Luxembourg is one jurisdiction that has always been demonstrating responsiveness in a fast evolving financial environment.
Historically attached to banking secrecy but facing an international growing pressure, Luxembourg adapted quickly, with a clear view to demonstrate it is a cooperative jurisdiction fully committed to tax transparency. Luxembourg is now pursuing its efforts towards a system of exchange of information upon request in line with international standards, expanding its double tax treaty network and releasing clear guidelines to the members of its fiscal administration for the application of exchange of information rules. Luxembourg also committed to international standards on automatic exchange of information, be it via the implementation of the EU directive on administrative cooperation or via the adhesion to the newly released OECD standard.
Responsiveness and ability can be observed not only at the level of the Luxembourg government but also at each level of public authorities. The Luxembourg supervisory authority of the financial sector (CSSF) shows awareness in the specific issues encountered by the financial center and recently released updated FAQs and a circular for the purposes of clarifying impacts of the AIFM Directive.
Substantial changes will have to be faced in the short term with the expected change of the VAT e-commerce regime as from 1st January 2015. A bill has been submitted to the Parliament in that respect. Professionals are eagerly waiting for the budget law proposal, curious about the solutions the government will propose to face the substantial loss of VAT revenues. New tools to increase Luxembourg’s competitiveness and attractiveness will be necessary. As part of this plan, Luxembourg is already sending a clear message to multinationals to set their headquarters in Luxembourg by improving the fiscal regime of highly skilled workers assigned to the Grand-Duchy.
As always, we hope that our newsletter will provide you with the necessary insight on current development in the legal and tax environment. Enjoy your reading!
The Atoz Insights Editorial Team
- Exchange of information upon request: further steps towards efficiency
- Automatic exchange of information: Luxembourg starts implementing the provisions of the Administrative Cooperation Directive
- Tax regime of highly skilled expatriates improved
- VAT Update
- CSSF releases upgraded FAQs relating to AIFM – April 1st recommended application deadline
Luxembourg puts a lot of efforts into demonstrating its commitment towards the achievement of an effective system of exchange of information (EOI) upon request. New double tax treaties /protocols in line with international standards are about to be ratified and a bill has been submitted in December 2013 to the Parliament for that purpose. A circular issued by the end of December 2013 reiterates to members of the fiscal administration the rules they need to comply with when handling an EOI request within a double tax treaty context.
New treaties/protocols to be ratified: bill submitted to Parliament
Luxembourg pursues its efforts in having EOI relationships in line with the international standards and expanding its double tax treaty (DTT) network at the same time. New DTTs compliant with OECD standards have been signed with Saudi Arabia, Guernsey, Isle of Man, Jersey and Czech Republic and current DTTs with Denmark and Slovenia have been amended to bring these in line with the standard. A bill has been submitted in December 2013 to the Parliament so as to ratify these DTTs and protocols. Furthermore, the bill clarifies that the domestic procedure that applies to EOI requests received within a DTT context will be governed by the law of March 31, 2010 (for previous coverage of the 2010 law, please read our ATOZ Newsletter of March 2010.) Similar references to the law of March 31, 2010 were made in the laws of July 16, 2011 and June 14, 2013 ratifying additional DTTs/protocols compliant with OECD standards.
Clarifications on domestic procedure: circular released by Luxembourg tax authorities
A circular issued end of December 2013 by the tax authorities (Circular EHCA n°1, December 31, 2013) complements Luxembourg’s commitment towards an improved EOI framework. The circular provides members of the fiscal administration with guidelines on how to handle an EOI request within a DTT context and focuses on 4 aspects:
How to assess the criterion of foreseeable relevance?
The circular reproduces part of the commentaries to the OECD Model Tax Convention. It makes clear to tax inspectors that their role should be limited to verify if there is a mere reasonable possibility that the requested information is relevant for the purposes of foreign taxation. In case of doubts, Luxembourg tax inspectors have to request further clarification from the foreign authorities. Having received these clarifications, Luxembourg tax inspectors are obliged to supply the requested information, no matter if they consider it as foreseeably relevant or not.
How to apply the principle of non-retroactivity?
DTTs and their amending protocols generally apply as of January 1st of the year following the exchange of the instruments of ratification. The Luxembourg tax authorities are therefore allowed to decline an EOI request if it relates to earlier tax years. However, as clarified by the circular, the tax authorities have to provide information which relates to earlier tax years (i.e. tax years to which the EOI provisions do not apply) to the extent this information is useful for the assessment of tax periods which are covered by the EOI provisions of the DTT.
What information must be provided?
Luxembourg tax authorities have to ensure that the holders of information provide the information requested in a comprehensive and detailed manner and without any alteration.
What if the taxpayer concerned by the EOI is a Luxembourg tax resident?
In this case, the circular clarifies that the tax authorities have to send the information request directly to the taxpayer concerned by the request.
If the foreign authorities require that the person concerned by the request is not informed, the injunction decision will be sent to the information holder.
Finally, if the person concerned by the request for assistance from a foreign authority is not resident in Luxembourg or if, for any reason, the injunction decision cannot be delivered, the latest will be sent to the information holder.
The circular is obviously an answer to the criticism of Luxembourg made by the OECD and the Global Forum on Transparency and Exchange of information. Luxembourg has been criticised for having an unduly restrictive interpretation of the concept of foreseeably relevant information, for rejecting EOI requests concerning Luxembourg tax residents and for refusing to supply earlier/past information even though the request was related to a tax year covered by the DTT. One can conclude that the release of this circular does not only aim at ensuring the efficiency of the EOI procedure within the tax administration but also at sending a clear message to international authorities to demonstrate the goodwill and commitment of Luxembourg. The legal force of a circular is however limited and one might wonder to which extent Luxembourg Courts will follow these guidelines, Luxembourg Courts having also been attacked by international institutions for their unduly restrictive attitude in these matters.
For further information, please contact Emilie Fister at emilie [dot] fister [at] atoz [dot] lu ()
While the OECD principles as regards to exchange of information upon request are now in place in Luxembourg since a few years, Luxembourg is moving to the next step and is currently in the process of implementing the provisions of the Administrative Cooperation Directive dealing with mandatory automatic exchange of information. Under these rules, the Luxembourg tax authorities will be required to communicate automatically to tax authorities of any other EU member state information regarding specific categories of income, which is available and concerns residents of that other member state.
Scope of automatic exchange of information
The provisions of the Administrative Cooperation Directive 2011/16/EU of 15 May 2011 (“the Directive”) dealing with mandatory automatic exchange of information cover the following 5 categories of income: professional income, director fees, pensions, life assurance and real estate income.
However, information can only be exchanged automatically by the tax authorities to the extent this information is available. This is why each EU member State has to confirm for which out of the 5 categories of income mentioned in the Directive information will be communicated automatically. The categories of income vary from country to country depending on their tax system.
The Luxembourg bill confirms the categories of income (3 out of the 5 listed in the Directive) for which information will be communicated by the Luxembourg tax authorities. As information regarding life insurance and real estate is not available to the Luxembourg tax authorities, the bill indicates that Luxembourg will communicate automatically, i.e. systematically, only information regarding professional income, director fees, and pensions.
How will information be communicated?
For these 3 categories of income, the information will be collected based on the salary and pension slips and the directors’ fees withholding tax form.
The information shall be sent using a standard computerised format aimed at facilitating such automatic exchange and based on the existing computerised format pursuant the provisions of EU Savings Directive 2003/48/EC of 3 June 2003.
The automatic exchange of information rules will become effective as of 1 January 2015 and will apply to information related to tax years 2014 and following.
Information will be provided at least once a year and at the latest on the 30th of June following the calendar year during which the information has become available.
The implementation of the Directive again demonstrates the willingness of Luxembourg to achieve an effective system of exchange of information in line with the requirements of the Global Forum on Transparency and Exchange of information. Luxembourg is currently not only acting at EU level but has already taken further steps at global level and has recently started the ratification process of the convention on mutual administrative assistance in tax matters which was signed by Luxembourg on 29 May 2013. Additional changes can be expected in the near future further to the recent release by the OECD of a Standard for Automatic Exchange of Financial Account Information between tax authorities worldwide, which has been endorsed by the G20 finance ministers during the 22-23 February 2014 meeting in Sydney. Under this standard, jurisdictions will obtain financial information from their financial institutions and automatically exchange that information with other jurisdictions on an annual basis. Under the new standard, financial institutions would include banks, brokers, certain collective investment vehicles and certain insurance companies. It remains to be seen how Luxembourg will react to this new OECD standard, but it can be expected that further changes will come.
For further information, please contact Samantha Merle at samantha [dot] merle [at] atoz [dot] lu ()
The tax regime of highly skilled expatriates has recently been amended by a circular released by the Luxembourg tax authorities. The aim of the amendment is to bring the regime in line with EU Law. To achieve this, the tax regime is extended retroactively as of January 1st 2014 to highly skilled expatriates hired by companies which are located in the European Economic Area (i.e. the EU as well as Iceland, Liechtenstein and Norway).
Several changes have been made to the text of the circular in order to take this change into consideration. The requirement according to which the specific knowledge and skills of the employee must benefit the staff of the Luxembourg Company in order to stimulate sustainable activities in Luxembourg has also been removed. This means that the knowledge of the expatriate will still have to benefit the staff of the Company but it will no longer have to stimulate sustainable activities in Luxembourg. The fact that this requirement no longer exists for the regime to apply is positive as this requirement was not defined in the previous version of the circular, so was rather subjective and created some legal uncertainty for tax payers.
Please see below an overview of the tax regime of highly skilled expatriates as it is now in force and applies since January 1st, 2014.
Benefits of the regime
In Luxembourg, given the small size of the country, some companies which want to develop their products or services have very often to hire highly qualified workers on the international labour market. Moving highly skilled workers from one country to another triggers however a lot of financial costs (accommodation, travel, etc.). To encourage these workers to come to Luxembourg, employers will often have to bear the costs. However, from a tax point of view, these costs are considered as a fringe benefit granted to the employee and thus taxable as an additional remuneration at the level of the employee. The net effect is that most of the fringe benefits that are necessary to attract expatriates often end up costing the employer more than double the amount of the actual price, due to the additional taxes payable.
The circular provides an answer to this issue and specifies that certain costs borne by the employer for the move, the stay and exit of the employee in Luxembourg will be exempt from tax at the level of the employee during a period of 5 years, while remaining tax deductible at the level of the employer.
The employer will therefore be able to compensate, free of tax, moving, travel and child care expenses, including school costs. It will also be able to compensate housing and tax equalisation costs tax free if the compensation does not exceed (i) EUR 50,000 (EUR 80,000) for a married couple and (ii) 30% of the expatriate salary. Finally, certain costs of living allowances may be granted (subject to conditions and limitations).
Who can benefit from this tax regime?
Qualifying inpatriates within the meaning of the circular are:
- Employees recruited abroad by a Luxembourg, EU or EEA Company; and
- Employees assigned by a foreign company which is part of an international group to a Luxembourg company of the group.
To the extent:
- The employees qualify as a tax resident;
- The employees have not been resident in Luxembourg before or lived closer than 150 km from the border zone and have not been subject to individual income tax in Luxembourg on their employment income in the 5 years preceding the assignment to Luxembourg; and
- The Company employs or undertake to employ at least 20 full time employees in the mid-term.
What are the conditions in case of assignment?
In case of an employee assigned by a foreign company, the following additional conditions apply:
- The employee must have 5 years seniority within the group or has acquired an experience of at least 5 years in the relevant sector;
- A working relationship has to remain between the foreign group company and the seconded employee during the period of secondment;
- There must be a secondment contract between the foreign group company and the company to which the employee is assigned; and
- The seconded employee must be able to go back to the foreign group company when the secondment period ends.
What are the conditions in case of direct recruitment?
In case of an employee recruited abroad, the following condition applies:
- The employee is required to benefit from in-depth skills in a sector in which there are recruiting issues in Luxembourg.
Conditions regarding the new employment
- Specific knowledge and skills of the employee must benefit the staff of the company;
- The employee must earn an annual gross salary of at least EUR 50.000. In this context bonuses and benefits in kind are not taken into account;
- The employee may not replace other employees to which the regime of the circular does not apply.
Conditions applicable to the employer
The number of inpatriates may not be higher than 30% of the total number of full-time employees. This condition does, however, not apply to companies established since less than 10 years.
Procedure to benefit from the regime
A prior authorisation from the tax authorities is not required. The employer is merely required to communicate to the tax authorities a list of employees benefitting from the regime. This communication has to be made once a year, at the latest on 31st January of the given tax year.
Duration of the regime
The expatriates’ regime applies for a maximum period of 5 years.
For further information, please contact Samantha Merle at samantha [dot] merle [at] atoz [dot] lu ()
VAT rates increase
As expected, all Luxembourg VAT rates will be increased by 2% in the coming months with the exception of the super-reduced rate which will remain 3%. In any case, the new Luxembourg standard VAT rate (17%) will remain the lowest within the European Union. Even if initially planned for January 1, 2015, the implementation date has not been yet confirmed.
2015 VAT changes for electronic, telecommunication and broadcasting services
By the end of 2013, the Council of the European Union published its Implementing Regulation (1042/2013) dealing notably with new rules applicable to the place of supply of telecommunication services, television and radio broadcasting services and electronically supplied services (ICT services) supplied by EU businesses to EU private customers.
Until now, when supplied by an EU service provider, the place of taxation of ICT services was the place of establishment of the service provider. From January 1, 2015, the place of taxation will become the Member State where the customer is established, his permanent address or his habitual residence. In Luxembourg, the bill No. 6642 implementing these rules is currently in the course of approval and should be adopted in the next months.
• Businesses concerned:
Businesses concerned are European providers of telecommunication services, television and radio broadcasting services and electronically supplied services.
• The changes
Businesses affected by these new rules will be required to charge the respective VAT rate in effect in the Member State where their customers are established. As the VAT rates vary from 3% to 27% within the EU, IT systems will have to be adapted to apply the correct rate based on the country of establishment of the customer. Invoices will also have to comply with local requirements.
• Open issues
Fortunately, businesses will not suffer an important administrative burden in all EU Member States (e.g. VAT registration, VAT returns, VAT payments) as a specific scheme, the so-called mini one-stop shop, has been designed to allow ICT service providers to file one single VAT return per quarter, including the VAT due in each respective Member State.
These changes raise however issues, such as:
- Defining accurately the place of establishment of the customer and the related VAT liability;
- The pricing effect on the final customer;
- Privacy issues about data collected on customer and the storage of such information;
- Invoicing requirements.
More Member States to apply reduced VAT rates to e-books
In 2013, the European Commission referred France and Luxembourg to the European Court of Justice (“ECJ”) for applying a reduced VAT rate to e-books.
The battle may however not be lost as another case implicating Finland is currently pending at the European Court of Justice in order to clarify the difference in treatment regarding the VAT rates applicable on books, depending on whether they have been supplied under an electronic-format or a hard-format. Besides, in a recent press release, the German Ministry of Culture has notified his intention to also apply a reduced rate on e-books. We will update you on future developments on this topic.
For further information, please contact Christophe Plainchamp at christophe [dot] plainchamp [at] atoz [dot] lu
The regulatory regime of the alternative investment fund managers (AIFMs) has raised number of questions within the fund industry since its entry into force in July 2013. The CSSF has recently brought further clarifications thereto by releasing upgraded versions of the AIFM FAQs and by issuing a circular on new reporting obligations of the AIFMs. The aim of the updates is to provide to the AIFMs operating in Luxembourg, through management of marketing of alternative investment funds, further guidance with respect to the transitory provisions, to the conditions of use of the marketing passport, to the reporting obligations or to the performance of the valuation function.
Transitory provisions until July 22, 2014 – April 1st first!
The CSSF reminds that each collective investment vehicle must perform a self-assessment in order to determine whether it falls within the definition of “alternative investment fund”, and underlines that it is the responsibility of the management body of any collective investment vehicle to determine if it qualifies as an AIFM or not, and if so, to request authorization, failure thereof entailing severe penalties.
The CSSF invites on this occasion the entities needing an authorisation as an AIFM and the investment vehicles qualifying as AIFs and being established as an Undertaking for Collective Investment - Part II, a SICAR or a SIF, to submit an application file or a file containing information regarding its compliance, by April 1st at the latest.
- Luxembourg AIFMs concerned:
The transitory regime running until July 22, 2014 allows the legal entities having performed management activities falling within the scope of the AIFM Law before July 22, 2013 (and technically qualifying as AIFMs) to continue their activity during the next five months. In the meanwhile they are encouraged to take all measures to comply with the obligations under the AIFM Law (in terms of general principles, operating conditions, organizational requirements, conflicts of interest, remuneration, risk and liquidity management rules, securitization rules, valuation and delegation rules). The compliance obligation will come into force either as from the moment the entity is authorized or as from July 22, 2014 (and therefore even in the absence of formal authorization from the CSSF), whichever occurs the earliest.
- Luxembourg AIFs concerned:
Similarly, the investment vehicles qualifying as externally managed AIFs and being established as an Undertaking for Collective Investment - Part II, a SICAR or a SIF during the transition period until July 22, 2014, can appoint an AIFM benefiting from the transitional provisions mentioned above. Once the AIFM is authorized by the CSSF, all necessary measures must be taken in order for the AIF to comply with the rules regarding the annual report or the disclosure to investors, the valuation rules and the depository rules.
The CSSF introduces a new section in the FAQs dealing with the multiple scenarios of the marketing passport. There are a series of detailed explanations on the conditions to be met by an AIFM established in Luxembourg or in another EU Member State when distributing shares or units in regulated or non-regulated AIFs (whether Luxembourg or EU) within the territory of Luxembourg or of other EU Member States, to professional investors or to retail investors. We can provide you with further information, tailored to your specific situation.
The reporting aspects introduced in the FAQs, which are to be read in combination with the ESMA Reporting Guidelines and the ESMA Opinion on Reporting under Article 24(5), deal with the reporting periods, the frequency, the transitory obligations or the first reporting period for existing, registered and authorized AIFMs. The Circular 14/581 aims to clarify specific technical details necessary for the AIFMs when fulfilling their reporting obligations and filing electronically the reporting files.
It is worth reminding on this occasion that reporting requirements apply also to non-EU AIFMs, for which the transitional period extends until 2015.
- Non-EU AIFMs concerned:
1° non-EU AIFM managing a Luxembourg AIF during the transitional period (independently of the territory into which it is marketed);
2° non-EU AIFM marketing in Luxembourg EU AIFs and/or non-EU AIFs during the transitional period, considering that the data to be reported to the CSSF should only cover the AIFs marketed in Luxembourg.
- The information to be disclosed relates to:
- the information on the main instruments traded and markets on which the AIFM is trading, and on the exposures and concentrations of each of the AIFs it manages;
- the information on the arrangements for the management of the liquidity of the AIF’s assets, on the risk profile of the AIF and risk management systems employed, on the main categories of assets in which AIF is invested and the results of the stress tests; and
- the information on leverage.
AIFM FAQs sundry provisions:
Internally vs externally managed: the CSSF put an end to the debate and stated that as far as the new special limited partnerships (société en commandite speciale) qualifying as AIFs and the mutual investment funds (fonds de placement collectifs) are concerned, they can only be externally managed AIFs.
Valuation: under certain conditions and provided the appointment is formalized in a written contract, an AIFM can appoint the AIF’s depositary or its administrator to act as an external valuer.
Transaction costs: the AIFs established under the Part II of the Law of 2010 must from now on disclose in their financial reports the transaction costs incurred in connection with the transactions on their portfolio.
Whether you need further information on an AIFMD related topic or need assistance in the preparation of your application file, please contact any of the AIFM team members at aifmd [at] atoz [dot] lu.
For the latest edition of Taxand’s Take, your regular update on the topical tax issues affecting multinationals, please click here.