Luxembourg publishes Bill on payments to EU "black-list" non-cooperative countries

31/03/20

In Brief

On 30 March 2020, the Luxembourg Government tabled a Bill (n°7547) before the Luxembourg Parliament, setting out draft legislation that disallows the tax deduction of interest or royalties paid or due to related parties, if these are corporate entities established in countries that are “black-listed” as being “non-cooperative” for tax purposes.
This measure is in line with guidelines of the Council of the EU, agreed at the Council of 5 December 2019.
Assuming the measure is enacted, it will apply for expenses paid or due as from 1 January 2021.

In more detail

The Bill follows the communiqué of the Luxembourg Government on 25 March 2020 that announced its intention to legislate in this area. Read more in this flash news.

The application of the draft legislation is limited in several ways:

  • Only interest and royalties expenses paid or due to “associated enterprises”, as defined for the purposes of applying Luxembourg’s transfer pricing regime, are in scope.

  • The measure only applies if the recipient is a corporate entity that would be regarded as “opaque” under Luxembourg tax law. 

  • The measure does not apply to operations that can prove that they can satisfy the “valid commercial reasons that reflect economic reality” requirement. These are not defined in the specific context and will need to be assessed on a case by case basis. 

  • The definitions of interest and royalties for the purposes of this measure are in line with those used in the relevant articles of the OECD Model Tax Convention, and thus with those used in most of Luxembourg’s double tax treaties. 

As presented, the draft legislation is incomplete, because it does not include any “black-list” naming any countries or territories that are deemed as “non-cooperative” for tax purposes. The draft legislation does however commit the Government to present to the Chamber of Deputies the “black-list” that will apply under the Luxembourg measure as from 1 January 2021. It also specifies that this “black-list” will be the same as the most-recent list then published by the EU Council of countries and territories that the EU regards as “non-cooperative” for tax purposes – i.e. the EU “black-list”.

Currently, and since 27 February 2020, this EU “black-list” names 12 countries or territories, as follows:

American Samoa; Cayman Islands; Fiji; Guam; Oman; Palau; Panama; Samoa; Trinidad and Tobago; Vanuatu; US Virgin Islands

Changes to this EU list have to date been made more than once a year, with some jurisdictions being removed from the list once they have either amended (or committed to amend) their legislation or regulatory practices in a manner satisfactory to the EU Finance Ministers. It should thus not be assumed that the jurisdictions listed above will necessarily be  those that will actually be affected on the basis that the Luxembourg measures take effect on 1 January 2021 – the EU Council could for instance decide to remove some of the jurisdictions during the remaining months of 2020. 

The Government will repeat this process, of presenting the relevant “black-list”, annually. Countries or territories that the EU have then newly included on their list will have the Luxembourg provisions applicable from the 1 January following. If countries or territories are removed from the EU list, the Luxembourg provisions will only apply to interest or royalties paid or due up to the date of publication of the version of the list that first removes the jurisdiction concerned. This would mean that only part of a relevant expense involved would be non-deductible for the tax year concerned.

Lastly, since the 2018 tax year, Luxembourg companies have already been required to indicate in their tax returns whether they have undertaken any transaction with any related party located in any of the EU “black-list” jurisdictions. This requirement is not affected by the draft legislation. 

In conclusion

Luxembourg companies having transactions with entities established in jurisdictions that are on the EU “blacklist” will need to assess their situation, recognising that the composition of the EU “black-list” might change, notably during the remaining months of 2020. As the measure stems from the EU Council recommendations of December 2019, implementation of potential similar measures by other EU member states should also be monitored. 

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