Luxembourg: Tax Update

Corporate Tax Rate Reduction, Mandatory Reporting Obligations and Multilateral Convention Ratification

Publication March 2019

2019 Budget

On March 5, 2019, the Luxembourg Government published the 2019 Budget Bill 7450 (the “2019 Budget”) which puts forth various corporate tax measures.

Firstly, the 2019 Budget proposes a reduction of the corporate income tax (CIT) rate from 18% to 17%, without amending the rate of the contribution to the unemployment fund imposed on the CIT rate, or the rate of municipal business tax. This means that a company’s overall income tax burden (including municipal business tax and contribution to the unemployment fund) will decrease from 26.01% to 24.94% for Luxembourg city.

The 2019 Budget proposes to broaden the income bracket to which the reduced CIT rate of 15% applies. The income bracket will be extended from EUR 25,000 to companies with a tax base up to EUR 175,000 for the 2019 fiscal year.

The 2019 Budget also proposes to extend the application of the recently introduced interest limitation rules deriving from the ATAD Directive to the Luxembourg group level. This will allow corporate tax payers upon request to choose whether they want to calculate the EBITDA and exceeding borrowing costs at the tax group level, or on a standalone basis, for the purposes of calculating the maximum deductibility of their exceeding borrowing costs.

The 2019 Budget further proposes to extend the super-reduced VAT rate (3%) to electronic books, publications and online press, as well as essential hygienic items. Plant protection products authorized for organic agriculture should benefit from a reduced VAT rate of 8%.

Once voted, all the above will be applicable with retroactive effect as from January 1, 2019.

Foreign Permanent Establishment

On February 22, 2019, the Luxembourg tax authorities issued a circular in order to clarify a paragraph contained in the law dated December 21, 2018. The paragraph provides a modernised definition of a “Permanent Establishment” (PE), and therefore seeks to resolve conflicts of interpretation of PEs under double tax treaties.

The circular clarifies that Luxembourg tax authorities may request evidence from a taxpayer that the other contracting state recognises the existence of a PE in its domestic territory. Such a request may be made upon demand, or on a mandatory basis, depending on the provisions of the tax treaty between Luxembourg and the other contracting state. Failure to supply such evidence will result in the taxpayer not being considered to have a foreign PE for Luxembourg tax purposes.

This circular and the related text of the law raise concerns as to their practical consequences and more important, whether the changes are lawful in the absence of a modification of the relevant tax treaties if these do not grant Luxembourg the right to tax profits income derived from a foreign PE.

MLI Ratification

On February 14, 2019, the Chambre des Députés voted to approve the Bill 7333, which was the final step required to ratify the text of the OECD-sponsored Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (“MLI”). Bill 7333 was approved without amendments to the original list of reservations and notifications submitted to the OECD. As such, Bill 7333 will now become law, and will take effect as of 1 June 2019. Concrete consequences of the MLI will depend on the choices made by the other contracting states. As such, existing structures should be reviewed in order to assess the impact of the MLI on a case by case basis.

UBO Register

On February 15, 2019, a Grand-Ducal Regulation was published to compliment the law of January 13, 2019 on the implementation of a register of beneficial owners (the “Regulation”). The Regulation takes effect as of March 1, 2019 so that all companies must be compliant with the requirements of the Law and the Regulation as of 1 September 2019.The Regulation details the supporting documents required for registration in the Register of Beneficial Owners (the “UBO Register”). It also provides guidance on how to access the information recorded in the UBO Register, as well the administrative fees associate to registration on the UBO Register, accessing and using the website, consulting the information recorded in the UBO Register, as well as ordering extracts and certificates from the website.

For more information regarding the Law and the UBO Register, please see our previous legal publication.


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