The Bill provides for a reduction of the corporate income tax (CIT) rate from 18% applicable for FY 2018 to 17% for FY 2019. There are no changes to the rate of the “solidarity surtax” levied on the CIT rate, or to the rate of municipal business tax payable by companies.
This change to the CIT rate results in an overall income tax rate of 24.94% for companies in Luxembourg City for FY 2019, down from 26.01% applicable for FY 2018.
In addition, the reduced CIT rate of 15% applicable since FY 2017 for companies with a tax base of less than EUR 25,000 is extended to companies with a tax base of less than EUR 175,000 for FY 2019.
For companies with a tax base between EUR 175,000 and EUR 200,001, the corporate income tax charge is to be EUR 26,250 plus 31 % of the basis above EUR 175,000 for FY 2019.
The Bill proposes a fully rewritten article 164bis of the Luxembourg income tax law (LITL) governing the Luxembourg tax unity (i.e. corporate group taxation) regime, to take effect as from tax years starting on or after 1 January 2019. The commentary on the Bill explains that this redrafting was necessary in order to allow implementation of the option offered by ATAD 1 for application of the new 30% EBITDA interest limitation rules at the level of a tax unity.
The new article 164bis however does not fundamentally change the mechanics of the existing regime. It also confirms and supplements existing rules hitherto included in the Grand-Ducal decree dated 18 December 2015 in execution of article 164bis, as well as some rules for practical application that were previously included in an administrative Circular.
Main general rules applicable to the computation of the taxable basis of a tax unity
The new article 164bis sets out measures for the computation of the tax basis of the members of the tax unity, and especially on the application of the interest limitation rules within the context of a tax unity.
As has hitherto been the case, for each tax year, all members of the tax unity have to prepare and file their own income tax return as if they were not part of the tax unity. Every member must however now report notably:
All incomes and expenses relating to transactions with other members of the tax unity are treated no differently to those arising in connection with other parties.
The total of net taxable income of the tax unity is to be computed by adding and off-setting (in cases where a result is a loss) the total of the net taxable income of all members of the tax unity, and then by applying the interest limitation rule at the level of the tax unity.
The borrowing costs, and the taxable interest revenues and other economically equivalent taxable revenues (“interest income”), of the tax unity are computed as the sum of respectively the borrowing costs and the interest incomes of each of the members of the tax unity. The “exceeding borrowing costs” of the tax unity are then equal to the excess of the borrowing costs of the tax unity over the interest income of the tax unity.
The EBITDA of the tax unity is the algebraic sum of the total of the net taxable income of all members of the tax unity increased by (i) the “exceeding borrowing costs” of the tax unity; (ii) the sum of deductible amortisation of all members of the tax unity; and (iii) the sum of deductible impairments of all members of the tax unity.
Exempt income, and expenses in connection with exempt income, for all members of the tax unity are thus excluded from the computation of the EBITDA of the tax unity.
The “exceeding borrowing costs” of the tax unity of a given tax year are then only deductible up to the amount of the higher of (i) 3 million euros or (ii) 30% of the EBITDA of the tax unity.
It should be noted that the application of the interest limitation rule at the tax unity level is optional. The tax unity can opt out, and chose to apply the rules on an individual basis. The request needs to be made by all the members of the tax unity, and cannot be changed during the period of the tax unity.
Carry forward of exceeding borrowing cost and unused capacity in a tax unity
“Exceeding borrowing costs” of the integrating company (i.e. the member of the tax unity that reports and pays tax on the result of tax unity) not deductible in a tax period may be carried forward by the integrating company without time limitation, and may then be deducted in any later tax period in which borrowing costs of that later period itself are fully deductible. Only the integrating company may carry forward non-deductible “exceeding borrowing costs” arising from the tax unity period.
Unused interest capacity of the integrating company, can only be carried forward for 5 years, and is to be used on a FIFO basis. Only the integrating company may carry forward the unused capacity arising from the tax unity period.
Non-deductible “exceeding borrowing costs” carried forward of the members of the tax unity arising from tax years preceding the entry into the tax unity may not be used within the tax unity, but may only be used by the member who incurred them after the unwind of the tax unity or once the entity has exited the tax unity.
The same logic as above is applicable to unused capacity carried forward of the members of the tax unity arising from tax years preceding the entry into the tax unity. During the existence of the tax unity, the 5-year limitation for the carry forward of unused interest capacity is suspended.
Grandfathering of loans concluded before 17 June 2016 in a tax unity
When determining the amount of “exceeding borrowing costs” of the integrating company, the integrating company may exclude “exceeding borrowing costs” that arise from debt contracted by any member of the tax unity before 17 June 2016, excluding any subsequent modification thereof.
The new wording used in the Bill is not in line with the final version of the wording of the equivalent provision in the law as voted in December 2018. It is therefore possible that the State Council will request an amendment, in order to ensure alignment with the wording of the law voted in December 2018.
Group equity ratio rule
When all the members of a tax unity are members of a consolidated group for financial accounting purposes, the integrating company may, on request, deduct in full the “exceeding borrowing costs” of the tax unity, if it can demonstrate that the ratio of the equity of the tax unity to the total assets of all the members of the tax unity is equal to or higher than the equivalent ratio of the consolidated group. The equity ratio of the tax unity can be considered as equal to or equivalent if it is lower than the equity ratio of the consolidated group for financial reporting purposes by up to 2%.
The comparison has to be made based on the same valuation method at both the level of all the members of the tax unity and at the consolidated group level, either under IFRS or under the financial information system of a Member State.
For the purpose of the computation of the equity ratio of the tax unity, a sub-consolidation of the members of the tax unity has to be prepared.
The integrating company has to enclose with its tax return the details of all computations required for the determination of the equity ratio of the tax unity and the equity ratio of the consolidated group. Computations have to be confirmed in an audit report.
If for a given tax year all members of the tax unity are “financial undertakings” to which the ATAD 1 interest limitation rules do not apply, then no interest limitation will apply to the tax unity.
If only some of the members of the tax unity are such financial undertakings, then the interest limitation rules at the level of the tax unity do not apply to these members.
Carried forward losses in a tax unity
As has hitherto been the case, losses of the integrating company may only be carried forward by the integrating company, and may be used against taxable income of the tax unity on a FIFO basis.
Losses carried forward of the members of the tax unity arising from tax years preceding the entry into the tax unity may be used by the tax unity only to the extent the member of the tax unity who incurred them is able to deduct them had it been subject to taxation on a stand-alone basis (i.e. it has a positive tax result). If not used during the tax unity period, on return to taxation on a stand-alone basis (e.g. end of tax unity, exit from the tax unity) the losses carried forward of the members may be carried forward but then may only be used by the member of the tax unity who incurred them.
Tax credit regimes in a tax unity
The new article 164bis also sets out the rules applicable to tax credits for employment, and investment tax credits, available in a tax unity either during the tax unity or from any preceding period. These rules cover the use of credits during the existence of the tax unity, and in the event of return to individual taxation by some or all of the members.
The Bill also foresees the implementation of the EU Directive 2018/1713 as regards rates of value added tax applied to books, newspapers and periodicals. If the Bill is approved, the standard VAT rate of 17% will be replaced by:
The changes in corporate income tax rates should be applicable for the 2019 tax year.
The new article 164bis should be applicable for accounting years starting on or after 1 January 2019.
The VAT changes should be applicable as from 1 May 2019.
The new article 164bis, allowing the application of interest limitation rules at the tax unity level in conformity with ATAD 1, is highly welcome. It should allow a better and fairer application of these rules to entities that are part of a tax unity.
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