ATAD/BEPS

The EU Anti Tax Avoidance Directive 2016/1164 (ATAD 1) was adopted at EU level in July 2016, and EU Member States had until 31 December 2018 to enact the provisions of the Directive into their national tax legislation. A bill (No 7318) setting out the proposed text of the necessary legislation was published in June 2018. After being sworn in in early December 2018, the new Government moved promptly to complete this legislative process. The vote to approve Bill 7318 was taken by the Luxembourg Chambre des Députés on 18 December 2018. The final text of the law differed little from the bill, although some small but important clarifications were made.

The measures now form the Law of 21 December 2018, and mostly enhance Luxembourg’s main corporate income tax legislation, i.e. the Law of 4 December 1967 on income tax Loi concernant l'impôt sur le revenu (LIR).

Most of the provisions in the new law will take effect from the first day of the first accounting period starting on or after 1 January 2019. For companies with calendar year-ends, the measures therefore became effective from 1 January 2019. As stipulated in the ATAD I, the measures on exit taxes however take effect a year later, for accounting periods starting on or after 1 January 2020.

On 29 May 2017, the EU’s Council formally adopted the new Directive amending Directive (EU) 2016/1164 as regards to hybrid mismatches with third countries (ATAD II) without further discussion. ATAD II has a broader scope than ATAD I as it also covers hybrid mismatches with third countries and more categories of mismatches. The Directive adds rules that apply to all taxpayers subject to corporate tax in one or more Member States, including permanent establishments in one or more Member States of entities resident for tax purposes in a third country. Rules reverse hybrid mismatches also apply to entities treated as transparent for tax purposes by a Member State.

Member States will need to transpose the provisions of ATAD II by 31 December 2019 and apply them by 1 January 2020. This applies to both mismatches between Member States and between Member States and third countries. By way of derogation, the reverse hybrid entity rule will need to be transposed by 31 December 2021 and applied per 1 January 2022. Payment to reverse hybrid will however not be deductible anymore from 1 January 2020.

It has now been four years since the Organisation for Economic Cooperation and Development (OECD) published its project recommendations on Base Erosion and Profit Shifting (BEPS). The EU has taken a clear lead, with strong political momentum not only pushing progress, but pressing Member States to police existing measures much more forcefully.

For businesses, the most important consequence of the BEPS measures is the need for behavioural change, at all levels. Building on media pressure, many tax administrations not only introduce tougher measures and seek to restrict tax treaty benefits, but also challenge more and more often any arrangements that, in their view, lack real substance or a truly commercial principal purpose. Greater transparency is the other main theme of the BEPS Project. This of course brings with it new reporting obligations - for example with country-by-country reporting (CbCR) - and organisations must be comfortable that they have systems in place to comply.