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 intention of the new government is oriented towards 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 and aims to attract new businesses and corporate headquarters to Luxembourg as well as allowing existing entrepreneurs to continue to develop their economic activities. Other than an increase of VAT which will however remain the lowest in the European Union, no further tax increases are currently foreseen 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 elaboration of a comprehensive transfer pricing legislation in line with international standards as well as the development of a uniform procedure with respect to advance 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.

Social fairness will govern the taxation of individuals through a review of the existing progression and tax rates as well as of the current personal allowances. The new government also announced that there will be no re-introduction of net wealth tax nor amendments to succession tax for individuals.

Further details announced are summarized below:

Reinforcing tax revenues

The fiscal policy of the government privileges 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 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. The respect of existing legislation as regards filing and payment deadlines would as well be reinforced through a more systematic application of the penalties and fines already foreseen in the current legislation. Following the international trend, the government has also committed itself to further enhance the fight against tax fraud.

VAT increase

As already largely anticipated, VAT rates shall 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.

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 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. It is also intended to further expand the existing Luxembourg tax treaty network.

The government refrains from participating to 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 European Union. The new government will continue the path taken by the former government as regards the exchange of information: it will continue participating to the work done within the European Union 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.

Taxation of companies

Luxembourg should develop itself as center of excellence for headquarters of multinationals: the modernization of the so-called participation exemption regime as well as of the tax rules applicable to income from intellectual property shall help reaching this objective, as well as the formalization of the use of the functional currencies for tax purposes. A further announced 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 to defer the taxation of profits through the building of a special reserve for investment are hence 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 ongoing improvements of the legal and regulatory framework. Subscription tax applicable to UCITS and SIF will not be increased.

Alternative Investment Funds (AIF)

The new government’s objective is to make Luxembourg the leading hub for Alternative Investment Funds 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 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.

Taxation of individuals

In order to achieve social fairness, the new government commits to review the existing progression and tax rates applicable to individuals as well as the various personal allowances. Furthermore, it is anticipated that spouses may elect in 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.

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 of authorization and supervision for the profession of tax advisor.

 

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