On 5 December 2017, the Council of the European Union approved and published conclusions containing an EU list of non-cooperative jurisdictions in taxation matters aiming at promoting good governance worldwide and reinforcing the efforts to prevent tax fraud and tax evasion. At that time, the Member States were also encouraged to enact “tax defensive measures" with regard to the listed jurisdictions.
On 5 December 2019, the ECOFIN issued specific recommendations inviting all EU Member States to apply one of the following tax defensive measures, in relation to the EU blacklisted jurisdictions:
- non-deductibility of related expenses;
- CFC rules;
- withholding tax measures; and,
- limitation of the participation exemption on profit distributions.
The Luxembourg Government chose the first option and proposes to introduce the non-deductibility of interest and royalties expenses of a Luxembourg taxpayer towards collective entities located in a blacklisted jurisdiction. This provision would be added through the amendment of article 168 of the Luxembourg Income Tax Law (LITL) through a bill of law that was introduced by the Government on 30 March.
In that context, it should be reminded that the Circular of 7 May 2018 issued by the Luxembourg tax authorities already compels corporate taxpayers to indicate in their tax returns whether they have entered into transactions with associated enterprises situated in non-cooperative jurisdictions as from tax year 2018. The Circular will continue to apply.
The bill of law
The bill of law provides that interest or royalties, accrued or paid, should not be deductible for tax purposes when the following cumulative conditions are met:
- The beneficiary of the interest or royalties is a collective entity, as defined by Article 159 LITL (meaning that, in principle, transparent partnerships would not be concerned). In cases where the beneficiary of the interest or royalties is not the beneficial owner, the actual beneficial owner should be considered for the proposed non-deduction.
- The collective entity, which is the beneficial owner, is an associated enterprise of the person owing the interest or royalties, within the meaning of Article 56 LITL (Luxembourg transfer pricing rules).
- The collective entity, which is the beneficial owner of the interest or royalties, is established in a country included in the list of non-cooperative jurisdiction in taxation matters.
The measure should not apply when the entity requesting a deduction is in a position to demonstrate that the transaction resulting in the payments of interest or royalties is put in place for valid reasons which reflect economic reality.
The above measures are planned to enter into force for interest or royalties accrued or paid as from 1 January 2021.
The list of non-cooperative jurisdictions will be updated by the Chambre des Députés on a yearly basis, upon the proposal of the Luxembourg Government based on the applicable EU list at that time.
Any update to the list, as proposed by the Government based on any change to the EU list, will be applicable to interest and royalties paid or due as from 1 January following the Government's proposal. The denial of deductibility regime will cease to apply to interest or royalties owed to an entity that is resident in a jurisdiction that is being removed from the EU list as from the date of the publication of the updated list in the Official Journal of the EU.
As of today, the Bill of law could target structures where a Luxembourg taxpayer owes interest or royalties to a related enterprise situated in American Samoa, the Cayman Islands, Fiji, Guam, Oman, Palau, Panama, Samoa, Trinidad and Tobago, the U.S. Virgin Islands, Vanuatu or the Seychelles. However, it should be borne in mind that the EU list of non-cooperative jurisdictions may be amended in the coming months and thus there is no certainty as to what jurisdictions will be impacted by these measures as from 2021 onwards.
It will be essential to monitor future amendments to the list of non-cooperative jurisdictions, which is typically reviewed twice a year, to assess the potential impact of these measures on investment structures.
We will continue monitoring closely any development during the legislative process and remain available to help you assess the potential impact of these measures to your structure.