Luxembourg Budget Law 2023 voted

The draft text as set out in bill n°8080, which aims at providing clarifications on the reverse hybrid rules covered under Article 168 quater LITL has been amended during the legislative process following comments notably from the State Council and the review by the Commission des Finances et du Budget (“COFIBU”). 

The Budget Law, as voted, confirms that the amendments of Article 168 quater LITL aim at clarifying that: 

• As one “entry condition” for being seen as a reverse hybrid entity, the non-taxation of the entity’s net income has to result from the actual qualification of the entity itself (i.e. transparent vs. opaque) at the level of its investors. Hence, the non-taxation of the net income of a partnership attributable to investors benefitting e.g. from a subjective exemption in their countries of residence should not be captured by the reverse hybrid rules since the non-taxation is not the result of the partnership being regarded as opaque by the investors. 

• In line with the general market interpretation, once the conditions set out under Article 168 quater LITL are met, only the portion of the net income of a reverse hybrid entity that is attributable to an associated enterprise seeing the entity as opaque should become taxable. The portion of the net income attributable to a non-associated enterprise seeing the entity as opaque should thus not become taxable. 

The clarifications brought to Article 168 quater LITL are welcome and in line with the general market interpretations of the rules since their introduction on 1 January 2022. It should provide more legal security to taxpayers when assessing the impact of the reverse hybrid rules when it relates to tax exempt investors or investors resident or established in a jurisdiction with no tax system. 

The other elements covered by the Budget Law set out in our previous PwC Flash newsletter, posted on 17 October 2022, remain valid.