Connexion, Q1 2014
Tax Policy Under a New Government: Luxembourg as a Prime Location for International Business
In times where fiscal policy must equate with transparency, fight against tax evasion, base erosion and profit shifting, it is a major challenge that the new coalition government has to face when it comes to determining the tax environment applicable to Luxembourg for the next parliamentary term.
The content of the coalition program as regards fiscal policy demonstrates the intention of the government to face this challenge: stability is the key principle, and attracting new businesses and corporate headquarters to Luxembourg, as well as allowing existing entrepreneurs to continue to develop their economic activities, is the aim of the tax policy.
The new government must, however, also re-balance public finances which it intends to achieve first through a detailed screening of public expenses, but also via an enhanced collection of tax revenues. The latter does not necessarily consist of an increase of existing tax rates, except for VAT considered as unavoidable, but the rate will be kept the lowest in Europe. The focus will be set on the reinforcement of tax collection, for instance, with a more systematic application of the penalties and fines already foreseen in the current legislation in case of non-respect of the existing legislation on filing and payment deadlines. The aforementioned legislation, in particular the General Tax law, should be modernized as well. With the aim to accelerate the tax collection, a potential extension of the self-assessment process for direct and indirect taxes to both companies and individuals is being considered. In line with international fiscal policy, the government has also committed itself to further enhance the fight against tax fraud. In addition, the criminal law applicable to taxation will be reformed. An increase of tax revenues can also be achieved with the announced reform of the levies on land and real estate: the property tax will be revised through an increase of applicable rates or/and of the assessment basis.
Regarding the financial sector, the new government intends to strengthen the position of Luxembourg as a leading location for investment funds in general and for Alternative Investment Funds in particular. Subscription tax applicable to UCITS and specialized investment funds (SIF), to private equity, real estate or hedge funds set up as SIFs will remain unchanged, and the tax regime applicable to SICARs will be maintained. Additionally, in order to further attract highly qualified individuals, the carried interest regime should become more efficient since it should be applied to all new funds launched in Luxembourg without any duration condition. The new government will continue the path taken by the former government with respect to exchange of information: it will continue participating to 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 scale required to ensure the stability and the competitiveness of the financial sector. The government refrains from participating to the introduction of a European Financial Transaction Tax. However, it could envisage adopting a worldwide FTT which would avoid any relocation of activities outside of the EU.
The fiscal policy concerning individuals is governed by social fairness. The new government commits to review the existing progression and tax rates applicable to individuals, as well as the various personal allowances based on socio-economic criteria. Furthermore, it is anticipated that spouses may elect in the future for a separate taxation, which is not the case under current law (spouses being always taxed jointly). In the context of the development of Luxembourg as a private banking center, the government announced that it will not re-introduce a net worth tax for individuals and not modify the tax regime for successions.
The coalition program includes measures relating to the taxation of companies at both national and international levels. The goal to achieve sustainable economic development and growth implies sustaining the business of small- and medium-sized enterprises. Measures such as the introduction of a mechanism allowing to defer the taxation of profits through the building of a special reserve for investment are hence envisaged. The government will also encourage an ecologically responsible use of energy resources through tax incentives. Additionally, in order to strengthen the capitalization of companies with shareholders’ equity and thus to avoid excessive debt leveraging and potential bankruptcies resulting thereof, 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. Finally, treasury activities and cash-pooling should be further developed with the introduction of a specific legal and tax framework.
At an international level, the ambition of the new government is that Luxembourg develops itself as center of excellence for headquarters of multinationals. To achieve this, some of the most relevant taxation laws applicable to companies (for instance the so-called participation exemption and the tax rules applicable to intellectual property) will be amended. In that context, one could expect, for example, that the circle of beneficiaries qualifying for withholding tax exemption on dividend distributions would be enlarged by inclusion of pension funds and sovereign funds. From a recipient perspective, the holding periods (currently 12 months) and thresholds (currently 10% or an acquisition price of 1.2 million EUR as regards the exemption of dividends and 6 million EUR as regards the exemption of capital gains) could be reviewed. Regarding the partial exemption applicable to income derived from qualifying intellectual property, measures are intended to enhance the current regime while meeting evolving international standards.
Since the capital currency used by multinationals is often expressed in a foreign currency, for instance the USD, tax compliance can often be rather burdensome and costly for these companies in practice. In order to avoid the complexity that the conversion into EUR for compliance purposes may present, the use of the functional currency will be formalized, i.e., companies will be allowed to file their tax returns in the currency of their statutory accounts. To be fully in line with OECD and EU principles of taxation, existing governance and substance rules will be extended, thus reinforcing the material and operational presence of companies and highly skilled workers in Luxembourg. In addition, the government will work out a comprehensive transfer pricing legislation in line with international standards and develop a uniform frame for advance tax clearances in order to provide more transparency, coherency and legal security for taxpayers. It is also intended to further expand the existing Luxembourg tax treaty network.
Looking at the above, the new government’s plans have all the required ingredients to contribute to the economic growth of Luxembourg and to strengthen its position as a prime location for doing business. The next essential step is a prompt and effective execution of these plans to implement the various commitments at the earliest. As it was already the case in the past, AMCHAM will continue to engage with the new government to make proposals and suggestions and thus contribute to making the announced fiscal policy a success.
By Frank Muntendam, AMCHAM Tax Committee Chairman, EY Luxembourg, & Marc Schmitz, EY Luxembourg