New Luxembourg tax legislation on payments to EU-listed "non-cooperative" countries

29/01/21

Updated 23/02/21

In brief

On 28 January 2021, the Luxembourg Parliament voted to approve an amendment to the income tax law provisions that govern the tax deductibility of expenses incurred by corporate taxpayers. The draft legislation (Bill n°7547) had been submitted to Parliament on 30 March 2020. The legislation was published as the Law of 10 February 2021, and adds a new item 5 to Article 168 of the Luxembourg Income Tax Law of 4 December 1967 as modified.

The new provision disallows the tax deduction of interest or royalties due to a related party, if the beneficiary is a corporate entity established in a country that is listed by the Council of the EU as being “non-cooperative” for tax purposes. It applies for expenses accruing as due from 1 March 2021.

The measure is in line with guidelines of the Council of the EU, agreed at the Council of 5 December 2019.

In more detail

The new provision has application only in strictly defined circumstances:

Only interest expenses and royalties expenses are in scope. Definitions of interest and royalties are included in the text of the new provision. These 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.
The new provision only applies if the interest or royalty is due to an “associated enterprise”, as defined for the purposes of applying Luxembourg’s transfer pricing regime.
The provision only applies if the beneficiary is a corporate entity that would be regarded as “opaque” under Luxembourg tax law.
The provision does not apply if the Luxembourg taxpayer can prove that the arrangements giving rise to the expense satisfy the “valid commercial reasons that reflect economic reality” test. This test, which is also part of Luxembourg’s general anti-abuse rule (“GAAR”) measures, is not further defined by the text of the new provision. Its application will thus need to be assessed on a case by case basis.

For the new provision to apply, the beneficiary must be established in a jurisdiction which is included on the list of countries and territories (as revised) that are deemed by the Council of the EU to be “non-cooperative” for tax purpose. The text of the new provision as voted makes direct references to the relevant “Annex I” list agreed by the Council of the EU.

The new provision applies as from 1 March 2021 for jurisdictions that are listed in the most recent version of the “Annex I” list published in the Official Journal of the EU. A meeting of the Council of the EU on 22 February 2021 approved amendments to this list, and publication in the Official Journal of the EU of the revised list is expected imminently. The countries and territories that are on the “Annex I” list that should apply from 1 March 2021 should thus be :

American Samoa
Anguilla
Dominica
Fiji
Guam
Palau
Panama
Samoa
Seychelles
Trinidad and Tobago
US Virgin Islands
Vanuatu

Changes to the “Annex I” 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. Other jurisdictions might be added (or re-added) to the list, as a result of further reviews. The list is thus by no means a static one.

The new provision deals with this aspect as follows:

If a jurisdiction is added to the list, and is still on the latest list to have been published in the Official Journal before the next subsequent 1 January, then the provision applies to expenditure accruing as due, but only as from that 1 January following.
If a jurisdiction is removed from the list, then the provision ceases to apply to expenditure accruing as due, as from the date of publication of the version of the list confirming that that the jurisdiction concerned has been removed.
It should also be noted that, 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 “Annex I” jurisdictions. This existing requirement is not affected by the new provision.

In conclusion

Luxembourg companies, that are incurring interest or royalty expenses due to any entities established in the “Annex I” jurisdictions listed above, should recognise that such expense ceases to be tax deductible to the extent that it accrues after 28 February 2021. The evolution of the composition of the “Annex I” list should also be kept under review.

As the measure stems from the EU Council recommendations of December 2019, implementation of similar measures by other EU Member States should also be considered and anticipated.

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