Tax updates Q1 2017
2017 Tax Reform
The purpose of this update is to inform you of aspects of 2017 tax reform that entered into force as of 1 January 2017. Indeed, the Luxembourg law implementing such tax reform was published in the official gazette on 27 December 2016.
You will find below the main measures impacting corporations:
Reduction of the Corporate Income Tax (CIT) rate
The CIT rate for companies having a net taxable basis of more than EUR 30,000 will be progressively reduced until 2018. The current CIT rate is 21% and will be 19% for 2017 and 18% for 2018. It means that the effective aggregate income tax rate for a company located in Luxembourg city (including CIT, municipal business tax (MBT) and the contribution to the unemployment fund) will decrease to 27.08% in 2017 and to 26.01% in 2018.
In addition, small companies whose annual taxable income is less than EUR 25,000 will be subject to a reduced CIT rate of 15%. For companies with a net taxable basis of between EUR 25,000 and EUR 30,001, the CIT rate will be EUR 3,750 plus 39% on the taxable basis beyond EUR 25,000 for 2017, and EUR 3,750 plus 33% on the taxable basis beyond EUR 25,000 for 2018.
Investment tax credit
Luxembourg law provides for two types of investment tax credits: (i) the complementary investment tax credit for increases in investments in tangible depreciable assets made during the year, and (ii) the overall investment tax credit for qualifying new investments made during the year.
The current complementary investment tax credit will be increased from 12% to 13%, and the overall investment tax credit will be increased from 7% to 8%. The rate of overall investment tax credit exceeding EUR 150,000 remains 2%.
The investment tax credit for assets eligible for the special depreciation regime (i.e. investments favouring the protection of the environment, the effectuation of energy savings or the creation of employment for handicapped employees) has been increased from 8% to 9%. The rate of 4% for investments exceeding EUR 150,000 remains unchanged.
In addition, the scope of eligible investments has been extended to include investments made anywhere within the European Economic Area.
Limitation of reportable tax losses
Tax losses generated as from 2017 (inclusive) will be carried forward for a maximum of 17 years. The use of tax losses generated before 1 January 2017 will remain unlimited. No further limitations have been set, contrary to what had been previously announced by the Ministry of finance.
Minimum Net Wealth Tax (NWT)
The minimum NWT (introduced in 2016 to replace the minimum CIT) will increase for Soparfis (financial holding companies whose sum of financial fixed assets, intercompany loans, transferable securities and cash at bank exceeds both 90% of their total gross assets and EUR 350,000) and will reach EUR 4,815 rather than EUR 3,210. The ranges of minimum NWT for all other companies will remain unchanged. As reminder, these are between EUR 535 to EUR 32,100.
The law also clarifies that the balance sheet of the preceding year should be taken into account for the computation of the minimum NWT.
A new deferred amortization regime
A new deferred amortization regime will be introduced. The taxpayer will be able to differ the deduction allowed by the amortization upon filing of a specific request when filing the tax returns for the year concerned. This optional mechanism will increase the CIT and MBT to be paid by the tax payer for the year concerned but it will also allow the taxpayer to limit, under certain conditions, the NWT due.
This measure will allow companies to apply for investment tax credits in situations where they could have been previously unable to do so, for example, in a loss situation. However, this measure is to be carefully considered because the investment tax credits cannot offset the MBT liability, and the mechanism is likely to increase the CIT and MBT liability as mentioned above.
Temporary tax relief on foreign exchange gains
The temporary tax relief on foreign exchange gains foreseen by the article 54bis of the Luxembourg income tax law (LITL) will be extended to any company as from the financial year 2016.
Electronic filing of the tax returns
The electronic filing of the CIT, MBT and NWT returns will become mandatory as from 2018 concerning 2017 tax returns (and from 1 August 2018 for NWT returns).
Increase of penalties & new type of tax fraud
In line with the increased attention paid by the tax authorities to the fulfillment of compliance obligations, penalties have now been increased. For example, the penalty for late filing of tax returns or intentional incomplete tax returns is now a minimum of 5% and a maximum of 25% of the tax unaccounted for.
In addition, the law now distinguishes 3 types of tax fraud: simple tax fraud, aggravated tax fraud and tax swindle (“escroquerie”). Aggravated tax fraud has been introduced in the General Tax code by the tax reform to comply with the 4th European anti money laundering (AML) Directive. A tax fraud will be considered as aggravated only if the tax evaded per tax period is beyond a certain threshold. The three types of fraud give rise to the application of a scale of monetary sanctions, while aggravated tax fraud and the tax swindle are punishable by imprisonment. Furthermore, aggravated tax fraud and tax swindle are now considered as criminal offences by the Penal Code (revised article 506) and thus as predicate offences to money laundering. They will therefore need to be borne in mind by all service providers in Luxembourg as well as by the authorities investigating money laundering (e.g. CSSF, CRF).
Joint responsibility of persons in charge of management
Persons in charge of the management of VAT taxable entities (administrators, directors, managers – including “de facto managers”, liquidators and trustees) can be held jointly and personally responsible for the payment of any VAT liability of the companies they manage in the event of a breach of VAT compliance obligations and/or non-payment of the VAT due by the company they manage.
In addition, and similarly to the procedure existing in the frame of direct taxes, VAT authorities will be entitled to initiate a guarantee call procedure (“appel en garantie”) from the persons in charge of the management of VAT taxable entities when the companies do not comply with their VAT obligations.
Increase of penalties
Similarly, the increase of penalties in relation to direct tax penalties due in case of breach of VAT obligations (e.g. filing of VAT returns) will be increased to range from between EUR 250 to EUR 10,000, while penalties for non-communication of information or documents will be increased to a maximum of EUR 25,000 per day of breach.
When the breach of VAT compliance rules occurs within the context of an intention to avoid the payment of VAT or obtaining an irregular reimbursement, a penalty of 10% to 50% of the unaccounted for or irregularly reimbursed VAT will be applicable.
Similarly to direct tax, in case of aggravated tax fraud a fine of between EUR 25,000 and six times the amount of unaccounted for tax and a period of 1 month to 3 years imprisonment will be applicable. In case of tax swindle a fine of between EUR 25,000 and 10 times the amount of unaccounted for tax and a period of 1 month to 5 years imprisonment will be applicable.
Budget Law 2017
The 2017 Budget Law was also published on 27 December 2016. Amongst other measures, this law includes a new set of rules concerning the transfer pricing practice. Such rules have been included in a new article 56bis into the LITL. In addition, the Luxembourg tax authorities published on the same date a new circular LIR n°56/1 -56bis/1 which includes some guidance and clarification regarding the OECD Transfer Pricing Guidelines.
This new circular replaces the circulars n°164/2 and n°164/2bis and demonstrates Luxembourg’s commitment towards the BEPS Action Plan and the OECD members.
The main elements of this new circular are:
Equity at risk
- The previous requirement to have a minimum amount of equity equivalent to 1% of the financing activity capped to EUR 2 Mio is no longer applicable.
- The circular provides that companies with a risk profile similar to that entities which are subject to Regulation EU 575/2013 of 26 June 2013 on prudential requirements for credit institutions and investment firms (i.e. EU implementation of the so-called Basel III Agreement – “Regulated Financing Entity”), and that comply with the equity requirements foreseen by said regulation, are deemed to have sufficient equity at risk.
- For all other companies with a different risk profile, the equity at risk will need to be determined on a case-by-case basis, using the widely accepted methodologies to determine capital at risk.
Arm’s length remuneration
- The circular distinguishes two safe harbor cases:
- If the finance company has a profile similar to a Regulated Financing Entity, it could be deemed to earn an at arm’s length remuneration if its return is equal to 10% (after tax) of its equity.
- In case the company acts as an agent, the circular considers that at an arm’s length remuneration should equal a return of 2% (after tax) on the assets financed (i.e. the on-loan). This is a measure of simplification introduced by the circular. The companies which want to opt for this measure will have to inform the tax authorities in their tax returns as from the fiscal year 2017. An agent company may however deviate from this remuneration if a transfer pricing report is prepared and supports the approach taken.
- The circular also provides that non-genuine arrangements, or transactions lacking economic substance, should be disregarded for the purposes of determining the arm’s length remuneration.
The requirements initially provided for by the circulars n°164/2 and n°164/2bis for financing companies to have real substance in Luxembourg are generally maintained. The new circular clarifies some criteria:
- A majority of the members of the board of directors, the senior executives, or managers, who have the authority to bind the company, are either Luxembourg residents, or non-residents who carry on a professional activity in Luxembourg falling under the scope of article 10 LITL, and who are liable to tax in Luxembourg on at least 50 % of the income derived from such activities. Where a corporate entity is a member of the board of directors, its registered office and its central administration must be located in Luxembourg;
- The company must have qualified personnel capable of controlling all transactions. However, the company may subcontract the functions which do not have a significant impact on its risk control;
- Key decisions concerning the company’s management must be made in Luxembourg. In addition, entities which are required by the Company Law to hold general shareholders’ meetings must hold at least one meeting per year at the place specified in the articles of association; and
- The company should not be considered a tax resident of another country.
This new circular is effective as from 1 January 2017. The companies willing to obtain a new advance pricing agreement can continue filing the requests in line with the requirements of this new circular.
Any advance pricing agreement concluded with the tax authorities before this date will no longer be binding for the Luxembourg tax authorities. The existing advance pricing agreements and the transfer pricing documents should thus be reviewed in light of the revised legal framework.
The Luxembourg law implementing country-by-country (“CbC”) reporting was published on 27 December 2016. The CbC reporting was developed by the OECD and transposes into Luxembourg law the directive 2016/881 of the European Council of 25 May 2016 (known as “DAC 4”) modifying the EU Directive 2011/16/UE in respect of administrative cooperation in the field of taxation. The tax authorities also published guidelines and replies to frequently asked questions on their website in this respect.
As a reminder, the CbC law applies to multinational enterprise (“MNE”) groups (i) whose total consolidated group revenue exceeds EUR 750 million during the previous fiscal year and which are required to prepare consolidated financial statements or (ii) would be required to do so if equity interests in any of their enterprises were listed. The law establishes that a Luxembourg resident entity fulfilling the above requirements (being an ultimate parent entity of the MNE group, a surrogate parent entity or a constituent entity under the secondary mechanism) will have to report certain information to the Luxembourg tax authorities such as information on the turnover, accounting profit before tax, income tax paid, income tax due, equity, undistributed income and number of employees, among other information required.
The CbC reporting obligation must be completed and filed within 12 months of the last day of the reporting fiscal year of the group (e.g. by 31 December 2017 if the 2016 financial year of the MNE group ends on 31 December 2016).
The law also includes a notification requirement to be made by any Luxembourg entity belonging to a MNE group, where if a Luxembourg resident entity is not a reporting entity, it must notify the Luxembourg tax authorities of the identity and the tax residency of the reporting entity of its MNE group. These notifications are due by the last day of the financial year of the MNE group. However, exceptionally the notifications for MNE groups having a fiscal year end after 1 January 2016 must be provided not later than 31 March 2017.
Companies face a penalty of up to EUR 250,000 for non-compliance with the CbC reporting obligations, such as a failure to file the CbC reporting, late filing of the reporting or inaccurate or incomplete disclosure.
The above measure confirms Luxembourg commitment to the BEPS Action Plan and towards the international community. However, actions required are immediate and we therefore recommend that you verify (i) if your company belongs to a MNE group falling under the scope of the CbC reporting, (ii) which entities have reporting obligations and which obligations applicable to your Luxembourg companies (as a surrogate or even via the secondary mechanism), and (iii) make the appropriate notifications for 2016 prior to 31 March 2017.