Context
This draft bill follows resolution from the Economic and Financial Affairs Council of the EU (ECOFIN) issued on 5 December 2019, requiring EU Member States to introduce legislative defensive measures for countries that are on the EU blacklist (to be applicable as of 1 January 2021).
As of today, the EU blacklisted jurisdictions are the Cayman Islands, Panama, Palau, the Seychelles, American Samoa, Fiji, Guam, Oman, Samoa, Trinidad and Tobago, the U.S. Virgin Islands and Vanuatu.
Until now, the only defensive measure as regards to blacklisted jurisdictions, implemented in Luxembourg, was the obligation for Luxembourg companies to disclose any intragroup transactions made with entities located in blacklisted jurisdictions in their tax returns.
Draft bill
The draft bill aims to modify article 168 of the Luxembourg Income Tax Law (“LITL”), adding paragraph 5.
The draft bill provides that interest and royalty payments made to or due to a related collective entity established in a blacklisted jurisdiction, would become non-deductible expenses for both corporate income tax and municipal business tax purposes, unless the taxpayer is able to proof that these expenses have been incurred in respect of transactions that have been carried out for valid commercial reasons and that reflect economic reality.
In the explanatory memorandum, the Government states that in order for transactions to be accepted as valid, economic reasons must, having regard to all relevant facts and circumstances, be capable of being judged to be real and presenting a sufficient economic advantage, beyond any tax benefit obtained. If such evidence is provided by the taxpayer, the defensive measure introduced by this draft bill should not apply.
The draft bill provides for applicability as of 1 January 2021.
It is important to note that:
- The bill of law does not introduce any grandfathering rules for existing arrangements giving rise to interest and/or royalty payments to be made to affiliated entities established in the above jurisdictions;
- The deduction of interest and royalties may denied when due to affiliated entities in the sense of article 159 LITL, i.e. opaque entities. Hence, on payments made to entities which are established in the blacklisted jurisdictions, where the entity is considered tax transparent, a look through approach may be applied to determine to what extent the participants in that tax transparent entity may fall in scope of the denial of the deduction or not;
- Measures are introduced to allow a continuation of the deduction in case the recipient thereof is not or cannot be considered the beneficial owner. In such circumstances, the impact of the measures is to be assessed at the level of the actual beneficial owner of the payment of interest and/or royalties;
- The bill of law is limited to a denial of a tax deduction and hence the measures do not impose a withholding tax on (arm’s length) payments covered by the measures.
The draft law proposes to include, in article 168 LITL, a specific definition of interest (the definition covers any paid or owed under any type of receivables, whether secured or not, including profit participating loans and covers equally premiums on debt instruments, whilst excluding penalties for late interest payments) and royalties (the definition covers any remuneration for the use of or the right to use authors’ rights, patents, trademarks, designs and models, formulas, secret processes and know-how acquired in the industrial, commercial or scientific field).
The draft bill provides that the list of blacklisted jurisdictions to be taken into consideration for the application of these new measures should be the most recent list as published in Annex I in the Official Journal of the European Union. The draft bill of law further introduces specific rules as regards the first or last application of these measures in case payments of interest and/or royalties are made to affiliated entities established in jurisdictions that – at a later state – will be added to or removed from such list of blacklisted jurisdictions.
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We will monitor and shall keep you timely updated on any further developments. In case you have any questions, or wish to discuss specific circumstances, please contact your usual contact at Tiberghien or reach out to any of the authors of this publication.
Michiel Boeren - Partner (michiel.boeren@tiberghien.com)
Maxime Grosjean - Senior Associate (maxime.grosjean@tiberghien.com)
Emma Fontenaud - Associate (emma.fontenaud@tiberghien.com)