ATAD 2 - Luxembourg Law for implementation is voted

19/12/19

In brief

On 19 December 2019, the Luxembourg Parliament voted to approve the law implementing the EU Anti Tax Avoidance Directive regarding hybrid mismatches with third countries (“ATAD 2”) into Luxembourg domestic law (the “Law”)[1]. The legislation (Bill n°7466) had been submitted to the Luxembourg Parliament on 8 August 2019.

The Law generally follows the text of ATAD 2 rather closely, adapting it mainly to integrate with the structure and terminology used in the Luxembourg Income Tax Law (“LITL”).

As anticipated by ATAD 2, the Draft Law will in general apply to tax years starting as from 1 January 2020, with the additional “reverse hybrid” measures that comprise Article 9a of ATAD 2 applying from the 2022 tax year, i.e. to tax years closing in 2022. For taxpayers having a tax year diverging from the calendar year, this means that Article 9a of ATAD 2 may apply to them already in 2021.

In detail

Only a few minor changes have been brought to the text of the Bill during the legislative process. We refer therefore to our prior Newsletter for further details as to the scope and various scenarios of hybrid mismatches that are covered by the Law:

https://www.pwc.lu/en/newsletter/2019/atad2-luxembourg-bill-for-implementation-is-published.html

The vote of the law was preceded by the report of the State Council issued on 10 December and the report of the Budget and Finance Commission issued on 13 December. Both include extensive comments which are very useful even if they are not per se representing an amendment or official clarification of the law.

As an example the State Council outlined its interpretation and reading of various points in the Bill as regards certain significant items, notably:

  • Tax adjustments without creation of economic rights should not be considered as “payments”;
  • No “counterfactual test” should be required based on the text of Law (in line with ATAD 2). This implies that in case the recipient of a payment under a financial instrument does not include it for tax purposes by reason of its tax status, it should not be necessary to assess whether the recipient would have included the payment if it was an ordinary tax payer in the same jurisdiction;
  • No hybrid mismatch should arise if the jurisdiction of the recipient applies a zero rate, low rate or if it applies a territorial regime;
  • Direct and indirect investors in an investment fund holding less than 10% of the ownership rights and entitled to less than 10% of the profits in the fund should be deemed not “acting together” with any other investors unless demonstrated otherwise by the tax authorities;
  • The application of the hybrid mismatch rules should not give rise to multiple taxation. As such, a CFC inclusion in a foreign jurisdiction should be an inclusion for the purpose of the hybrid mismatch rules. Similarly, dual inclusion income should be determined so as to not give rise to multiple taxation.

The reports of the State Council and of the Budget and Finance Commission left the text of the legislation as now voted largely unaltered from that set out in August 2019 in the Bill. The Budget and Finance Commission did however state that further guidance, potentially in line with that emanating from the State Council, might yet be appropriate, not least in the form of a tax authority Circular or a Grand Ducal Decree addressing various points. There is however no certainty over when, or even whether, such a Grand-Ducal Decree or Circular might emerge.

In conclusion

If not already done, taxpayers have to assess their situation considering the potential impact of the Law now effective as from the tax years starting on 1 January 2020, except for the additional “reverse hybrid” measures (implementing Article 9a of ATAD 2) applying from the 2022 tax year.

[1] Subject to confirmation by the Luxembourg State Council that no second hearing is required

1. PwC Luxembourg (www.pwc.lu) is the largest professional services firm in Luxembourg with 2,870 people employed from 76 different countries. PwC Luxembourg provides audit, tax and advisory services including management consulting, transaction, financing and regulatory advice. The firm provides advice to a wide variety of clients from local and middle market entrepreneurs to large multinational companies operating from Luxembourg and the Greater Region. The firm helps its clients create the value they are looking for by contributing to the smooth operation of the capital markets and providing advice through an industry-focused approach.

2. The PwC global network is the largest provider of professional services in the audit, tax and management consultancy sectors. We are a network of independent firms based in 158 countries and employing over 250,000 people. Talk to us about your concerns and find out more by visiting us at www.pwc.com and www.pwc.lu.

Contact us

Gerard Cops

Tax Services Leader, PwC Luxembourg

Tel: +352 49 48 48 2032

Sami Douénias

Tax Partner, PwC Luxembourg

Tel: +352 49 48 48 3060

Iryna Sansonnet-Matsukevich

Tax Partner, PwC Luxembourg

Tel: +352 49 48 48 3185

Alina Macovei

Tax Partner, PwC Luxembourg

Tel: + 352 49 48 48 3122

Fabien Hautier

Tax Partner, PwC Luxembourg

Tel: +352 49 48 48 3004

Vincent Lebrun

Tax Partner, PwC Luxembourg

Tel: +352 49 48 48 3193