1 July 2013
Luxembourg moving towards enhanced cooperation in taxation and exchange of information
Following Luxembourg’s adoption of a Law in March 2013 on administrative cooperation between EU Member States in the field of taxation, Luxembourg also announces automatic exchange of information on interest payments as of 2015.
Luxembourg implements updated provisions on tax transparency
In March 2013, the Luxembourg Parliament voted a Law transposing the Directive 2011/16/EU on administrative cooperation in the field of taxation (“the Law”). The Law was published in the Luxembourg’s official gazette, the Mémorial, on 4 April 2013 and entered into force with effect from 1 January 2013.
The Law repeals the Law of 15 March 1979 on international administrative assistance for direct taxes, as amended.
The Law lays down the rules and procedures under which Luxembourg will cooperate with other EU Member States on the exchange of tax related information that is foreseeably relevant to the administration and enforcement of the domestic laws of the Member States. The Law complements Luxembourg’s legislation enabling the exchange of information provided for by double taxation treaties (DTTs). In the recent years, Luxembourg has signed new DTTs and amended existing DTTs with other countries which comply with the Organization of Economic Cooperation and Development (OECD) standards on the exchange of information between tax authorities.
The Law applies to all taxes except value added tax (VAT), customs duties, and excise duties covered by other EU legislation on administrative cooperation between EU countries. It does not apply to social security contributions.
The Law implements almost all provisions of the Directive, inter alia:
- Inclusion of information held by a bank or other type of financial institution in the scope of exchange of information on request regarding taxable periods as from 1 January 2011
- Introduction of deadlines for the exchange of information
- Introduction of other forms of administrative cooperation
The Law does not implement the Directive’s provisions on the automatic exchange of available information, which must become effective as of 1 January 2015 and will cover certain specific categories of income (professional income, director fees, pensions, life assurance and real estate income) to the extent such information is in the tax authorities’ possession. The EU Commission has recently issued a proposal to extend the scope of the automatic exchange of information (please see after).
1 January 2015 – automatic exchange of information on interest
Until recently, Luxembourg stood firmly behind the arrangement of the EU Savings Directive1 whereby automatic exchange of information and withholding tax on interest payments co-existed. In 2009, after the financial crisis erupted in 2008, exchange of information upon request according to OECD2 standards was internationally adopted. Luxembourg has been in this context more specifically considered to be “a jurisdiction that has substantially implemented the internationally agreed tax standard”. Automatic exchange of information was not, until recently, the general standard for effective fight against tax fraud and evasion. Although the Luxembourg Government still considers withholding tax to be the most effective approach to guarantee effective taxation and client privacy, it now acknowledges that dialogue with its partners has shown that international developments, such as FATCA3, point to a broader use of automatic exchange of information in tax matters.
Consequently, in his annual State of the Nation speech in April 2013, Prime Minister
Jean-Claude Juncker announced that Luxembourg will apply the “automatic exchange of information” on interest payments on debt claims made by Luxembourg financial operators to individuals resident in another EU Member State with effect from 1 January 2015. The automatic exchange of information on interest payments will be limited to the exchange of information among competent tax authorities of EU Member States pursuant to the EU Savings Directive.
As of 1 January 2015, the option to deduct withholding tax from interest payments to EU-resident individuals will no longer be applied in the Grand Duchy. The fiscal regime for Luxembourg resident individuals will remain unchanged. Economic operators established in Luxembourg paying interest to individuals resident in other EU Member States, i.e., mostly banks, will transmit the information foreseen in the EU Savings Directive to the Luxembourg direct tax authorities, the Administration des Contributions Directes.
The Luxembourg tax authorities will then confidentially transmit the information to the corresponding tax authority in the EU Member State in which the beneficial owner is a resident. This automatic exchange of information is limited to an exchange of information among competent government tax authorities, and limited to information regarding savings income in the form of interest payments on debt claims. Professional secrecy will continue to be applicable.
Information exchange with third countries, such as the United States, will be on a bilateral basis4.
1 January 2015 – Move towards “European FATCA”?
Under the current European framework for the automatic exchange of information, should an EU Member State (e.g., Luxembourg) provide a wider cooperation to a third country (e.g., the United States) than the cooperation defined in the Directive on administrative cooperation in the field of taxation, then that Member State must provide such wider cooperation to any other Member State that may request to enter into such mutual cooperation.
Therefore, each time the US conclude bilateral agreements with EU Member States under FATCA, the latter would thus be required to provide such wider information to other Member States. In order to avoid distortions between Member States, the European Council requested the EU Commission to elaborate a proposal of Directive creating a European regulation for the automatic exchange of information, i.e., “European FATCA”.
On 12 June 2013, the EU Commission issued thus a proposal of directive (the Proposal of directive)5 amending the Directive in order to fight more efficiently against tax evasion. The automatic exchange of information between the EU member states would indeed be extended to:
- Capital gains
- All other financial income
- Account balances
The scope of automatic exchange of information within EU Member States under the Proposal of directive will be the same as under US FATCA and will follow the same schedule, i.e., effective as from 1 January 2015. As a result, the availability of information to report should not come as an issue for financial institutions because of this Proposal of directive.
Further to the implementation of the proposed directive together with the EUSD and the Directive, almost any kind of income received by an EU resident would be subject to automatic exchange of information.
Taxable income as from financial year 2014 would thus be concerned by such automatic exchange of information if the proposed directive is adopted by the EU Parliament and the EU Council.
The common declaration of the G8 summit on 18 June 2013 stated that “Tax authorities across the world should automatically share information to fight the scourge of tax evasion”. The “European FATCA” should therefore be considered as part of a worldwide move towards automatic exchange of information between tax authorities.
Next step in this international campaign for exchange of information is the G20 summit which will be held in Moscow in July 2013 with the issuance of recommendations and a comprehensive action plan towards the cooperation between tax authorities and a new single worldwide and multilateral standard of automatic exchange of information.
Impact on the Luxembourg financial center
- As a result of these changes, Luxembourg will effectively apply the following mechanisms as of fiscal year 2015:
- Automatic exchange of information as defined in the EU Savings Directive applicable to interest paid to individuals resident in an EU Member State other than Luxembourg6
- Exchange of information upon request with other EU Member States, as effective since
- 1 January 2013 pursuant to the Law on administrative cooperation in the field of taxation
- Exchange of information upon request as agreed in double-tax treaties with third countries
- Automatic exchange of information with other EU Member States on specific categories of income, only to the extent such information is available to the Luxembourg tax authorities, and subject to conditions and procedures still to be defined and enacted
- Automatic exchange of information with other EU Member States on any kind of financial income and account balances (subject to the adoption of the Proposal of directive)
- Automatic exchange of information on US accounts with respect to the implementation of FATCA (Inter-Governmental Agreement (IGA) still under negotiation)
- Other bilateral arrangements with third countries, withholding tax on interest for Luxembourg residents as currently applicable
The Luxembourg Finance Minister, Mr. Luc Frieden, in a statement published in April 2013, further clarified Luxembourg’s position on the proposed scope extension of the EU Savings Directives, as well as Luxembourg’s willingness to contribute to the ongoing discussion on the taxation of multinational companies:
“It is important to distinguish between two very important but quite different ongoing discussions. On the one hand, the fight against tax evasion is on top of the agenda. Luxembourg has decided to introduce automatic exchange of information based on the current Savings Directive which today applies to interests paid to individuals. Discussions about extending the scope of this directive are still ongoing and aim at including additional instruments such as trusts. Luxembourg accepts the extension of the scope and continues to insist on a global level playing field as it was suggested by the G20 just last week during the Spring meetings. On the other hand, there is another topical issue that Luxembourg is actively participating in and which relates to the taxation of multinationals and often referred to as BEPS (base erosion and profit shifting). Whereas current tax structures are fully in line with international standards the move from double taxation to non double taxation is of course of serious concern. Insisting on the importance to preserve the advantages of cross-border activities and investments, Luxembourg will contribute to discussions on BEPS.”
Far from depending on banking secrecy as has existed to date, the success of Luxembourg in attracting financial services, and becoming a major financial center, may be attributed to a number of factors such as:
- Reputation of the diversity of Luxembourg’s financial products and the attractive range of investment solutions
- Regulatory environment including accessibility, knowledge and responsiveness of the regulator
- Political, economic and social environment
- Legal environment and taxation regime
- Operational factors such as relocation costs, local infrastructure, and the qualifications and knowledge of a multicultural, multilingual international workforce
- Service provider considerations such as expertise and ability to meet specific local market distribution requirements from Luxembourg
- Central location at the heart of Europe with easy access to other financial centers and
- European markets
According to the Ministry of Finance “professional secrecy, confidentiality and data protection will remain important pillars for wealth management in Luxembourg” and “the introduction of automatic information exchange in its bilateral relations with all EU Member States will further enhance Luxembourg’s position as a stable, modern and transparent financial center.”
The introduction of automatic exchange of information in addition to information exchange regime upon request and spontaneous exchange in tax matters is the result of Luxembourg’s dialogue with its partners and of the analysis of what the future holds for international financial markets. These information exchange regimes demonstrate Luxembourg’s continued commitment to increased transparency which should improve the perception of tax practices and procedures adopted and implemented locally. The changes are further milestones in the process of development of the Luxembourg financial center as a modern and transparent center whose genuine international character and data protection regime as well as its product diversity will be key assets for customer satisfaction provided to Luxembourg’s present and future clientele worldwide.
These changes take place in a broader context of efforts taken against tax fraud, tax evasion, harmful tax measures and aggressive tax planning as reaffirmed by the conclusions adopted by the EU Council on 14 May 2013 and the common declaration of the G8 on 18 June 2013 stating insofar taxation is concerned that “1) tax authorities across the world should automatically share information to fight the scourge of tax evasion, 2) countries should change rules that let companies shift their profits across borders to avoid taxes, and multinationals should report to tax authorities what tax they pay where, 3) companies should know who really owns them and tax collectors and law enforcers should be able to obtain this information easily, 4) developing countries should have the information and capacity to collect the taxes owed them – and other countries have a duty to help them”.
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1 Council Directive 2003/48/EC of 3 June 2003 on taxation of savings income in the form of interest payments.
2 Organization for Economic Cooperation and Development.
3 FATCA - Foreign Account Tax Compliance Act. US tax rules designed for the US to collect information on US taxpayers, their income and their assets, from non-
US financial institutions, directly or through other tax authorities.
4 Luxembourg is in the process of negotiating a Model I Inter-Governmental Agreement (IGA) on the implementation of FATCA which will provide automatic
exchange of information on bank accounts and certain other investments of US investors.
5 Proposal 2013/0188 for a Council directive amending Directive 2011/16/EU as regards mandatory exchange of information in the field of taxation.
6 Further to the agreement reached on 14 May 2013 on the mandate to improve the EU’s agreements with Switzerland, Liechtenstein, Monaco, Andorra and San
Marino, and the consensus on the scope of the revised Directive, the European Council of 22 May 2013 called for the adoption of the revised Directive before the
end of 2013.