Taxation in Luxembourg

By Sébastien Labbé and Jean-Paul Olinger

Posted: 2nd September 2014 08:50

Sébastien Labbé and Jean-Paul Olinger, tax partner specialised in the financial services sector now leading KPMG Luxembourg’s tax practice and tax director within the Financial Services team of KPMG Luxembourg, respectively, spoke to Corporate Livewire in reference to recent tax changes which could affect the Luxembourg market.
 
What aspects of Luxembourg’s tax landscape help to make it an attractive jurisdiction for business?
 
Luxembourg offers an attractive tax environment with for instance:

 - Stable political environment with a strong reputation for pro-business legislation and administration;
 - Low statutory corporate tax rate and in many cases even lower effective tax rates;
 - Lowest VAT rates in Europe (although an increase from 15% to 17% is announced to take place as of 1 January 2015);
 - Extensive exemptions from withholding tax on dividends;
 - No withholding tax on non-profit linked interest and royalties;
 - No controlled foreign companies (CFC) rules;
 - Generous thin capitalisation rules;
 - Attractive tax regimes in the field of investment funds, securitisation, intellectual property, investment in risk capital and reinsurance;
 - Extensive bilateral tax treaty network with currently 70 treaties in force and 30 additional treaties under negotiation;
 - Attractive taxation of employees and low social security contributions for employers and employees;
 - Accessibility and pro-active involvement of the government with respect to businesses which relocate personnel and operations to Luxembourg (e.g. to obtain visa or trading licenses). 
 
Can you give us an overview of taxation in Luxembourg over the last year?
 
The Luxembourg tax environment has remained stable in 2014 and was dominated at Government level by international agreements (discussed in the next section) and at domestic level by new circulars issued by the tax authorities with regard to VAT and income tax.
 
Indeed, further to the extension of the VAT exemption for management services provided to alternative investment funds and certain foreign investment vehicles, the Luxembourg VAT authorities published a circular in November 2013 clarifying that the scope of the VAT exemption includes under certain circumstances risk management services provided for the benefit of alternative investment funds.
 
Moreover, the Luxembourg tax authorities published in January 2014 a new circular on the tax regime applicable to impatriate workers providing amongst others for an extended definition of “impatriate worker” and rules regarding the filing of individual income tax returns.  The new circular offers great opportunities to increase international assignments, and design new assignment policies for international groups. 
 
Finally, in June 2014, the Luxembourg tax authorities issued a circular letter setting forth a framework of rules governing the functional currency regime applicable under Luxembourg tax law that shall allow a corporation to determine the taxable income under certain circumstances in the currency of its corporate capital (other than Euro).  As a result, the triggering of exchange differences in Euro could be avoided since the drawing up of a tax balance sheet in Euro according to Luxembourg tax valuation rules will no longer be required.
 
Over the last months, Luxembourg continued expanding its tax treaty network, which now comprises over 70 treaties in force, whereas more than 30 additional treaties are being negotiated or pending ratification.
 
What do you foresee in terms of taxation in Luxembourg for 2015?
 
In April 2014, Prime Minister Xavier Bettel held his statement speech on Luxembourg’s economic, social and financial situation.  He reiterated the Government’s political commitment to continuing to attract new investors to Luxembourg by competing fairly with other countries and ensuring a competitive tax framework in Luxembourg. 
 
The main novelty lies in the new private foundation, which should position Luxembourg as a prime location for wealth creation and management as of 2015.  This new wealth management vehicle is an innovative vehicle likely to attract entrepreneurs and high net worth individuals to Luxembourg. 
 
It has its own legal personality and will be suitable for securing private or business assets, for separating economic ownership from the decision-making authority, or for protecting the private sphere.  It will be a very flexible vehicle in terms of management and governance, whilst also guaranteeing a high level of confidentiality towards the public.  However, it is important to clarify that the private foundation is in no way designed to hide any information from the public authorities and more particularly from the tax administration, to whom all up to date information should be accessible at the registered office of the private foundation. 
 
Also, the tax treatment of this new vehicle appears to be particularly attractive for entrepreneurs and high net worth individuals, as the new law will introduce the “step-up in basis” concept for individuals relocating to Luxembourg.  As a result, individuals carrying unrealised capital gains will be allowed to value their assets at their market value at the date of their move to Luxembourg.
 
Moreover, the Government confirmed that as long as there is an international will to create an effective “level playing field” to ensure a coherent and fair application of international tax standards, Luxembourg will remain committed to moving forward with transparency, the exchange of information for tax purposes and BEPS (Base Erosion and Profit Shifting).  In the near future, exchange of information will more and more be the norm for a broad range of items of income.  In this regard, several reforms are about to be enacted in Luxembourg:
 
First, Luxembourg endorses the revision and extension of the scope of the EU Savings Directive, applicable as of 2017, to include certain vehicles and instruments currently out of scope and to apply a look-through approach to certain EU and non EU entities or legal arrangements (including Trusts, transparent entities…). 
 
Second, Luxembourg is about to abolish as from 2015 the withholding tax option authorised in 2005 and applying to individuals being resident of another EU Member State and deriving interest income from Luxembourg source as an alternative to exchanging information.  As a result, the exchange of information will as from 2015 apply automatically in all cases to interest income as defined in the current scope of the EU Savings Directive, then as from 2017 it will apply to its extended scope. 
 
Furthermore, subsequent to the transposition of the second part of the EU Administrative Cooperation Directive by the law of 26 March 2014, the automatic exchange of information will also apply to information on salaries, pensions and directors’ fees regarding taxable periods as from 1 January 2014. 
 
On 28 March 2014 Luxembourg also signed a so-called intergovernmental agreement (IGA) with the United States of America to implement the US legislation known as FATCA.  The Model 1 IGA signed by Luxembourg essentially provides for an automatic exchange of information on the very broad scope of items of income covered by FATCA on annual basis between the Luxembourg tax authorities and the U.S. authorities. 
 
Finally, it is probably also worth mentioning the projects of “EU FATCA” (in practice an enhancement of the scope of the EU Administrative Cooperation Directive of 2011) and “OECD FATCA” (the so-called Common Reporting Standard) that should also impact Luxembourg in the short to mid-term.
 
At the same time, the Grand Duchy will also actively contribute to the EU and OECD’s work against tax fraud and aggressive tax planning.  In this respect, we expect the introduction of stronger operational substance requirements and the issue of new transfer pricing guidelines.  Moreover, the Prime Minister announced that increased means will be put in place in order to fight VAT fraud.  The new legal regime regarding the registration of bearer shares adopted by Parliament on 16 July 2014 should also be considered as effort towards increased transparency.
 
The implementation by all EU Member States in their domestic legislation before 31 December 2015 of new anti-hybrid rules under the amended EU Parent-Subsidiary Directive should terminate the use of hybrid instruments throughout the European Union.
 
Main VAT rates (15 to 17%, 12 to 14% and 6 to 8%) are foreseen to increase as of 1 January 2015, whereas the super-reduced rate of 3% applicable on basic necessity products will remain unchanged.  Nevertheless, Luxembourg will strive to keep the lowest regular rate in the EU.
 
Finally, the Government announced that the Luxembourg tax system would be globally reformed with effect as from 1 January 2017, with the aim of maintaining both a fair taxation for individuals and the competitiveness of companies.
 
What advice can you offer for optimising tax management and balancing efficiency and compliance in the New Year?
 
Maintaining in Luxembourg a robust, ad hoc and commercially driven substance, commensurate with the activities undertaken, is a must and should continue to help taxpayers manage their tax affairs.
 
Is there anything else you would like to add?
 
Luxembourg is a credible and efficient place through which many international players organise their global activities and investments.  This is also supported by the stable and flexible Luxembourg regulatory framework.

 
Tax is an integral part of life for every organisation and individual.  To ensure they are managed successfully, tax issues need to be planned for and actively dealt with as part of the core of any business activity rather than later at the periphery.  This is our approach at KPMG Luxembourg, whether you are a large multinational, a dynamic national company, a partnership or a private client.
 
Our team of 200 dedicated tax professionals advises our clients in Luxembourg and across the world.  Whether you are a business or an individual, we assemble a team of experienced tax advisors to help achieve your objectives.  We use our in-depth technical tax knowledge and our broader understanding of how tax fits into the wider business picture to help clients meet their compliance responsibilities and act on planning opportunities.
 
We are able to assemble multidisciplinary teams of professionals, drawing on the dedicated resources across KPMG’s global network member firms.  Our people operate within industry groups, giving you access to advisors who understand the tax issues specific to your business and skillfully employ modern technology to gather and manage the pertinent data.
 
Contact:
Sébastien Labbé
Tax Partner
Tel: +352 22 51 51 5565
Email: Sebastien.labbe@kpmg.lu
 
Jean-Paul Olinger
Tax Director
Tel: +352 22 51 51 5573
Email: jeanpaul.olinger@kpmg.lu

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