7 May 2013
Luxembourg draft law proposes unconditional deferral of exit taxes
On 15 March 2013, the Luxembourg government submitted a draft law to the parliament amending the exit tax rules for individuals and companies. The draft law provides for an unconditional payment deferral of the capital gains tax until the actual disposal of the transferred assets or the transfer of tax residence outside of the European Economic Area (EEA), i.e., the other 26 member states of the European Union as well as Iceland, Liechtenstein and Norway.
The draft law aims also to amend the current regime on the roll-over relief on capital gains realized upon the transfer on certain eligible assets.
The new rules will enable businesses and companies to exercise their right of freedom of establishment. For many international groups, flexibility to move their business or assets cross-border enables them to react to market changes and new opportunities.
Current Luxembourg exit tax rules
A company is subject to Luxembourg corporate income tax if it has either its statutory seat or its place of effective management (so-called central administration) in Luxembourg. The transfer abroad of the statutory seat and central administration of a resident company is treated as a deemed liquidation for Luxembourg corporate income tax purposes, unless the company keeps a permanent establishment (PE) in Luxembourg to which its assets can be allocated. The deemed liquidation entails the deemed realization of all assets and liabilities at fair market value. Therefore, Luxembourg levies an “exit tax” on unrealized capital gains which have been accumulated by companies during their tax residency in Luxembourg (latent gains).
This exit tax also applies to nonresident companies with a Luxembourg PE. Latent gains built up in assets allocated to the Luxembourg PE will, in principle, be taxed upon the transfer of the PE abroad. Likewise, if a nonresident individual transfers its Luxembourg undertaking or PE abroad, Luxembourg income tax law qualifies this transfer as a deemed alienation of the undertaking or PE for valuable consideration. The transfer price is deemed to be equal to the fair market value of the undertaking or PE.
Under current Luxembourg tax law, a payment deferral (sursis de paiement) of the exit tax is at the discretion of the Luxembourg tax authorities and is granted only if the collection of the tax results in a considerable hardship for the taxpayer and the claim is not endangered by the payment deferral. Generally, the granting of a deferral is conditional on the providing of a guarantee.
EU law requirements for exit tax rules
In the view of the European Commission, the current Luxembourg exit tax rules are not compatible with the requirements of EU law as interpreted by the Court of Justice of the European Union (CJEU) in the Hughes de Lasteyrie du Saillant case dated 17 April 2004 (C-9/02), the N case dated 7 September 2006 (C-470/04) and the National Grid case dated 29 November 2011 (C-371/10), since the emigrating taxpayer would be subject to immediate taxation in Luxembourg on the latent gains. Moreover, the granting of a payment deferral is at the discretion of the Luxembourg tax authorities and subject to a guarantee deposit, which is not in accordance with the CJEU case law, in the Commission’s view.
Therefore, the European Commission started the first stage of an infringement procedure by sending a letter of formal notice to Luxembourg on 27 September 2012.
Proposed amendments to Luxembourg exit tax rules
In response to the letter of formal notice, the draft law proposes significant amendments to the Luxembourg tax law for the transfer of (1) a statutory seat and place of effective management of a resident company and (2) of a Luxembourg undertaking or PE to another EEA member state.
In case a taxpayer has built up latent gains in certain assets during its tax residency in Luxembourg and thus faces an exit tax on unrealized capital gains, the draft law proposes a payment deferral of this exit tax as long as the taxpayer is the owner of these assets and is a tax resident in an EEA member state. As a consequence, the exit tax becomes due upon the actual disposal of the transferred assets or upon the transfer of tax residence outside of the EEA. Furthermore, in case of withdrawal of assets from the net assets of a Luxembourg enterprise or PE on which a capital gain was realized at the moment of the transfer and which benefitted from the payment deferral regime, the Luxembourg income taxes related to the capital gain on such an asset are no longer covered by the payment deferral and thus become payable at that moment.
The payment deferral of the exit tax will be granted upon request, without any late interest charges (accruing on the deferred tax amount) and without any guarantee deposit. Documentation demonstrating the continued ownership of the assets should be provided to the Luxembourg tax authorities annually. The taxpayer also has the choice to renounce the payment deferral of the exit tax.
To the extent that the host EEA member state is not taking into account any capital losses realized after the transfer of the Luxembourg undertaking or PE, the Luxembourg tax authorities need to issue a rectifying tax assessment for the year of the transfer, taking into account the capital losses realized by the taxpayer after the transfer to the host EEA member state.
The payment deferral rules for the exit tax are also applicable to resident individual taxpayers who transfer their Luxembourg undertaking or Luxembourg PE to another EEA member state. To avoid advantageous treatment of national transfers, transfer of assets from one Luxembourg undertaking to another Luxembourg undertaking of the same taxpayer can no longer be done at book value.
Roll-over of capital gains
A proposed amendment which is not directly linked to the exit tax rules concerns the roll-over of capital gains. Capital gains realized upon the disposal of buildings or non-depreciable assets (e.g., land, participation) can be rolled over to newly acquired or newly created fixed assets through the reinvestment of the sales price. As a consequence, the acquisition cost or production cost of this replacement asset will be reduced accordingly by the rolled-over capital gain (which results in reduced depreciation expenses) and the taxation of the capital gain will either be deferred until the disposal of the replacement asset for non-depreciable fixed assets or be taxed progressively through the reduced depreciation expenses further to the reduction of the acquisition or production cost.
Currently, Luxembourg tax law requires that the replacement asset must be allocated to a Luxembourg PE. To make this roll-over regime compliant with EU law, the draft law proposes that the replacement asset can also be allocated to a PE of the Luxembourg company in another EEA member state provided that the assets are clearly identified and that certain specific rules are respected. Special rules are foreseen by the draft law in case the replacement asset is allocated to a PE situated in an EEA member state in order to ensure an equal taxation for Luxembourg as if the asset would have been allocated to a Luxembourg PE.
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