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New Luxembourg tax measure towards non-cooperative jurisdictions

Whilst all our attention and energy are focused on the Covid-19 situation, other important developments continue that require attention.

On 30 March 2020, the Luxembourg Government introduced a draft of law N°7547 before parliament, implementing a legislative defensive measure targeting non-cooperative jurisdictions as listed by the European Union (EU) in accordance with the conclusions of the Council of the EU and the guidance drafted by the Code of Conduct Group (the Bill). The Bill introduces non-deductibility of certain royalties and interest payments incurred by Luxembourg companies, paid to companies located in black-listed countries. The new rule should apply as from 1 January 2021.

The Bill introduces a new paragraph in article 168 of the Luxembourg Income Tax Law (ITL) which specifies the expenses that are not tax-deductible for corporate income tax and municipal business tax purposes. According to the Bill, interest and royalties paid or accrued by a Luxembourg company are no longer deductible subject to the following cumulative conditions:

  • the beneficiary – or the beneficial owner – of interest/royalties is a company within the meaning of article 159 ITL (e.g. public or private limited liability company, partnership limited by shares);
  • the beneficiary company and the payor are related enterprises within the meaning of article 56 ITL; and
  • the beneficiary company is established in a jurisdiction mentioned in the EU list of non-cooperative jurisdictions for tax purposes (the EU List).

In addition, under the Bill, the non-deductibility of interest/royalties provided for by article 168 ITL should not apply where the Luxembourg company demonstrates that the transaction pursuant to which interest/royalties are paid is implemented for valid commercial reasons that reflect economic reality.

The concepts of interest and royalties are defined in line with Directive 2003/49/EC of 3 June 2003 on a common system of taxation applicable to interest and royalty payments made between associated companies of different Member States as well as Articles 11 and 12 of the OECD Model Tax Convention.

The list applicable for tax year 2021 should be drawn up at a later stage based on the last available EU List and will be updated on a yearly basis, if necessary. Currently, this list is composed of 12 jurisdictions (i.e. American Samoa, Cayman Islands, Fiji, Guam, Oman, Palau, Panama, Samoa, Trinidad and Tobago, US Virgin Islands, Vanuatu and Seychelles).

The new provision should apply to interest/royalties paid or due as from 1 January 2021.

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