold their investment and repurchased it a few years later with a huge loss and for a negligible consideration. The transaction was, according to the representative, not in line with usual business practices (that are profit-driven) and as such, was suspicious by nature. Among other arguments, the representative also noted that other group companies waived their respective receivables over LuxCo 2. LuxCo 1 booked a full depreciation on the receivable from LuxCo 2. LuxCo 1 therefore considered the receivable as doubtful. In such context, according to the representative, it did not make sense to keep the liability on LuxCo 2’s balance sheet. These facts might have influenced the decision of the CA, but the CA issued its decision on different grounds.

The CA noted the following facts at LuxCo 1’s level: The receivable on LuxCo 2 was booked with a full depreciation. Its own liability was booked at nominal value. At LuxCo 2’s level, the liability was still on the balance sheet at nominal value. A company is, in principle, required to book a liability without having regard to depreciations booked by its creditors. However, none of the creditors (the private investors or LuxCo 1) ever asked for a repayment, even when LuxCo 2 subsequently realized profits four, five, six and seven years later. Further, LuxCo 2 never charged interest on the loan to LuxCo 1. The combination of each of these factual elements revealed that the private investors actually did not intend to recover their monies under the loan financing. Any other diligent creditor would have written off its receivable. An inappropriate path was therefore chosen, according to the CA.

As to the fourth condition, the taxpayer argued the existence of non-tax reasons: a creditor is free to grant or not grant a debt waiver, and the managers of LuxCo 1 might have to assume personal liability if they had waived the debt. These arguments were dismissed by the CA, considering that the final creditors (i.e. the private investors) controlled the structure. As a result, according to the CA, the sole explanation for not waving the debt was a fiscal one. The private investors wanted to avoid exceptional profits at the level of LuxCo 2 that would have been generated by a write-off. The CA concluded that there was an abuse of law within the meaning of § 6 of the Tax Adaptation Law.

Conclusion

The judgment seems very strained in its conclusion. We have split our comments into two parts; first, the general principles set down by the CA; and second, the application of those conditions to the facts. The definition of the four conditions seems sensible and broadly in line with international principles. Two comments can be made nonetheless.

• The third condition, inappropriate "path", will need clarification as it risks creating a circular logic. There is also a clarification needed as to the burden of proof for this condition.

• The fourth condition, absence of valid non-tax reasons, echoes similar judgments internationally. However, it seems to require that the non-tax reasons justify the path chosen as opposed to the scheme not being wholly artificial, which seems like a higher burden of proof on the taxpayer than in Cadbury Schweppes, for example. It will be interesting to see whether this condition would stand up to EU scrutiny in a cross-border EU context.

As to the application of these conditions to the facts of the case, it seems very hard to arrive at the CA’s conclusion, based on the facts presented. There was a clear non-tax transaction which the CA accepted (thankfully overturning a bizarre finding of the lower TA). The CA, however seemed to conclude that what would in normal commercial circumstances be a perfectly standard choice of treatment, i.e. maintaining an intercompany receivable rather than waiving it, had insufficient valid non-tax reasons. In our experience, it is exactly the opposite: The waiver is the more complex and less natural transaction, which usually requires more justification commercially prior to proceeding. The CA therefore seems to postulate that a tax payer is required to carry out an operation (loan waiver) which is legally and commercially questionable in order to eliminate a tax advantage (loss carry forward) which has been legitimately and commercially obtained. To our knowledge, such a finding is quite unprecedented internationally. Thus, as a preliminary conclusion, we could say that having established a sensible set of general conditions, the CA’s finding on the facts is likely to create uncertainty for taxpayers going forward. It will be important to review existing and planned structures to ensure that this dimension is adequately managed.

For more information about this topic, please contact Keith O’Donnell at keith [dot] odonnell [at] atoz [dot] lu

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Tax regime of audio-visual investment certificates to be repealed and replaced by financial aid

The Law of 13 December 1988, as amended, created a temporary tax scheme on the basis of audio-visual investment certificates. This scheme was aimed at promoting venture capital investments in the production of audio-visual works to be produced mainly in the EU and specifically in Luxembourg. Based on the current law provisions, the government can issue audio-visual investment certificates until 2015 to authorized capital companies that reside in Luxembourg and are fully taxable there; whose main corporate object is audio-visual production and which effectively produce audio-visual works under certain conditions. Taxpayers holding audio-visual investment certificates can obtain, upon request, an income tax deduction for audio-visual investment limited to 30% of the taxpayer’s taxable income and deductible from the taxable income of the tax year to which the audio-visual investment certificates apply.

A draft law has been released which will end the temporary audio-visual Certificates regime by the end of this year. The regime will no longer apply from 2014. A financial aid has however been introduced which will replace the tax regime.. It states that audio-visual certificates in their current form, i.e. a tax deduction, will no longer apply as of 2014. Instead, companies will be able, under certain conditions, to benefit from financial aid. The aid will be computed based on criteria similar to the previous regime.

The change means a complete overhaul of the financial support system of the audio-visual sector, all payments being in the future granted through the system of a selective financial aid. The reason why the government decided to change a system which had been in place for so many years is to have a system which remains strong and efficient, even in times of economic crisis. Indirect aids by means of tax credits or deductions require a sufficient taxable basis and companies have to be profitable in order to be able to benefit from such an indirect aid system. This has been raised issues during the years of crisis. The change in the system aims therefore to make sure that Luxembourg can remain attractive to the audio-visual sector, even in times of crisis, and that Luxembourg can continue attracting investments in the audio-visual sector.

For more information about this topic, please contact Keith O’Donnell at keith [dot] odonnell [at] atoz [dot] lu or Samantha Merle at samantha [dot] merle [at] atoz [dot] lu

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Hidden dividend distributions & time limits for assessing companies

The Luxembourg Tribunal recently rendered a decision regarding hidden dividend distributions. A Luxembourg company filed tax returns and was taxed accordingly. In 2010, the tax authorities performed a tax audit in respect of tax years 2000-2005 and discovered new facts which, from their point of view, illustrated the company had made a hidden dividend distribution. The tax authorities reassessed the company at a higher tax rate, considering that certain expenses deducted accounting-wise were not deductible for tax purposes, as they were incurred for other group companies and thus had to be considered as hidden dividend distributions. The questions were whether the tax authorities were right, from a procedural point of view, to reassess the company and whether the conditions for a hidden dividend distribution were met.

Procedural aspects: could the company be reassessed?

The matter related to tax years which had already been assessed (2000-2005) and for which the taxes had already been paid. The question was whether the conditions for reassessing the Company in 2010 were met or not: Had the delay for reassessing elapsed or not?

§ 222 (1) of the General Tax Law provides that new tax assessments can be issued only if new facts or evidence are discovered which justify a higher assessment and if the delay for doing so has not elapsed. This delay is five years, but is extended to 10 years if no tax return has been field or if a wrong or incomplete tax return has been filed. In the case at hand, the company argued that the fact that a transaction was now qualified by the tax authorities as a hidden dividend distribution could neither be considered as a new fact allowing the tax authorities to reassess the Company nor as a wrong nor incomplete tax return.

The Tribunal considered that the issue of an amended tax assessment in this case was justified since some hidden distributions, which had not been mentioned in the tax return (expenses not properly documented), had been revealed during the tax audit performed by authorities. The new evidence was not the requalification into a dividend distribution as such, but the fact that the company had booked, as tax-deductible expenses, items which were not documented and which were actually expenses incurred for the direct or indirect subsidiaries of the shareholders of the company and not for the company itself. The fact that these expenses were not in economic connection with the activity of the company could only be discovered by the tax authorities at the time of the audit, so that the conditions for the issue of a new assessment were met. According to the Tribunal, the tax returns were wrong as they reflected as tax-deductible items expenses which were not in relation with the economic activity of the company. Thus, as the 10-year delay had not elapsed yet, the tax authorities were allowed to issue a new assessment. The expenses could therefore be added back to the taxable basis of the company, meaning an increased taxable basis and a higher amount of tax to be paid by the company.

Were the conditions for a hidden dividend distribution met?

Based on the rules dealing with the procedure in front of administrative courts, it is up to the tax authorities to evidence the facts which create the tax liability (so, the hidden dividend distribution). It is however up to the tax payer to demonstrate the facts that would release the tax payer from its tax liability or at least reduce it. The tax authorities have therefore first to evidence a certain amount of facts and/or circumstances which seem to speak for a hidden distribution and in a second step, it is up to the taxpayer to evidence that the facts and/or circumstances are such that they should not to be regarded as a hidden dividend distribution (shift of the burden of proof to the taxpayer). The taxpayer will have to demonstrate that there was no decrease of its taxable basis or that this decrease was motivated by economic reasons.

In the case at hand, only VISA receipts were provided to the tax authorities instead of the original bills or receipts, which were not kept by the company. The company could furthermore not evidence that the fuel costs deducted for accounting purposes were not only in connection with the activity of another related company, but instead had been incurred for the company itself. The same applied to salary costs. The company finally incurred some costs, which were in relation with the activity of a real estate company (SCI). The company argued that even if these costs were in relation with the activity of the subsidiary, they should be considered as deductible at the level of the company because the 80% held SCI was tax transparent. The Tribunal concluded however that the company could only deduct expenses in relation to its own activities, and that the expenses of the SCI could be deducted only at the level of SCI.

The Tribunal concluded that the expenses were incurred for subsidiaries of the shareholders of the company so that an advantage was granted to the shareholders and the conditions of article 164 (3) ITL were met. The position of the tax authorities was therefore confirmed, and the new tax assessment was considered as valid.

This case law is interesting as it clarifies the rules dealing with the procedure for issuing amended tax assessments where new facts are discovered after an assessment has been issued, especially the applicable deadlines for reassessing companies. It furthermore clarifies the question of the burden of proof in the case of an irregular bookkeeping (expenses deducted in the accounts of a company which are actually expenses in relation with the activity of other companies of the group).

For more information about this topic, please contact Keith O’Donnell at keith [dot] odonnell [at] atoz [dot] lu or Samantha Merle at samantha [dot] merle [at] atoz [dot] lu

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Advocate General opinion on the computation of a “global” prorate in the Credit Lyonnais case (C-388/11)

By way of the Crédit Lyonnais case (C-388/11), the European Court of Justice is called to rule on the computation of the input VAT deduction right of a bank which has branches established in other Member States and outside the European Union.

The question is to know whether the head office should take into account the turnover realized by its branches for the computation of its input VAT deduction right. Taking into account the amount of income received on a global basis is a key issue as it can substantially influence the right to input VAT deduction of the main office, especially in the financial sector.

At first sight, the AG seems to be against to the position adopted by the Crédit Lyonnais with respect to a global prorata. Allowing a global prorata to the head office could create an unjustified advantage since the main office may not incur costs in relation to turnover realized by branches. Moreover, depending on their location, the branches can be non-taxable persons or established in countries without any VAT system.

The conclusion of the AG is therefore that Member States should not be obliged to allow the computation of a global prorata including the turnover realized by branches established abroad. The possibility should be left to Member States to allow or not the computation of an input VAT deduction prorata including the turnover of branches. The decision of the Court should be released in the coming months.

For more information please contact Christophe Plainchamp at christophe [dot] plainchamp [at] atoz [dot] lu

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Investment funds – The European Court of Justice rules on VAT exemption of investment adivisory services in the recent GFBK case (C-275/11)

In the GfBk Case (C-275/11), the European Court of Justice (ECJ) analyzed the VAT treatment of investment advisory services rendered to a management company of an investment fund. The decision was good news since the ECJ followed the opinion of the Advocate General in which he recommended that such services should benefit from the VAT exemption applicable to the management of investment funds.

GfBk was an investment advisor which notably provides information, recommendations relating to the stock market and advice relating to investment in financial instruments. GfBk entered into an agreement with the manager of a special investment fund which foresaw the provision of advisory services to the manager within the framework of its management, the monitoring of the fund and the making of recommendations for the purchase or sale of assets. As was current practice in the sector, GfBk was paid on the basis of a percentage calculated by reference to the average monthly value of the investment fund. The fund manager made no asset selection of its own in the management of the investment fund, but continued to take the final decision on its own responsibility.

Based on the VAT exemption applicable to the management of investment funds, GfBk considered these services as VAT exempt. A dispute between GfbK and the German Authorities brought the case to the ECJ.

The conclusions of the Advocate General were in favor of a VAT exemption (please refer to our last newsletter. The ECJ has confirmed that services relating to investment in transferable securities provided by a third party manager of a special investment fund fall within the scope of the VAT exemption applicable to management of special investments funds.

The Court recalled the objective of the VAT exemption applicable to the management of special investment funds, which is to facilitate investments in securities for small investors. The VAT exemption ensures the VAT neutrality between direct investment in securities and investment through undertakings for collective investment. Moreover, should investment advisory services provided by a third party be subject to VAT, it would create distortions of competition.

The Court decision is in line with the current practice in Luxembourg since investment advisory services in relation to investment funds subject to the supervision of the CSSF or of the Commissariat aux Assurances as well as securitization vehicles are considered as VAT exempt. This ruling has therefore no impact for the Luxembourg fund industry although it frees the fund activity from the threat of a potential VAT cost.

This decision also confirms the attractivity of Luxembourg in the light of AIFMD. Despite of this positive ruling, we however remind you that the drafting of investment advisory agreements must be given the utmost level of attention. A VAT review is imperative to ensure the application of the VAT exemption.

For more information please contact Christophe Plainchamp at christophe [dot] plainchamp [at] atoz [dot] lu

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Leasing services – Insurance services regarding the leased goods should be VAT exempt

According to the current practice in Luxembourg, leasing services supplied together with insurance for the leased goods are considered as a single supply of services subject to VAT (15 %).

The European Court of Justice ("ECJ") has recently issued an important judgment on the VAT treatment applicable to the provision of insurance in relation to leased goods (BGZ Leasing – C-224/11). In the case at hand, BGZ entered into operational lease agreements with its customers. BGZ remained the owner of the goods and the lessees lease for these goods. The customers had the possibility to benefit from insurance of these goods. At the request of the customer, BGZ contracted with an external insurance company and re-invoiced insurance premia at cost to the lessee.

The question raised before the ECJ was whether the leasing of goods and the provision of insurance by a lessor should be regarded as a single supply subject to a single VAT treatment (taxable) or should be regarded as two separate supplies subject to their own VAT treatment (leasing subject to VAT and insurance VAT exempt).

The Court stated that these two transactions (leasing and insurance) should be regarded as distinct and independent services for VAT purposes. In addition, the ECJ confirmed that the provision of insurance of a leased item (where insurance is re-invoiced at cost to the lessee) falls under the VAT exemption applicable to insurance services.

This decision should have a positive impact on businesses which cannot recover all their input VAT (banks, insurances, holding companies, etc.). In the light of this case law, these businesses should also consider making claims to recover the VAT wrongly charged by their suppliers in the past.

For more information please contact Christophe Plainchamp at christophe [dot] plainchamp [at] atoz [dot] lu

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Only a few months left until the coming into force of the law on Alternative Investment Fund Managers

Under the terms of Directive 2011/61/EU regarding Alternative Investment Fund Managers “AIFM”, each Member State must have transposed the provisions thereof into national law by July 22, 2013.

The bill was introduced by the Chamber of Deputies on August 24, 2012 “The Bill”, and the expected deadline for the coming into force of these new regulations remains at July 22, 2013.

The new regulations to be introduced by this legislation will have broad implications for many investment and management companies, whether operating or established in Luxembourg. ATOZ has put together a team of dedicated professionals to help guide and prepare you for the changes to be made.

On March 22, 2013, the Luxembourg Council of State has released its advice on the Bill, and has welcomed the transposition of the directive into Luxembourg law, underlining the fact that with the entering into force of the AIFM Directive, the entire fund industry will be subjected to binding legal rules, as all investment funds will therefore fall either under the UCITS regime (Undertaking for Collective Investment in Transferrable Securities) or the AIF regime.

To face this forthcoming challenge, ATOZ has prepared a detailed presentation to introduce the upcoming changes. 

To receive a copy of the presentation please contact Nicolas Cuisset at nicolas [dot] cuisset [at] atoz [dot] lu

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ATOZ NEWS

ATOZ voted one of the greatest places to work in Luxembourg

ATOZ has enjoyed a remarkable success story so far, and we aim to keep going. We have already grown considerably, and by general consensus, we are one of the best tax advisors in Luxembourg. Not only are we the best, but we are also one of the best places to work, voted the fourth-best business to work for in 2013 in Luxembourg by the Great Place to Work Institute, a global human resources consulting firm.

“It’s a great pleasure for us to share this achievement with our clients and people. We put a special emphasis on investing in our team members and offering them career flexibility and mobility, extensive training and a commitment to social-impact work. All of these have contributed to our success,” said ATOZ Managing Partner, Keith O’Donnell.

“In addition to our people, our strategy and goals, values that are embraced by every member are one of the principal ingredients of our fabric to achieve our vision: To become the most trusted business advisor in the marketplace offering its Members the realization of their full potential,” said ATOZ Managing Partner – Operations, Fatah Boudjelida.

ATOZ Chair for European and International Taxation

Seminar on the OECD partnership report

The ATOZ Chair for European and International Taxation at the University of Luxembourg organized a seminar on original OECD Partnership Report introduced by Dr. Professor Helmut Loukota, who drafted the report.

The ATOZ Chair was delighted to welcome Dr. Loukota for his overview of the Partnership Report and of recent cases involving qualification and attribution conflicts. Dr. Loukota was the Chairman of the OECD study group on Partnerships, Trusts and Investment Funds and the Partnership Report was written under his direction. He served for many years as Head of Division for International Tax Law in the Austrian Federal Ministry of Finance and he remains a consultant on international tax matters for the ministry. In recognition of his accomplishments, he was appointed Honorary Professor at the Vienna University of Economics and Business. He has given lectures on International Tax Law around the world.

He reminded the audience of the origins of the report and in particular the very pragmatic principle in its drafting which was to ensure that its findings could be implemented via changes to the commentary, rather than changes to the model tax convention (MTC) itself. This led let to a lively debate on the limits of interpretations of the MTC and the legal value of the commentary itself.

For additional information and content related to the seminar, please contact Keith O’Donnell at keith [dot] odonnell [at] atoz [dot] lu

Exchange of information and bank secrecy

“In the wake of the financial crisis, countries realized their urgent need to unlock new sources of revenue, as well as increase their efforts to collect revenue, particularly by fighting against tax evasion. In an increasingly global economy, one crucial element of success in fulfilling such needs is a country’s ability to obtain information about its taxpayers across borders. Thus, although the possibility to exchange information has been for quite a long time, there have been significant changes to the information exchange landscape in just the last few years. All major jurisdictions with bank secrecy rules have been forced to limit the application of those rules in case of cross-border exchange of information requests. Since 2002, more than 500 taxpayer Information Exchange Agreements have been signed.”

Given this well-defined trend, the ATOZ Chair for European and International Taxation at the University of Luxembourg held a conference, examining the rights and procedures established in the different bilateral and multilateral agreements, providing for the exchange of information, as well as the mutual assistance directives at the level of the European Union. The excerpt above comes from the book, “Exchange of information and bank secrecy,” which is the compilation of the content presented at the conference.

To receive a copy of the book, contact Keith O’Donnell at keith [dot] odonnell [at] atoz [dot] lu or Gilles Sturbois at gilles [dot] sturbois [at] atoz [dot] lu

State Aid & Tax Law

The ATOZ Chair for International and European Taxation of the University of Luxembourg has recently issued its third book: “State Aid and Tax Law”. The book will be welcomed by practitioners who are sure to benefit greatly the academic and administrator guidance on State Aid provisions and the rules on harmful tax competition.

For additional information or to receive a copy of the book, contact Keith O’Donnell at keith [dot] odonnell [at] atoz [dot] lu

For upcoming events and additional information about the ATOZ Chair for European and International Taxation, visit ATOZ Chair

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