On 25 April 2019, the Luxembourg Parliament voted to approve the 2019 Budget Law. This legislation, containing measures amending the tax regime, had been submitted to Parliament on 5 March 2019 as Bill 7450.
The new legislation includes two important corporate tax measures:
1. A reduction of the corporate income tax rate from 18% to 17%.
2. A complete rewrite of the legislation governing the Luxembourg tax unity regime, to permit the application of the ATAD 1 interest limitation rules at Luxembourg group level, and to clarify and consolidate existing measures.
The reduction in the corporate income tax rate applies for the 2019 tax year, and the revised tax unity rules are applicable to accounting periods beginning on or after 1 January 2019.
No material changes to the draft measures set out in Bill 7450 have been made during the legislative process.
The standard corporate income tax (CIT) rate is reduced 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 rates of municipal business tax payable by companies.
This change to the CIT rate results in an overall effective corporate tax rate of 24.94% for companies in Luxembourg City for FY 2019, down from 26.01% applicable for FY 2018.
In addition, for FY 2019, 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 companies with a tax base between EUR 175,000 and EUR 200,001, the corporate income tax charge for FY 2019 is to be EUR 26,250 plus 31% of the basis above EUR 175,000.
The legislation replaces the existing text of article 164bis of the Luxembourg income tax law (LITL), governing the Luxembourg tax unity (i.e. corporate group taxation) regime, with a fully re-written version, 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 rewritten article 164bis however does not change fundamentally 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rules hitherto included in the Grand-Ducal decree dated 18 December 2015 in execution of article 164bis (which is being repealed), as well as some rules for practical application that were previously included in an administrative Circular.
Rules applicable to the computation of the taxable basis
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 also report notably:
- the total of its net taxable income before “special expenses” (which include, in particular, the use of any losses brought forward), and prior to any application of the interest limitation rules;
- the amounts of; deductible borrowing costs; interest revenue and income economically equivalent to interest; exempt income; expenses in connection with exempt income; and deductible amortisation and/or value reductions.
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 net revenue of the tax unity is to be computed, by aggregating and off-setting (in cases where a result is a loss arising in that period), the total net revenues before “special expenses” of all members of the tax unity.
One practical consequence of this process (which is a refinement of the approach previously seen) is that the losses of all members of the tax unity arising in a period have to be offset against profits of other members of the tax unity in priority to any losses being brought forward, notably those of that member arising from tax years preceding the entry into the tax unity.
The interest limitation rule is then applied at the level of the tax unity – this is accomplished as outlined further below.
Lastly, the aggregate amount of “special expenses”, including losses brought forward, are deducted (insofar as there is still the capacity to do so), to arrive at the taxable basis of the tax unity for the period.
Extension of the tax unity computational rules, to include interest limitation measures on a consolidated basis
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, of 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.
Interest limitation measures - carry forward of “exceeding borrowing costs” 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 the 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.
Interest limitation measures - “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 in article 164bis concerning the exclusion for subsequent modifications is not exactly in line with the equivalent provision in the main interest limitation legislation of article 168bis, enacted in December 2018. Whether this will have any practical effect remains to be seen.
Interest limitation measures – 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.
Interest limitation measures – financial undertakings
If for a given tax year all member of the tax unity are “financial undertakings” for which the ATAD 1 interest limitation rules do not apply any limitation, 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.
Loss carry-forwards in a tax unity
As has hitherto been the case, all losses arising within the fiscal unity are treated as being those of the integrating company, and are to be carried forward by the integrating company. Such losses are to be used against subsequent taxable income of the tax unity on a FIFO basis.
Losses brought forward attributable to the members of the tax unity and arising from tax years preceding the entry into the tax unity (“pre-tax unity losses”) may be used by the tax unity, but only to the extent the member of the tax unity that incurred them would have been able to deduct them had it continued to be subject to taxation on a stand-alone basis (i.e. to the extent that member would have had 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 pre-tax unity losses carried forward of the members may continue to 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 the use of tax credits for employment, and for 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 company taxation by some or all of the members.
The legislation implements EU Directive 2018/1713 as regards rates of value added tax applied to books, newspapers and periodicals. The standard VAT rate of 17% is replaced by the super-reduced VAT rate of 3% for books, newspapers and periodicals, either in physical form or electronically supplied or both, as well as for their rental in libraries. However, publications wholly or predominantly devoted to advertising or adult content, as well as publications wholly or predominantly consisting of video content or audible music, remain subject to the standard 17% rate.
The super-reduced 3% rate is also extended to cover feminine hygiene products.
The standard VAT rate of 17% has also been replaced by the reduced rate VAT rate of 8% for specific organic plant products.
The changes in corporate income tax rates apply for the 2019 tax year.
The new article 164bis applies for accounting years starting on or after 1 January 2019.
The VAT changes apply as from 1 May 2019.
The 1% cut in the corporate income tax rate, and the significant increase in the upper limit for the reduced rate, is in line with the commitment made in the coalition agreement for the Government that took office in December 2018. The rate cut brings Luxembourg closer to the current reported average corporate tax rate for the EU Member States of 21.9%.
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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