Global Tax Alert | 6 December 2013

New Luxembourg Government announces main aspects of its fiscal policy

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Executive summary

On 2 December 2013, the newly composed Luxembourg Government published its coalition program including components of its future fiscal policy. The focus of the new Government is on structural reforms in order to re-balance public finances during the forthcoming parliamentary term. This will be achieved first through a detailed screening of public expenses, second through specific measures supporting economic growth, and finally via a number of modifications to the current tax system. The Government program announces stability as a key principle of its future tax policy. It aims to attract new businesses and corporate headquarters to Luxembourg and to allow existing entrepreneurs to continue to develop their economic activities. Other than an increase of the value-added tax (VAT) which will, however, remain the lowest in the European Union, no tax increases are currently on the governmental agenda.

The position of Luxembourg in an international context will be strengthened with the extension of the current corporate governance and substance rules, the development of comprehensive transfer pricing legislation in line with international standards as well as the development of a uniform procedure with respect to tax clearances. Some of the most relevant taxation laws applicable to companies (for instance the so-called participation exemption, the tax rules applicable to intellectual property, and the use of functional currencies) will be amended in order to enable Luxembourg to become a center of excellence for global or regional headquarters of multinational companies. At the same time, small and medium-sized enterprises will be encouraged via specific mechanisms to achieve sustainable economic development and growth.

Further details of the announcement are summarized below.

Detailed discussion

Reinforcing tax revenues

The fiscal policy of the Government favors an increase of tax revenues via the support of economic growth combined with a reinforcement of tax collection and modernization of the existing General Tax Law, but also by reforming the criminal law on taxation. Raising taxes, other than an increase of VAT rates which is considered as unavoidable, is seen as a measure of last resort.

A potential extension of the self-assessment process for direct and indirect taxes to both companies and individuals is under consideration. Respecting existing legislation as regards filing and payment deadlines would also be reinforced through a more systematic application of the penalties and fines already foreseen in the current legislation. Following the international trend, the Government is committed to further enhance the fight against tax fraud.

VAT increase

As already largely anticipated, VAT rates will be increased in order to compensate for the future loss of VAT revenues derived from e-commerce, with a commitment to keep the standard rate (of currently 15%) the lowest within the European Union (EU).

Luxembourg in an international context

The new Government aims at further developing Luxembourg as prime location for headquarters, fully in line with OECD and EU principles of taxation. A first step will be the extension of existing governance and substance rules, thus reinforcing the material and operational presence of companies and highly skilled workers in Luxembourg.

Furthermore, the Government will develop comprehensive transfer pricing legislation in line with international standards and a uniform frame for tax clearances in order to provide more transparency, coherency and legal security. It is also intended to further expand the existing Luxembourg tax treaty network.

The Government refrains from participating in the introduction of a European Financial Transaction Tax (FTT) as currently proposed, but supports a worldwide FTT which would avoid any relocation of financial activities outside of the EU. The new Government will continue the path taken by the former Government as regards the exchange of information. It will continue participating in the work done within the EU and the OECD, but any extension of the scope of the automatic exchange of information must be made in accordance with the terms and the time line required to ensure the stability and the competitiveness of the financial sector.

Taxation of companies

The objective is to develop Luxembourg as a center of excellence for headquarters of multinationals. To that end, the so-called participation exemption regime will be modernized, the tax rules applicable to income from intellectual property will be amended, and the use of functional currencies for tax purposes will be formalized. Another action point is the introduction of a tax and legal framework for treasury activities (cash-pooling).

The goal to achieve sustainable economic development and growth also implies sustaining the business of small and medium-sized enterprises. Measures such as the introduction of a mechanism allowing deferral of taxation of profits through the creation of a special reserve for investment are therefore envisaged.

In order to strengthen the capitalization of companies with shareholders equity, the Government will introduce the concept of notional interest, allowing companies, under certain conditions and within specific limits, to deduct a deemed interest expense calculated on the amount of their capital.

Mutual funds (UCITS)

The new Government will strengthen the position of Luxembourg as leading location for investment funds by further improvements of the legal and regulatory framework. Subscription tax applicable to UCITS (Undertakings for Collective Investment in Transferable Securities) and SIF (Specialized Investment Fund) will not be increased.

Alternative Investment Funds (AIF)

The new Government’s objective is to make Luxembourg the leading hub for AIF in Europe. A program will be launched to attract the largest Private Equity funds to Luxembourg. Subscription tax applicable to Private Equity, Real Estate or Hedge Funds set-up as SIFs will not be increased and the tax regime applicable to SICARs (investment company in risk capital) will be maintained. Additionally, the carried interest regime should become more efficient since it should be applied to all new funds launched in Luxembourg without any duration condition.

Regulating the profession of Tax Advisor

In order to enhance professionalism and reputation of the financial center and of the professionals acting in the field of tax advisory, the Government will introduce a regulation for the authorization and supervision for the profession of tax advisor.

For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP (United Kingdom), London
  • Gergely Szatmari
    +44 20 778 30582
    gszatmari@uk.ey.com
Ernst & Young LLP, Luxembourg Tax Desk, New York
  • Jurjan Wouda Kuipers
    +1 212 773 6464
    jurjan.woudakuipers@ey.com
  • Sabriye Ilkay
    +1 212 773 9376
    sabriye.ilkay@ey.com
Ernst & Young LLP, EMEIA Financial Services Luxembourg Tax Desk, New York
  • Guillaume Roux
    +1 212 773 3677
    guillaume.roux@ey.com
  • Raffaele Gargiulo
    +1 212 773 3505
    raffaele.gargiulo@ey.com
Ernst & Young LLP, Luxembourg Tax Desk, Chicago
  • Alexandre J. Pouchard
    +1 312 879 3007
    alexandre.pouchard@ey.com
  • Estelle Collardeau
    +1 312 879 2897
    estelle.collardeau@ey.com
Ernst & Young LLP, Luxembourg Tax Desk, San Jose
  • Xavier Picha
    +1 408 918 5880
    xavier.picha@ey.com
Ernst & Young Tax Services Limited, Luxembourg Tax Desk, Hong Kong
  • Domitille Franchon
    +852 2846 9957
    domitille.franchon@hk.ey.com

EYG no. CM4023