EY Tax ClubFILE/AT… · EY Tax Club Year-end Tax update John Hames / Sylvie Leick / Yannick Zeippen 2 December 2015

EY Tax Club

Year-end Tax update

John Hames / Sylvie Leick / Yannick Zeippen

2 December 2015

Page 2

Agenda

► Tax rulings

► Transfer Pricing

► Anti-abuse rules

► Transparency

► IP Tax regime

► Net Wealth Tax

► Individuals

► Double taxation treaties

► VAT

► Trends

2 December 2015 EY Tax Club

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Tax rulings

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New tax ruling process - effective 2015

Formalization of the previous tax ruling practice into Luxembourg domestic law (§ 29a

Abgabenordnung and Grand-Ducal Regulation (GDR) dated 23 December 2014):

► Formal requirements (e.g., information on taxpayer, detailed description of envisaged

transactions, detailed tax analysis, bona fide statement).

► Timing of filing of tax rulings: GDR requires that transactions must not have “produced their

effects”.

► Validity of 5 years (under certain conditions).

► New Tax Ruling Commission (“commission des décisions anticipées”) – still rulings are

addressed to the head of the tax office.

► New administrative service fees applicable for any request submitted as from 1 January 2015

(range between EUR 3,000 – 10,000) – no fees for pending rulings filed before 31 December

2014.

► Publication of anonymized “executive summaries” / exchange of information.

► Increased focus on business purpose and transfer pricing.

► No recourse possible against negative decision – however a claim can be filed against the

tax assessment.


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New tax ruling process

► In essence, no substantial change compared to the past except for the fact that

the former administrative practice is formalized under a legal framework.

► Focus on providing a robust legal framework and improving the dialogue

between the taxpayer and the tax administration.

► Tax rulings remain an interpretation of the Luxembourg tax law applicable to a

specific fact pattern.

► Increased tax transparency in line with principles of the new Government’s fiscal

policy.

► Contribution to a competitive domestic and international tax environment.

► Stable framework with the aim to achieve enhanced planning security and

conformity with OECD / BEPS standards.



Transfer Pricing

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Transfer pricing - effective 2015

Formalization of the framework for Luxembourg transfer pricing (TP) legislation and

introduction of transfer pricing documentation requirements:

► Under prior legislation, power of the Luxembourg tax authorities to reassess the

taxable result of a Luxembourg taxpayer in cases where an unjustified transfer of

profits had been made due to a special economic relationship of that taxpayer with a

non-resident taxpayer.

► New regulation outlines the arm’s length principle in line with the OECD Model

Convention and applicable (as from 1 January 2015) to transactions with resident and

non-resident related party.

► TP documentation required for all transactions between related parties for the

purpose of verification of transfer prices by the Luxembourg tax authorities.

► New Luxembourg ruling procedure applies also to Advance Pricing Agreements

(APA).



Anti-abuse rules

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Parent Subsidiary Directive (PSD) changes

► Draft law n°6847 aims at introducing anti-hybrid (avoidance of double non-

taxation due to hybrid mismatches in two Members States) and general

anti-abuse rule (“GAAR”, benefit of PSD denied for structures which main

purpose is to gain a tax advantage).

► Application only within intra-EU context.

► Implementation deadline is 31 December 2015.


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LuxCo

EUCo

► Based on national law, loan instrument qualifies as equity

► Income derived: tax exempt dividend

► Based on national law, loan instrument qualifies as debt

► Expense on loan: tax deductible interest

Loan granted from LuxCo to EUCo

► Tax exemption denied

Parent Subsidiary Directive (PSD) changes Anti-hybrid provision


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► “Member States shall not grant the benefits of this Directive to an

arrangement or a series of arrangements that, having been put into place

for the main purpose or one of the main purposes of obtaining a tax

advantage which defeats the object or purpose of this Directive, are not

genuine having regard to all relevant facts and circumstances.”

► “An arrangement or a series of arrangements shall be regarded as not

genuine to the extent that they are not put into place for valid

commercial reasons which reflect economic reality.”

Parent Subsidiary Directive (PSD) changes GAAR


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US Branches

► Discussions between the Luxembourg tax authorities and the IRS regarding

the tax treatment of US branches of Luxembourg companies resulting in

double non-taxation.

► Protocol or exchange of letters to the US-Luxembourg tax treaty providing for

specific requirements that need to be met in order to be able to claim a

branch exemption likely to be concluded; possibly specific grand-fathering

period for existing US branch structures.

► Going forward, the Luxembourg tax authorities will, in essence, no longer

issue advance tax clearances confirming the Luxembourg tax treatment of

US branches.

► Situations to be analyzed on a case-by-case basis (signed advance tax

clearance obtained or pending, US branch implemented, etc.).


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Mandatorily redeemable preferred shares (MRPS)

► Tax treatment of MRPS under discussion due to hybrid treatment (debt

qualification for tax purposes vs equity treatment for accounting and legal

purposes).

► According to latest discussion with Luxembourg tax authorities, debt

qualification should be upheld provided this is also reflected in the statutory

annual accounts (substance over form approach under Lux GAAP or IFRS).

► Applicable at the latest for accounts closing as from 1 January 2016.


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Financial instruments under critical review

► Qualification for tax purposes: analysis of all criteria will result in the

determination of debt or equity.

► Critical review of the terms and conditions of various financial

instruments (CPECs, IPPECs, etc.), e.g. typical “equity” features:

► Crossed conversion options (issuer and holder) no longer accepted

► Stapling (instrument connected with shares) to be avoided

► Maturity < 30 years

► Determination of interest (not profit participating)



Transparency

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Transparency Package – Exchange of rulings

► March 2015: EU Commission presented package of tax transparency

measures (Transparency Package):

► Assessing possible new transparency requirements for multinationals, e.g. public

disclosure of certain tax information by multinationals

► Reviewing the Code of Conduct on Business Taxation

► Quantifying the scale of tax evasion and avoidance

► Repealing the Savings Tax Directive

► Key element: Proposal to change Directive 2011/16/EU to provide for

mandatory automatic exchange of information on tax rulings (Advance

Tax Rulings & Advance Pricing Agreements).

► Initial division among Members States – political agreement finally reached at

ECOFIN meeting of 6 October 2015.


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► Key features of the political agreement:

► Requirement to exchange information automatically on advance cross-border tax

rulings, as well as APAs (“push”)

► Member states receiving the information will be able to request further information

where appropriate (“pull”)

► Storage of the exchanged information on a secure central directory accessible to

all Member States and, to some extent, to the EU Commission

► Member States will have the option to exclude from information exchange

advance tax rulings and pricing arrangements issued to companies with an

annual net turnover of less than €40 million at the group level, if such

advance cross-border rulings and APAs were issued, amended or renewed

before 1 April 2016; exemption does however not apply to companies

conducting mainly financial or investment activities.


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► Implementation:

► Application of new rules from 1 January 2017.

► Directive will be retroactive to 1 January 2012, but specific transition

rules for rulings issued before 1 January 2017 will apply:

► Advance cross-border rulings and APAs issued, amended or

renewed between 1 January 2012 and 31 December 2013

will be exchanged under the condition that they are still

valid on 1 January 2014.

► Advance cross-border rulings and APAs issued, amended or

renewed between 1 January 2014 and 31 December 2016

will be exchanged irrespectively of whether they are still

valid or not.


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FATCA / Exchange of information

► Entry into force on 29 July 2015 of the FATCA agreement signed with the

US, including the Memorandum of Understanding signed on 28 March 2014

and the exchange of notes.

► Deadline for 2015 reporting was 31 August 2015; deadline is 30 June for

subsequent years.

► Circular letters (ECHA Nos. 2 and 3) issued, providing for more detailed

guidelines on the application of the agreement by Luxembourg financial

institutions and on the format to be used by financial institutions for submitting

the required information to the Luxembourg tax administration.


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FATCA / Exchange of information

► Draft law n°6858 on the automatic exchange of information in the field of

taxation.

► Incorporate to the greatest extent possible of the provisions of the FATCA

law.

► The automatic exchange will cover among others:

► the account balance or value, including, in the case of a Cash Value Insurance

Contract or Annuity Contract, the Cash Value or surrender value;

► the total gross amount of interest, dividends, and other income generated with

respect to the assets held in the account;

► the total gross proceeds from the sale or redemption of Financial Assets paid or

credited to the account.



IP Tax regime

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IP tax regime

► Abolishment of existing regime as from 1 July 2016.

► Transitional period starting on 1 July 2016 and expiring on 30 June 2021: regime will continue to apply until the aforementioned expiry date to any qualifying intellectual property (IP) that has been constituted or acquired before 1 July 2016, including improvements made to such IP provided that such improvements are terminated before 1 July 2016.

► Safeguard measure: expiry of the transitional period on 31 December 2016 if:

► IP has been acquired after 31 December 2015 from a related party;

► IP has, at the time of its acquisition, not been already eligible for the Luxembourg IP Regime or for a foreign tax regime corresponding to the Luxembourg IP Regime.

► Spontaneous communication of information for new entrants after 6 February 2015.



Net Wealth Tax

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New NWT reduction mechanism

► As from 1 January 2015 the determination of the unitary value as well as of

the net wealth tax (NWT) on an annual basis.

► Amendment of the mechanism for claiming NWT reduction: CIT of the

preceding year (instead of the CIT of the same year as it was previously the

case) to determine the limit of the NWT reduction, i.e. CIT of the year N

constitutes the limit for the reduction of the NWT of the year N+1.

► Request for NWT reduction of the year N+1 should be made in CIT return for

the year N.

► Deadline for building the special NWT reserve unchanged, i.e. at the latest at

the time of the closing accounts following the financial year for which the

NWT is claimed.

► Attention: exceptionnally, NWT reduction for the years 2014 and 2015 must

be claimed in the tax return 2014.


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New NWT reduction mechanism

Year of assessment: 2016

NWT 2016: To be assessed on unitary value as at 1.1.2016 based on

accounts as at 31.12.2015

Limit: CIT 2015, known in 2016 based on accounts as at

31.12.2015

Request for NWT

reduction:

to be filed in corporate tax return 2015

Deadline for booking

special reserve:

31.12.2017

NB: The special reserve must be constituted at the occasion of the allocation of the

profit of the financial year (either allocation of 2015 results which takes normally

place in 2016 or allocation of 2016 results which normally takes place in 2017), but

at the latest at the closing of the financial year following the year for which the

reduction of net wealth tax is requested (i.e. NWT reduction claimed for 2016, so at

the latest reserve must be recorded in the accounts as at 31.12.2017).


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► Differentiated NWT rate:

► For unitary value up to EUR 500 million: 0.5%

► For unitary value above EUR 500 million: EUR 2,500,000 + 0.05% calculated on the

taxable amount less EUR 500,000,000

► Minimum IRC will be replaced by new minimum NWT:

► EUR 3,210 if the sum of fixed financial assets, transferable securities, cash, and

receivables owed to affiliated companies exceeds 90% of their balance-sheet total and

EUR 350,000; or

► If the aforementioned threshold is not met, the amount of minimum NWT will depend on the

balance-sheet total as of the closing of the preceding financial year:

New NWT regime (1.1.2016)


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► For purposes of determining balance-sheet total, use of commercial

balance sheet (valuation according to Income Tax Law and not to

Valuation Law).

► Exclusion of assets for which taxation right belongs to another country

based on a tax treaty (immovable property, permanent establishment).

► Reduction of minimum net wealth tax by amount of CIT after tax credits

of previous year.

► Minimum NWT also applicable to :

► Companies in a tax consolidation

► Securitization companies, SICARs, SEPCAVs and ASSEPs

New NWT regime (1.1.2016)


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► Amendments to the tax consolidation regime:

► Introduction of horizontal tax consolidation.

► Possibility to include Luxembourg permanent establishments of companies

resident in a Member State of the EEA and fully liable to a tax corresponding to

Luxembourg corporate income tax into a tax consolidation.

► Extension of the benefit of exit taxation to migrations to any country which is

not within the EEA provided that this third country has concluded a double

taxation treaty with Luxembourg containing a clause allowing the exchange

of information in line with the OECD principles.

Other changes for corporate taxpayers



Individuals

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► Tax amnesty (1.1.2016 – 31.12.2017):

► No prosecution for tax fraud if spontaneous filing of corrective tax return and

payment of amount of tax due within one month following receipt of revised tax

assessment.

► Tax due increased by 10% for corrective tax return filed in 2016.

► Tax due increased by 20% for corrective tax return filed in 2017.

► Step-up provision for substantial shareholding upon migration of an

individual’s tax residency to Luxembourg.

► Option to be taxed as a resident for the entire tax year with entitlement to

claim the reimbursement of a possible excess of income tax withheld.

► Adaptation of revaluation coefficients (revaluation of acquisition price for

purposes of determining taxable capital gains).

Individuals



Double Taxation Treaties

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Double taxation treaties (DTT)

► In process (draft law):

► DTT with Andorra and Croatia

► New DTT with Estonia and Singapore

► Protocols to the existing DTT with the United Arab

Emirates, France, Ireland, Lithuania, Mauritius and

Tunisia

► Signature:

► DTT with Uruguay and Brunei

► New DTT with Hungary

► Exchange of notes to the DTT with Austria



VAT changes

Page 34

VAT

► VAT rates increase: the standard VAT rate of 15% increased to 17%, the

reduced VAT rates of 6% and 12% increased respectively to 8% and 14%

from 1.1.2015.

► Recovery of VAT by holding companies: Holding companies can have a

full VAT deduction right when rendering management services to companies

in which they hold shares, unless they also perform VAT exempt transactions

(joined cases Larentia +Minerva (C-108/14) and Marenave (C-109/14)).

► Luxembourg law dated 26 May 2014 lays down a change to article 76

introducing from 1.1.2015 the right to submit a claim against the

assessment after the three months deadline, but not later than 6 months, if

the taxable person was not in the position to react for reasons beyond his

control.



Trends

Page 36

► Global Forum on Tax Transparency

► EU:

► Patent boxes

► GAAR principle into Interest & Royalties Directives

► State Aid investigations

► Common Consolidated Corporate Tax Base (CCCTB)

► Financial Transaction Tax

► OECD BEPS action plan

► Tax reform 2017

Trends


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Any questions?


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EY Tax Club on Linkedin


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EY Tax Club Evaluation Form


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Contacts Details


John Hames – Partner, Business Tax Leader

Email Address: [email protected]

Phone Number: +352 42 124 7256

Sylvie Leick – Executive Director, Human Capital Leader


Phone Number: +352 42 124 7242

Yannick Zeippen – Partner, Indirect Tax


Phone Number: +352 42 124 7362

Page 41

Disclaimer

The information in this presentation is intended to provide only a

general outline of the subjects covered. It should not be regarded

as comprehensive or sufficient for making decisions, nor does it

replace professional advice. Accordingly, Ernst & Young Tax

Advisory Services Luxembourg S.à r.l. accepts no responsibility

for loss arising from any action taken or not taken by anyone using

this information. The information herein will have been

supplemented by explanations arising from any oral presentation

by us and should be considered in the light of this additional

information. If you require any further information or explanations,

or specific advice, please contact us and we will be happy to

discuss matters further.

EY Tax Club 2 December 2015

Documents

EY Tax ClubFILE/AT… · EY Tax Club Year-end Tax update John Hames / Sylvie Leick / Yannick Zeippen 2 December 2015