Summer 2013 is really hot with news. The fight against tax evasion and exchange of information are in the news on a daily basis. The OECD just released an action plan against base erosion and profit shifting. Offshore accounts and revelations regarding politicians re-launched the discussions about automatic exchange of information and fight against tax evasion. The implementation of FATCA becomes a daily concern not only for public authorities but also for financial institutions. Releases of the OECD and EU Commission in the course of June signal FATCA becoming the worldwide standard as regards automatic exchange of information.
While the future seems to hold an extended automatic exchange of information, in the present, Luxembourg courts are still called to rule on procedures of exchange of information upon request.
In this international context, where harmonization seems to prevail, Luxembourg seeks to remain an attractive jurisdiction. AIFMD law is now implemented and the double tax treaty network is being considerably extended. Luxembourg also seeks to attract individuals by amending its regime on expatriates.
As always, we hope that our newsletter will provide you with the necessary insight on tax news. Enjoy your reading!
Jean-Michel Chamonard, Partner
- TAX NEWS
- OECD launches Action Plan on Base Erosion and Profit Shifting
- AIFM Law enters into force
- Automatic exchange information: towards a US Luxembourg Model I IGA, a European FATCA and a global automatic exchange of information
- Exchange of information on demand – Luxembourg case law: secrecy and legal proceedings
- IP regime – Luxembourg case-law provides clarifications
- Financial transaction tax (FTT) – Luxembourg’s doubts
- Luxembourg expands treaty network
- Tax regime of highly skilled expatriates improved
- Investment Funds & WHT reclaims: Luxembourg SICAV not entitled to a Dutch refund
- VAT - Important changes to VAT deduction rights
- VAT - Changes brought by the implementation of the AIFM Directive
- ATOZ NEWS
- FATCA in practice in Luxembourg
- Taxand Global Client Breakfast
- The ATOZ Chair for European and International Taxation
- Taxand Global Conference : New York 2013
- TAXAND NEWS
Base Erosion and Profit Shifting (BEPS) is at top of mind of G20 members and OECD countries. In February 2013, the OECD report addressing BEPS issues made a priority of the development of an action plan. And a priority it is: only a few months after the issuance of the BEPS report, the OECD already disclosed the anticipated action plan at the G20 meeting held in July 2013 in Moscow.15 actions are to be implemented within a 2 year timeframe in order to, as the OECD says, “give governments the domestic and international instruments to prevent corporations from paying little or no taxes”. We present below the 15 actions specified in the Action Plan.
1. Address the tax challenges of the digital economy (to be completed by September 2014)
The objective of the first action is to identify the main difficulties that the digital economy poses for the application of existing international tax rules and develop detailed options to address these difficulties, considering both direct and indirect taxation.
Issues to be examined include among others the “ability of a company to have a significant digital presence in the economy of another country without being liable to taxation due to the lack of nexus under current international rules, the attribution of value created from the generation of marketable location relevant data through the use of digital products and services, the characterization of income derived from new business models, the application of related source rules, and how to ensure the effective collection of VAT/GST with respect to the cross-border supply of digital goods and services”. A review of the various business models in this sector will be required for this purpose.
2. Neutralise the effects of hybrid mismatch arrangements (to be completed by September 2014)
The objective of this second action is to “develop model treaty provisions and recommendations regarding the design of domestic rules to neutralize the effect (e.g. double non-taxation, double deduction, long-term deferral) of the use of hybrid instruments and hybrid entities.” The aim is to make sure that the income generated is taxable at least at one level and that situations of double non taxation simply disappear.
This action may include:
- Changes to the OECD Model Tax Convention in order to make sure that hybrid instruments and entities (as well as dual resident entities) are not used to obtain the benefits of treaties unduly;
- Domestic law provisions that prevent exemption or non-recognition for payments that are deductible by the payor;
- Domestic law provisions that deny a deduction for a payment that is taxable at the level of the recipient (and is not subject to taxation under controlled foreign company (CFC) or similar rules);
- Domestic law provisions that deny a deduction for a payment that is also deductible in another jurisdiction; and where necessary,
- Guidance on coordination or tie-breaker rules if more than one country seeks to apply such rules to a transaction or structure.
It is quite clear that this particular item will have a big impact for Luxembourg which is often used as an investment platform for holding and financing activities. The use of such instruments and entities is quite common in Luxembourg so that existing as well as new structures will have to be carefully reviewed.
3. Strengthen controlled foreign company (CFC) rules (to be implemented as of September 2015)
“One of the sources of BEPS concerns is the possibility of creating affiliated non-resident taxpayers and routing income of a resident enterprise through the non-resident affiliate. CFC rules have been introduced in many countries to address this issue. However, the OECD considers that while CFC rules in principle lead to inclusions in the residence country of the ultimate parent, they also have positive spillover effects in source countries because taxpayers have no (or much less of an) incentive to shift profits into a third, low-tax jurisdiction. “This is why the action plan foresees the development of recommendations regarding the design of controlled foreign company rules. Since the report does not provide any details on how these recommendations will look like, it is difficult at this stage to assess the impact of this action, but it will collide with some existing debates such as the US debate on deferral.
4. Limit base erosion via interest deductions and other financial payments (to be implemented by September/December 2015)
The action plan foresees to “develop recommendations regarding best practices in the design of rules to prevent base erosion through the use of interest expense, for example through the use of related-party and third-party debt to achieve excessive interest deductions or to finance the production of exempt or deferred income, and other financial payments that are economically equivalent to interest payments. “
In connection with and in support of the foregoing work, transfer pricing guidance will also be developed regarding the pricing of related party financial transactions, including financial and performance guarantees, derivatives (including internal derivatives used in intra-bank dealings), and captive and other insurance arrangements.
This action will as well have implications for Luxembourg as a platform for financing activities, even though the recent transfer pricing developments on financing activities performed out of Luxembourg by non-regulated entities should in principle limit the changes to be introduced following this action point, given that Luxembourg is already in line with the OECD arm’s length principles defined in the Transfer Pricing Guidelines.
5. Counter harmful tax practices more effectively, taking into account transparency and substance (to be completed by September 2014/December 2015)
Here, it is about revamping “the work on harmful tax practices with a priority on improving transparency, including compulsory spontaneous exchange on rulings related to preferential regimes, and on requiring substantial activity for any preferential regime. It will take a holistic approach to evaluate preferential tax regimes in the BEPS context. It will engage with non-OECD members on the basis of the existing framework and consider revisions or additions to the existing framework.”
It is expected that the review of member country regimes will be finalized by September 2014 with a strategy to expand participation to non-OECD members by September 2015 and have the existing criteria revised by December 2015.
While this work goes into the direction already taken by most countries including Luxembourg as far as exchange of information and more generally transparency is concerned, the review of all existing measures may entail a challenge of existing measures which had already been assessed at EU level by the Code of Conduct for Business Taxation. This means that some Luxembourg tax regimes considered so far as code of conduct compliant may be challenged again which will create some legal uncertainty for tax payers until a new assessment has been made at OECD level.
6. Prevent treaty abuse (to be completed by September 2014)
The idea here is “to develop model treaty provisions and recommendations regarding the design of domestic rules to prevent the granting of treaty benefits in inappropriate circumstances. Work will also be done to clarify that tax treaties are not intended to be used to generate double non-taxation and to identify the tax policy considerations that, in general, countries should consider before deciding to enter into a tax treaty with another country”
7. Prevent the artificial avoidance of permanent establishment (PE) status (to be implemented by September 2015)
The plan is to “develop changes to the definition of PE to prevent the artificial avoidance of PE status in relation to BEPS, including through the use of commissionaire arrangements and the specific activity exemptions. Work on these issues will also address related profit attribution issues.”
8. Develop rules to prevent BEPS by moving intangibles among group members (to be completed by September 2014/2015)
By means of an amendment of the OECD Transfer Pricing Guidelines by September 2014 and possibly to the OECD MTC by September 2015, rules will be developed in order to “prevent BEPS by moving intangibles among group members. This will involve:
- adopting a broad and clearly delineated definition of intangibles;
- ensuring that profits associated with the transfer and use of intangibles are appropriately allocated in accordance with (rather than divorced from) value creation;
- developing transfer pricing rules or special measures for transfers of hard-to-value intangibles; and
- updating the guidance on cost contribution arrangements.”
9. Develop rules to prevent BEPS by transferring risks among, or allocating excessive capital to, group members (to be completed by September 2014/2015)
By means of an amendment of the OECD Transfer Pricing Guidelines by September 2014 and possibly to the OECD MTC by September 2015, rules will be developed to prevent BEPS by transferring risks among, or allocating excessive capital to, group members. This will involve adopting transfer pricing rules or special measures to ensure that inappropriate returns will not accrue to an entity solely because it has contractually assumed risks or has provided capital. The rules to be developed will also require alignment of returns with value creation.” This action point sits uneasily with existing rules and practice and will be challenging in practice.
10. Develop rules to prevent BEPS by engaging in transactions which would not, or would only very rarely, occur between third parties (to be completed by September 2015)
By means of an amendment of the OECD Transfer Pricing Guidelines and possibly to the OECD MTC, rules will be developed “to prevent BEPS by engaging in transactions which would not, or would only very rarely, occur between third parties. This will involve adopting transfer pricing rules or special measures to:
- clarify the circumstances in which transactions can be recharacterized;
- clarify the application of transfer pricing methods, in particular profit splits, in the context of global value chains; and
- provide protection against common types of base eroding payments, such as management fees and head office expenses.”
11. Establish methodologies to collect and analyse data on BEPS and the actions to address it (to be completed by September 2015)
Recommendations will be developed” regarding indicators of the scale and economic impact of BEPS and ensure that tools are available to monitor and evaluate the effectiveness and economic impact of the actions taken to address BEPS on an on-going basis. This will involve developing an economic analysis of the scale and impact of BEPS (including spillover effects across countries) and actions to address it. The work will also involve assessing a range of existing data sources, identifying new types of data that should be collected, and developing methodologies based on both aggregate (e.g. FDI and balance of payments data) and micro-level data (e.g. from financial statements and tax returns), taking into consideration the need to respect taxpayer confidentiality and the administrative costs for tax administrations and businesses.”
12. Require taxpayers to disclose their aggressive tax planning arrangements (to be completed by September 2015)
Recommendations will be developed “regarding the design of mandatory disclosure rules for aggressive or abusive transactions, arrangements, or structures, taking into consideration the administrative costs for tax administrations and businesses and drawing on experiences of the increasing number of countries that have such rules. The work will use a modular design allowing for maximum consistency but allowing for country specific needs and risks. One focus will be international tax schemes, where the work will explore using a wide definition of "tax benefit" in order to capture such transactions. The work will also involve designing and putting in place enhanced models of information sharing for international tax schemes between tax administrations.”
13. Re-examine transfer pricing documentation (to be completed by September 2014)
Rules will be developed “regarding transfer pricing documentation to enhance transparency for tax administration, taking into consideration the compliance costs for business. The rules will include a requirement that MNE’s provide all relevant governments with needed information on their global allocation of the income, economic activity and taxes paid among countries according to a common template.”
14. Make dispute resolution mechanisms more effective (to be completed by September 2015)
Solutions will be developed “to address obstacles that prevent countries from solving treaty related disputes under Mutual Agreement Procedures (MAP), including the absence of arbitration provisions in most treaties and the fact that access to MAP and arbitration may be denied in certain cases.”
This action point is good news for tax payers, MAP being often not practical and therefore not an alternative in practice.
15. Develop a multilateral instrument to enable jurisdictions that wish to do so to implement measures developed in the course of the work on BEPS and amend bilateral tax treaties
An analysis will be performed of “the tax and public international law issues related to the development of a multilateral instrument to enable jurisdictions that wish to do so to implement measures developed in the course of the work on BEPS and amend bilateral tax treaties. On the basis of this analysis, interested parties will develop a multilateral instrument designed to provide an innovative approach to international tax matters, reflecting the rapidly evolving nature of the global economy and the need to adapt quickly to this evolution.”
The report identifying relevant public international law and tax issues should be finalized by September 2014 while the development of a multilateral instrument by December 2015.
Next steps and implications
The action plan will be formally submitted to the summit of the G20 leaders in September of this year.
To ensure that the work is inclusive and effective, the report suggests that interested G20 countries that are not members of the OECD will be invited to be part of the project as Associates (i.e. on an equal footing with OECD members) and will be expected to associate themselves with the outcome of the BEPS Project. Other non-members could be invited to participate as Invitees on an ad hoc basis. The report also foresees that business and civil society representatives will be invited to comment on the different proposals developed in the course of the work.
The report is very ambitious, first because the number of measures to be taken and the related work to be performed are huge and second because the timing for implementing these measures is very tight. We consider therefore that some delay can be expected, especially if we keep in mind that this work will require a general agreement at global level: the past has shown at EU level, that decisions requiring the consent of all Member States could often simply not be implemented. Here things are slightly different since there is a clear willingness at global level to achieve the same objectives. However, since some of the measures still need to be fine-tuned or even defined, it is too early at this stage to know in details how far the OECD countries will have to go to achieve the objectives defined in the action plan. In the meantime, while multinationals, when planning their investments abroad, should more than ever seek the advice of their tax advisers and monitor progress in this area.
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 ().
The law implementing the EU Alternative Investment Fund Managers Directive (the AIFMD) into Luxembourg national law has entered into force on 15 July 2013 (the “Law”).
Professionals of the AIF industry should launch the implementation phase of their strategy to become compliant with the AIFMD in Luxembourg before July 22, 2014 at the latest.
Our dedicated team can help you getting on the fast track to implement the necessary changes and make sure that your alternative investment fund structure is compliant with the applicable provisions of the Law.
In addition to the implementation of the AIFMD, the Law upgrades the common limited partnership regime, while introducing a brand new special limited partnership, and provides for specific tax provisions applicable to limited partnerships and to carried interest, thus offering an attractive flexibility in the structuring of private equity in Luxembourg.
For an overview of these measures, please click here and read our past newsletter in this respect.
To face this forthcoming challenge, ATOZ has also prepared a detailed presentation to introduce the upcoming changes.
To receive a copy of the presentation, please contact our dedicated team at aifmd [at] atoz [dot] lu ().
The fight against tax evasion currently is one of the major international concerns. Growing international pressure is driving the financial industry towards global and automatic exchange of information. FATCA and the EU Directive on administrative cooperation are existing tools reflecting this international trend, which is to make of automatic exchange of information the new standardThe US FATCA law and regulations created a momentum in the discussions about international tax evasion and automatic exchange of information. To date, more than 75 countries are already in discussions with the USA to enter into an intergovernmental agreement (IGA). Most of them are considering the conclusion of a Model 1 IGA as opposed to a Model 2. In the Model 1 IGA, the information transits from the foreign financial institution to the IRS via its domestic authorities. The Model 2 IGA provides for a direct communication of the information from the foreign financial institution IRS and implies the adoption into domestic law of the extensive and complex Final Regs. Luxembourg announced in May 2013 that a Model 1 would be chosen for the adoption of an IGA.
At EU level, the Directive on Administrative Cooperation already provides for an automatic exchange of information on five categories of income and capital. Pursuant to article 19 of the Directive (most favoured nation clause), the fact that member States have concluded or will conclude IGAs as regards FATCA means that these Member States provide for a wider cooperation. According to the Commission, an expanded automatic exchange of information on a EU basis would “remove the need and incentive for Member States to invoke article 19.”The EU Commission proposed on 12 June 2013 to amend the current directive so as to extend its scope to dividends, capital gains and all other forms of financial income and account balances. The aim of EU Commission is to share as much information amongst Member State “as they have committed to doing with the USA under FATCA.”
Automatic exchange of information is also hot news at a global level. The OECD took the opportunity of the last G8 summit to submit on 18 June 2013 a report that aims at making of automatic exchange of information the new international standard. The idea developed by the OECD is to develop a standardised automatic exchange model on the basis of the Model 1 IGA.
Luxembourg already announced it would apply automatic exchange of information within the context of the EU Savings Directive as from 2015. It covers income qualifying as interest within the meaning of the EU Savings Directive. Within the context of the Directive on administrative cooperation, Luxembourg agreed to exchange information only on professional income. It seems that restrictions to an automatic exchange of information will be difficult to defend in the current international context.
For more information about this topic, please contact Gilles Sturbois at gilles [dot] sturbois [at] atoz [dot] lu.
Since Luxembourg agreed to apply international standards on exchange of information, Luxembourg courts have been called to rule on a whole new kind of disputes. They are more and more called to rule on exchange of information procedures in a double tax treaty context. The latest decisions issued by Luxembourg courts each deal (among others) with the same issue: is the request of exchange of information a privileged document? One additional and rather short decision also clarifies that a single administrative notice can be brought several times before Luxembourg courts (TA 17 May 2013, n°32459).
Legal proceedings initiated by taxpayers in the context of an exchange of information procedure are generally based on the same idea: they argue that the condition of foreseeable relevance is not met. At the time the proceedings are initiated, taxpayers have only been provided with a copy of the notice issued by local (Luxembourg) tax authorities to the holder of information. The taxpayer has not been provided with a copy of the foreign request that initiated the exchange of information procedure. To be able to verify if the condition of foreseeable relevance is met, taxpayers ask during the course of the proceedings to be provided with a copy of the foreign request. They argue that the absence of communication of such document would constitute a breach in the rights of defense. Tax authorities counterclaim that access to such document should be denied as it is privileged information under the double tax treaty and as its communication would otherwise violate Luxembourg principle of tax secrecy.
Luxembourg courts had therefore to define if the request constitutes confidential information and to which extent it can be disclosed.
On the basis of article 26 5 (Exchange of information) of the OECD Model Tax Convention and its commentaries, Luxembourg courts define the request as a confidential information (TA 28 February 2013, n°31662, CA 17 May 2013, n°32221C, CA 2 May 2013 n°32184C). The request is protected under Luxembourg tax secrecy rules (Cf CA 17 May 2013, n°32221 C). As a practical consequence, Luxembourg tax authorities do not need to provide the holder of information or the tax payer with a full copy of the request (same case law).
As outlined by Luxembourg courts in the above mentioned decisions, derogations are however attached to the confidentiality principle. Article 26 (5) of the OECD Model Tax Convention allows information to be disclosed to persons and authorities involved in the assessment or collection of taxes. This means that the information may be communicated to the taxpayer, his proxy or witnesses. The holder of information qualifies as witness. Further, pursuant to domestic procedural rules, supporting material has to be disclosed in case of legal proceedings.
Luxembourg courts therefore ruled that in case of proceedings, representatives of the tax authorities are obliged to lodge the request as supporting material at the registry of the court, which is obliged to communicate the request to the taxpayer (CA 17 May 2013 n°32221 C, CA 2 May 2013 n° 32184C, TA 28 February 2013, n°31662). No violation of tax secrecy can be invoked to the extent the taxpayer initiated the disputes. It means that the taxpayer becomes aware of the exact content of the foreign request only at the time the foreign request is lodged at the court. The law allows the taxpayer to file an additional set of conclusions when he becomes aware of the request, which preserves the rights of defense (CA 17 May 2013 n°32221C).
The increasing number of disputes related to exchange of information reflects the growing importance of the topic in our fiscal environment. For now, the disputes relate to exchange of information on a demand in a double tax treaty context. Luxembourg implemented in March 2013 the EU directive on administrative cooperation. The directive provides for all three kinds of exchange of information (on demand, spontaneous and automatic), only the two first being implemented into Luxembourg law. This new legal background should entail an increase of exchange of information procedures and of corresponding disputes. Further, the multiplication of applicable norms will probably give rise to interesting legal debates in the course of legal proceedings.
For more information about this topic, please contact Gilles Sturbois at gilles [dot] sturbois [at] atoz [dot] lu ().
A decision of the Luxembourg Administrative Tribunal has been published in respect of the application of the IP 80% exemption regime. It is the first decision of the Luxembourg Tribunal regarding the application of the IP regime. It deals with the condition of the regime regarding the date of creation of the IP, which has to be after December 31, 2007. The decision is interesting as it is favourable for the tax payer and recalls that administrative circulars are only guidelines and can therefore not be used by the tax authorities as a legal basis to require additional or more strict conditions for a tax regime provided by law to apply.
In the case at hand, the Company had started to sell its products under a specific trade mark since the Company’s incorporation in 1994 (so before December 31, 2007) but had registered this trade-mark only in the course of 2008 (so after December 31, 2007). The question was therefore which of the 2 points in time had to be taken into account and therefore whether the conditions of the partial exemption regime were met or not.
The tax authorities (Tax Office Sociétés 2) considered that the date of creation of the IP, in the case at hand, was not the date of registration of the trade mark but the date as from which the products had been sold under this trade mark. The tax authorities therefore denied the application of the partial exemption regime and this, based on the IP Circular which refers to this specific point in time in certain cases.
As the date of creation of the IP is not defined in the law, the Tribunal referred to the commentaries to the draft law and concluded that date to take into account was the date of registration of the trade mark so that the conditions of the partial exemption regime were met.
The Tribunal added that administrative circulars cannot impose conditions or requirements which are more restrictive than the ones mentioned in the law:
This decision is positive for tax payers, because Tax Office Sociétés 2 has been, based on our experience, very restrictive so far in the way it applies the IP regime and may be obliged in future to adopt a more balanced approach or at least it will no longer be able to use arguments mentioned in the Circular, and not in the law, in order to limit the scope of application of the regime.
This decision is also interesting as it reminds the tax authorities about the limited legal force of circulars and thus the limited power that tax authorities have when they issue circulars. We have seen in recent years from time to time tax provisions introduced only by means of circulars, provisions which are not defined at all in the law and which are subject to conditions only defined in circulars. An example is the circular on expatriates. What is its legal force and is the legal force of its requirements?
Other circulars, like the one on financing activities, have introduced conditions and requirements for a certain type of activity and these requirements have now in practice to be met by tax payers performing this type of activities if they want to make sure that the remuneration will not be challenged by the tax authorities. In this respect, it is quite clear that some of the requirements on substance go beyond, if not against, what is mentioned in the Luxembourg tax law. This case law might be therefore an interesting argument for tax payers to make the tax authorities go for a more flexible approach when analysing the criteria set in the Circular.
For more information about this topic, please contact Gilles Sturbois at gilles [dot] sturbois [at] atoz [dot] lu () or Samantha Merle at samantha [dot] merle [at] atoz [dot] lu ().
The implementation of a financial transaction tax generates an endless debate. Proof of this is the legal challenge launched in April 2013 by the UK against FTT before the CJUE. In a conference held in London, M. Luc Frieden explained that “Luxembourg is not opposed philosophically to the FTT, but it must be looked at on a global level not by 11 countries for the sake of growth…On this issue we need global not regional standard setting”. He also announced that Luxembourg will certainly bring its support to the case that has been started by the UK against the proposed FTT. M. Frieden did not expand further on the form such support would take. A few weeks later, Luxembourg‘s position was clarified in a Q&A dated May 2013 published by the Ministry of Finance on its website
The Q&A clarifies that Luxembourg approves a taxation of financial transactions that would hedge the risks inherent to these kinds of transaction only to the extent it is to be introduced on a global level.
Luxembourg regrets that the implementation takes the form of an enhanced cooperation. The levy of the FTT on a restricted territorial scope might entail capital outflows towards countries not applying the tax and a fragmentation of the single market. Further, Luxembourg opposes the extraterritorial effects of the FTT. By reason of the residency and issuance principles, a Luxembourg bank will be liable for the FTT in case it enters a financial transaction with a resident of a participating state or because it enters into a transaction that involves financial instruments issued by a participating member state. In other terms, non-participating countries will have to pay the FTT.
The Ministry of Finances expresses its doubts. It states that it did not initiate a legal challenge towards the FTT as the UK did. One might wonder if Luxembourg will join such challenge, as a few months ago it stated back in January 2013 that it “reserves the right to seek all legal remedies available in case it considers that the future tax does not respect the relevant treaty provisions on enhanced cooperation or is incompatible with the good functioning of the internal market.”
For more information about this topic, please contact Keith O’Donnell at keith [dot] odonnell [at] atoz [dot] lu ().
After having ratified 13 recent Double Tax Treaties (“DTTs”) and Protocols with the first objective to align Luxembourg standards with the OECD standards on exchange of information in tax matters, Luxembourg keeps on expanding its DTT network. 7 additional DTTs have been signed or initialed and another new one is currently in negotiation. While an expansion of the DTT network is good news, as it makes Luxembourg more attractive for foreign inbound or outbound investments, some of the ratified or recently signed DTTs only replace existing ones, introducing changes which may refrain investors from performing certain investments in Luxembourg as these investments will now be less attractive from a tax point of view. Here, reference can be made to the changes introduced for Luxembourg companies investing in real estate in Germany, Kazakhstan, Poland and Russia or to the anti-abuse provisions included in certain DTTs and drafted in so general terms that they may create some legal uncertainty for tax payers. These DTTs include however also positive changes, such as reductions of withholding tax rates or provisions granting DTT benefits to collective investment vehicles, which is great news for the Luxembourg investment fund industry.
Exchange of information upon request
Some 13 exchange of information protocols and DTTs in line with the current version of the OECD MTC have been ratified. They have been concluded with Canada, Italy, Macedonia, Malta, Romania, Switzerland, Seychelles, Tajikistan, Kazakhstan, Poland, Korea and Russia.
Furthermore, the DTTs recently signed with the Czech Republic, Jersey, Guernsey, the Isle of Man and Saudi Arabia include exchange of information provisions which are also in line with the current version of the OECD MTC and we can expect the same as far as the DTTs recently initialed or in negotiation with Hungary, Serbia and Andorra are concerned, where the text of the DTT is not available yet.
The OECD standards on exchange of information in tax matters provide for information exchange upon request, where the information is “foreseeably relevant” for the administration of the taxes of the requesting party, regardless of bank secrecy and a domestic tax interest.
It is worth noting that in the course of the negotiation and signature of these protocols and DTTs, article 26 of the OECD Model Tax Convention (“MTC”) has been amended so as to extend its scope to groups of taxpayers. According to this new provision, tax authorities will be able to request information from a group of taxpayers, without naming them individually, to the extent the request is not a ’fishing expedition’. Because this update is too recent (it occurred in July 2012), it has however not been reflected in the new Protocols and DTTs ratified by the Law.
The Luxembourg law which ratifies these DTTs and Protocols indicates that the exchange of information rules, as defined by the law of March 31st, 2010 and already applicable to the exchange of information DTTs and Protocols in force, will apply in the same way to the new exchange of information protocols and DTTs.
It will be necessary to await the finalization of the ratification process by the other Contracting States in order to definitively know as from which tax year the new rules will apply.
Given the status of ratification in the various countries involved as of today, we know already that the DTTs and Protocol concluded with the following countries will apply to taxes in relation to tax years starting on or after January 1st 2014:
New rules for the taxation of gains on real estate investments
The new DTTs with Germany, Kazakhstan, Poland and Russia include a specific provision, according to which capital gains derived by a resident of a Contracting State from the alienation of shares (or similar rights for some of these DTTs) in real estate companies are taxable in the source country (country in which the real estate is located). In other words, these gains are now, in line with the current OECD MTC, taxed in the same way as real estate income (i.e. at source), whereas they were, in the past, treated as gains on the sale of movable property, meaning that they were only taxable in the country of the seller.
This change is of importance for many real estate investment structures, especially for Luxembourg Companies investing in real estate in Germany, Kazakhstan, Poland or Russia via a local property company. So far, the capital gains were only taxable in Luxembourg (country of the seller) and could benefit from an exemption based on the participation exemption regime. Now, there will be a potential taxation of the gains in the country in which the real estate is located (to the extent the local legislation provides for such taxation).
Luxembourg companies which invest in real estate in these countries should therefore carefully review their investment structure to mitigate any adverse tax consequence. Given the status of the ratification process in the countries involved, these new provisions will apply in Germany, Poland and Russia for sure as of tax year 2014 and at the soonest as of tax year 2014 in respect of Kazakhstan (to the extent Kazakhstan ratifies prior to year-end).
As far as the DTTs recently signed with the Czech Republic, Jersey, Guernsey are concerned, they still have provisions in accordance with the old version of the OECD MTC. It means that under these DTTs, capital gains on shares will be only taxable in the country of the seller.
DTT benefits for investment funds
The Protocol to the DTT signed on 5 March 2013 between Luxembourg and the Czech Republic sates that the term "resident of a Contracting State" also includes a fiscally non-transparent person (including a Collective Investment Vehicle, “CIV”) that is established in that State according to its laws even in the case where the income of that person is taxed at a zero rate in that State or is exempt from tax there. This provision means that SICAVs and SICAFs benefit from the DTT provisions. FCPs, since they are fiscally tax transparent, should not.
Under the new DTTs with Jersey, Guernsey and the Isle of Man, body corporate CIVs are considered as residents and beneficial owners of the income received while transparent CIVs are considered as individual residents and beneficial owners of the income received. This means that SICAVs/SICAFs will be able to benefit from the same reduced withholding tax rates as ordinary fully taxable Luxembourg Companies while for FCPs, since they are tax transparent, the maximum rate applicable to individuals (which is higher), will apply. For investments performed by Luxembourg CIVs, this distinction should however not have any impact since these 3 jurisdictions do not levy withholding taxes on dividend distributions.
The same provision is included in the DTT with the Seychelles.
Finally, the Protocol to the new Tajikistan-Luxembourg DTT provides that Undertakings for Collective Investment are considered as residents and beneficial owners of the income they earn. Here, no distinction is made between SICAVs/SICAFs and FCPs.
Reduced withholding tax rates
Below, you will find an overview of the changes that have been introduced on some of the DTTs and Protocols as regards WHT rates:
|Czech Republic||0% (1) or 10%||0%||0% or 10%||?|
|Germany||5% (1) or 15%||0%||5%||Tax year 2014|
|Guernsey||5% (1) or 15%||0%||0%||?|
|Isle of Man||5% (1) or 15%||0%||0%||?|
|Jersey||5% (1) or 15%||0%||0%||?|
|Kazakhstan||5% (6) or 15%||10%||10%||Tax year 2014|
|Korea||10% (1) or 15%||5%||5%||?|
|Macedonia||5% (2) or 15%||0%||5%||Tax year 2014|
|Poland||0% (3) or 15%||5%||5%||Tax year 2014|
|Russia||5% (4) or 15%||unchanged||unchanged||Tax year 2014|
|Seychelles||0% (1) or 10%||5%||5%||?|
|Tajikistan||0% (7) of 15%||12%||10%||Tax year 2014|
1. If shareholding of at least 10%
2. If shareholding of at least 25%
3. If shareholding of at least 10% during 24 months preceding the date of payment.
4. If shareholding of at least 10% and a minimal acquisition cost of EUR 80.000.
5. For copyright of literary, artistic or scientific work except of computer software and including cinematograph films, and films or tapes for television or radio broadcasting.
6. If shareholding of at least 15%
7. If shareholding of at least 10% during 12 months
Anti-avoidance/limitation on benefits
As far as the Protocol with Korea is concerned, it explicitly provides that nothing in the DTT shall prevent the contracting states to apply their domestic anti avoidance rules. Similar provisions are also included in the new Germany-Luxembourg DTT.
The Poland-Luxembourg Protocol denies DTT benefits in case of income connected to artificial arrangements or when persons take advantage of laws, regulations and administrative practices that are qualified as a harmful tax measure by the EU Code of Conduct Group for Business Taxation.
The Russian protocol denies DTT benefits when it has been demonstrated further to consultations between the two contracting states that a tax resident was established with the main purpose to be granted benefits that would otherwise not have been granted.
As commented by the State Council at the time of the review of the draft law ratifying recent DTTs and Protocols, we see that recent treaties concluded by Luxembourg often contain anti-abuse clauses (like in the Polish Protocol for example) but that this type of clauses first vary in their wording from DTT to DTT and secondly are often drafted using so general and imprecise terms that it creates a legal uncertainty for the tax payer. The State Council recommends therefore that Luxembourg takes a clear position on how these rules are to be understood and applied in practice, noticing that the way these rules are applied often vary from country to country.
The recent developments in respect of DTTs are positive as regards countries with which Luxembourg did not have any DTT so far as they should increase business flows between Luxembourg and these countries. Luxembourg should however remain vigilant when negotiating DTTs as some provisions may have negative impacts on certain sectors which are key for Luxembourg as a business friendly location, like the real estate sector, where the implementation of provisions on the taxation of capital gains on real estate companies will rather refrain investments and may have a negative impact in the middle and longer term. Positive developments are the inclusion of specific provisions granting DTT benefits for collective investment funds, in line with the recent OECD commentaries in this respect. We expect that Luxembourg will in future systematically require from its DTT partners the inclusion of such provision in each of its new DTTs or Protocols in order to remove the tax barriers that often exist when CIVs invest abroad.
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 ().
On 21 May 2013, the Luxembourg tax authorities published an amended Circular LIR 95/2 on the taxation of expatriates, which aims at attracting, by means of a favourable tax regime, high skilled workers to Luxembourg.
The new Circular replaces the former Circular LIR 95/2 as from January 1st, 2013. The new Circular no longer refers to highly skilled workers but to so-called inpatriates (foreign employees working in Luxembourg), showing already that the aim of the new Circular is to make the favourable tax regime available to a larger amount of people. The experience in applying, since 2011, the provisions of the former Circular has indeed often shown that the former Circular was too restrictive on several aspects and was lacking on some of its formal requirements, which were too burdensome. The new Circular is here to broaden the scope of application of the regime and to relax its formal requirements. One notable change in this respect is that the prior approval from the tax authorities for applying the regime is no longer required.
We present below the regime as provided by the new Circular, highlighting the changes compared to the former Circular.
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 high skilled workers from a 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 married couple and (ii) 30% of the expatriate salary. Finally, certain costs of living allowances may be granted (subject to conditions and limitations). Since the benefits remain the same as under the former Circular, please click here and read our Newsletter in this respect for more details on the provisions of the tax regime as such.
Who can benefit from the favourable tax regime?
Qualifying inpatriates within the meaning of the Circular are:
- Employees recruited abroad to work in Luxembourg (no longer temporarily as in previous Circular) for a Luxembourg company; and
- Employees assigned by a foreign company which is part of an international group to a Luxembourg company of the group. The concept of international group is no longer defined, as it was the case in the former Circular, most probably in order to be able to take a broader approach and thus apply the Circular in an increased number of cases.
They have to fulfill the following conditions:
- The inpatriates are no longer required (as it was the case in the previous Circular) to have specific diplomas. They are also no longer required to contribute to the development or creation of economic activities in Luxembourg with high added-value;
- The new Circular states however that specific knowledge and skills of the employee must benefit the staff of the Luxembourg company in order to stimulate sustainable activities in Luxembourg;
- The inward expatriates have to become Luxembourg tax residents;
- They may not have been resident in Luxembourg before or have lived closer than 150 km from the border zone and may not have been subject to individual income tax in Luxembourg on their employment income in the 5 years preceding the assignment to Luxembourg;
- They must earn a taxable gross salary of at least EUR 50,000 (while it was the maximum amount subject to social security under the former Circular). In this context bonuses and benefits in kind are not taken into account;
- They may not replace other employees to which the regime of the Circular does not apply;
- The employee is required to benefit from in-depth skills in a sector in which there are recruiting issues in Luxembourg.
In case of secondment within an international group, the following additional requirements apply:
- The expatriate 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 Luxembourg company and the foreign group company; and
- The seconded employee must be able to go back to the foreign group company when the secondment period ends.
Conditions applicable to the Luxembourg Company for the tax regime to apply
The conditions for the Luxembourg Company are:
- The Company must employ or undertake to employ at least 20 full time employees in the mid-term; and
- The number of inpatriates may not be higher than 30% (10% under the former Circular) of the total number of full-time employees. As far as this condition is concerned, the new Circular does not say inpatriates but highly qualified workers instead but we understand that it is a mistake made during the drafting of the new Circular as the new Circular is actually only an amended version of the previous one. We understand therefore that this requirement has to be understood as a requirement regarding the number of inpatriates. This condition does, however, not apply to companies established in Luxembourg since less than 10 years.
Procedure to benefit from the regime
A prior authorisation from the tax authorities is no longer required. The employer is merely required to communicate to the tax authorities a list of the 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.
While the changes introduced by the new Circular are positive as they aim at making the favourable tax regime more flexible and available to a larger amount of people, one should bear in mind that some of the conditions of the Circular still remain subjective and may be interpreted differently. The fact that no more prior approval from the tax authorities is required is on one hand good news as it will speed up the process but on the other hand, it’s a risk to be taken by employer and employees as the tax authorities may in the end take a different position when assessing the employee. This is why a careful review of each individual situation is required before applying the Circular.
For more information about this topic, please contact Gilles Sturbois at gilles [dot] sturbois [at] atoz [dot] lu () or Samantha Merle at samantha [dot] merle [at] atoz [dot] lu ().
A Dutch Lower Court has recently delivered its decision in Investment Fund X v. the tax administration (No. 12/261) concerning a refund of dividend withholding tax to a Luxembourg SICAV.
A Luxembourg SICAV had received dividends from the Netherlands on which 15% dividend withholding tax was withheld. The SICAV claimed a refund of the tax withheld, which was rejected by the Dutch tax administration. The SICAV appealed, arguing that not granting a refund is incompatible with the free movement of capital enshrined in Article 63 of the Treaty on the Functioning of the EU (TFEU).
The SICAV put forward 2 arguments:
- The SICAV should be deemed comparable to a Dutch resident investment fund with the status of a fiscal investment institution.
- Alternatively, the SICAV should be comparable to a domestic entity that is exempt from Dutch corporate income tax (and not being an investment fund).
The Court considered however that:
- As regards the comparability of a Luxembourg SICAV with a Dutch investment fund, the Court ruled that to the extent that Luxembourg SICAVs do not have the obligation to distribute their profits, as it is the case for Dutch resident investment funds, it could not be found comparable to a Dutch resident investment fund with the status of a fiscal investment institution.
- The analysis of the type of entities for which a specific tax exemption should be provided is to be based on legal and factual properties. The reasons for which a specific tax exemption is provided should be taken into account when analyzing the comparability of a foreign entity with a domestic one. Even if the aim of the domestic provision is relevant for the comparability analysis, a Luxembourg SICAV cannot be considered as comparable to domestic entities that are exempt from corporate income tax, but which are not investment funds.
The Dutch entity envisaged in this description is a mutual fund whose activities include the investment of capital (fiscale beleggingsinstelling). It must respect various conditions, the most notable one being the obligation to distribute its profits to its shareholders. These distributions are subject to withholding tax. A rate of 0% corporate income tax may then be applied.
Consequently, the Court held that a taxable Luxembourg investment fund does not have to be treated in the same way as a Dutch entity which is exempt from corporate income tax. It should be noted that although the Luxembourg SICAV is exempt from tax in Luxembourg, the Dutch court held that the SICAV would have been fully liable to corporation tax had it been a Dutch resident company. Therefore, it made the consideration that a Dutch resident taxable Luxembourg investment fund does not have to be treated in the same way as a Dutch entity which is exempt from corporation tax.
This decision is quite surprising as the Court of Appeal of ’s-Hertogenbosch (second instance) recently decided to reimburse the withholding tax that had been levied with respect to an exempt Finnish investment fund in a case very similar to the Luxembourg one at hand.
The Finnish case concerned an entity that is not subject to tax and which does not have the obligation to distribute its profits. It was compared to a Dutch contractual fund, since it does not have legal personality in Finland. The Court considered the main aim of the provision that holds that exempt EU resident entities should be exempt from WHT had they been exempt if they were resident in the Netherlands. This was deemed to be the prevention of economic double taxation on dividend distributions to entities that are exempt from corporate income tax. The Court based its reasoning on Verkooijen and concluded that the Finnish investment fund should be deemed to be a comparable entity. The fact that had the Finnish entity been resident in the Netherlands it would not be exempt was irrelevant. Such reasoning would result in a disguised restriction in the opinion of the Court.
The final outcome of the Luxembourg SICAR case is however still unsure since an appeal has been lodged by the investment fund (although no date for trial has been set yet). In addition, since the Finnish case is currently pending before the Netherlands Supreme Court (third instance), the decision of the Supreme Court on the Finnish case may impact the final outcome of the Luxembourg case.
It will be therefore necessary to await further decisions of the upper courts in both cases in order to be able to know with certainty what is the Dutch position as regards the ability for Luxembourg SICAVs to claim a refund of Dutch withholding taxes. The ECJ may also be seized by either party.
For more information about this topic, please contact Keith O’Donnell at keith [dot] odonnell [at] atoz [dot] lu ().
The Luxembourg VAT authorities have issued a Circular-letter (Circular-letter n° 765 dated May 15, 2013) regarding the input VAT deduction right of companies. This Circular letter has retroactive effect as of January 1st, 2013. To find out more about the practical implications of this Circular-letter.
The practical implications of this Circular can be summarised as follows:
- Current situation: Until now, the method used in practice by Luxembourg holding companies to determine their input VAT deduction right has been a "prorata", based on turnover. Pursuant to this method, input VAT is deductible according to a ratio taking into account the turnover allowing the deduction of VAT and the total turnover entering the scope of VAT. Sometimes a full deduction of input VAT is claimed in relation to certain costs (e.g. costs recharged to other entities of the group). However, VAT strategies have often been opportunistic and not integrated in the corporate life of companies, notably in terms of accounting treatment.
- Changes brought by the Circular: The objective of the VAT Authorities is now to have taxpayers allocate costs as much as possible to specific revenues, to determine whether input VAT can be deducted. The allocation of costs can be based on a cost-by-cost basis or on the use of specific keys such as input VAT deduction proratas based on the number of employees, square meters allocated to each activity, etc. This Circular letter may therefore bring opportunities for businesses, but also imposes a review of the methodology currently used by taxpayers. It notably foresees that taxpayers should evidence the cost allocation with help of their accounting records, in particular since an analytical accounting software is often used.
- Action points: The method used to compute the proportion of input VAT deductible should be reviewed but also the practical application. The implementation is of primary importance, in particular the accounting treatment of transactions should match the VAT deduction method used on a day-to-day basis. This may also be a good time to discuss whether the input VAT deduction right can be improved, for example via specific proratas based on sectors of activity, or on time allocated by the staff to the different activities (e.g. financing activities, management of subsidiaries,...).
For any further information on this topic, please do not hesitate to contact Christophe Plainchamp at christophe [dot] plainchamp [at] atoz [dot] lu ().
As you read above, the AIFM Law has been implemented in Luxembourg. In addition to the legal and direct tax aspects, this transposition brings changes to the scope of the VAT exemption applicable to the management of investment funds.
In particular, article 44 of the Luxembourg VAT Law which relates to the VAT exemption applicable to management funds has been enlarged to include the management of AIFs within the scope of the VAT exemption.
The new article does not bring changes with respect to vehicles whose management was previously covered by the VAT exemption.
Management services rendered to the following investment vehicles are therefore VAT exempt:
- Investments funds, including SIFs and SICAR, and pension funds that are under the supervision of the CSSF (Luxembourg supervisory body of the financial sector) or under the supervision of the Commissariat aux Assurances (Luxembourg supervisory body of the insurance sector);
- Similar investment vehicles that are under the supervision of an Authority similar to the CSSF or Commissariat aux Assurances in their country of establishment;
- Securitization vehicles located in Luxembourg;
- Alternative Investment Funds (AIFs) covered by the AIFM law.
Together with the positive decision of the ECJ in the case GfBk, the entry into force of the AIFMD in the Luxembourg VAT landscape should further enhance the fund industry in Luxembourg.
For any further information on this topic, please do not hesitate to contact Christophe Plainchamp at christophe [dot] plainchamp [at] atoz [dot] lu ().
ATOZ was happy to host the LPEA’s Tax Committee for a Roundtable event, titled "FATCA in Practice in Luxembourg with a distinguished panel of experts about:
• The status of Luxembourg’s Model 1 IGA agreement
• The implications of working with Model 1 IGA
• The immediate impact on Luxembourg’s PE structures
• The most important next steps to become FATCA compliant
We were delighted to welcome as a special guest speaker, the Luxembourg representative leading the IGA negotiations with the US Internal Revenue Service (IRS), His Excellency Mr. Alphonse Berns, Director Fiscal Policy, Ministry of Finance, Luxembourg. Other speakers include FATCA specialists: Amandine Horn and Pascal Noël, Deloitte; Christopher Berry, PWC (UK); Philip Martin, Alvarez & Marsal, Taxand (UK); and Thierry Lesage, Arendt & Medernach.
For additional information and content related to the seminar, please contact Keith O’Donnell at keith [dot] odonnell [at] atoz [dot] lu
Atoz had the pleasure to host the Taxand Board members for a breakfast event bringing together Taxand clients and Taxand professionals from around the world. Our Taxand Global Client Breakfast took take place on July 2nd, not only have our clients benefited from roundtable discussions on the latest tax trends but also through networking with the leaders of Roundtable discussions with the leaders of Taxand leaders from around the world including, Dennis Xu (Taxand China), Frederic Donnedieu (Taxand France), Mukesh Buttani (Taxand India), Veerinder Singh (Taxand Malaysia), Ricardo Gomez (Taxand Spain), David Pert (Taxand UK), Bob Lowe (Taxand USA), Manuel Candal (Taxand Venezuela).
For additional information please contact Keith O’Donnell at keith [dot] odonnell [at] atoz [dot] lu ()
In May our directors in collaboration with the Knowledge team had the pleasure to support 4 students - Ana Miranda, Diogo Dias, Lionel Gobert, and Miranda Haxiu in a specific case study from the Atoz Chair for European and International Taxation of the University of Luxembourg
During their studies, students have to work on several case studies under the supervision of local tax offices as ATOZ. They learn directly with local experts how to use the extensive network of tax treaties with Luxembourg and receive an initial understanding of the jurisprudence of the Court of Justice of the European Union, which is based in Luxembourg. In addition, to ensure exposure of the students to practical tax issues, beyond mere theoretical tax issues, students participate in research projects organized by the ATOZ Chair.
Ana Miranda who experienced the mentoring with Atoz shared with us some thoughts on this initiative, “We would like to express our gratitude for the dedication and support given to our group during these days at ATOZ. Not only we had the privilege to ask questions and get some good piece of advice but especially they took some time to allow us brainstorm with them, and we are aware of how busy they are! We’d like to thank them for the meticulous written comments on the document and for all their general remarks. It helped to put us back on the right direction. We’d like to thank them also for all the attention and warming welcome every morning! And yes we enjoyed very much doing this work and it was an enormous pleasure meeting them all! “
For upcoming events and additional information about the ATOZ Chair for European and International Taxation, visit ATOZ Chair.
The Taxand Global Conference 2013, hosted by Alvarez & Marsal Taxand US, took place at the Waldorf Astoria Hotel in New York City from April 24 to April 26 2013. A blend of more than 550 Taxand clients and Taxanders from nearly 50 countries joined us this year to discuss topical tax issues, share expertise and enhance relationships. Using a mix of presentations, dynamic multi-media and video content, Taxanders were joined on stage by key business leaders, guest speakers and clients to share their views and key pointers to help drive business performance in an uncertain economy.
Find out all you need to know about our annual global conference in NYC, including key content, films, photos and much more here.
For the latest edition of Taxand’s Take, your regular update on the topical tax issues affecting multinationals, please click here.