Finance Monthly Magazine, March 2014

Future Tax reform in Luxembourg

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Marc Schmitz is Partner in the International Tax Services department and Tax Policy Leader. He has over twenty-two years of experience in advising large industrial and commercial multinational clients on tax issues relating to international corporate structuring and financing, acquisitions, re-organizations and company migrations. John Hames, Partner in the Business Tax Services department, has over twenty-two years of experience in Luxembourg business taxation, with prime focus on corporate tax compliance & reporting for multinational groups.

What more can you tell us about the EY Tax practice?

EY runs one of the world’s most globally coordinated Tax practices, with anetwork of 28,000 professionals in more than 120 countries dedicated to setting their standard for exceptional client service. Our EY Tax practice is organized across geographic areas and business lines to deliver services seamlessly to our clients. Our people and global resources are able to helpclients develop and execute business strategies quickly and effectively, with strong accountability and governance.

What characterises taxation in Luxembourg at present?

Luxembourg is characterized by a stable and competitive tax system. Although the nominal tax rate may appear high compared to other countries, expenses are generally deductible if directly linked to the business, lowering thus considerably the effective tax burden.

Dividends and capital gains may benefit from a tax exemption under the so-called participation exemption regime, and research and development is strongly encouraged through tax incentives (80% tax exemption of income from intellectual property, accelerated depreciation on qualifying assets). Luxembourg has furthermore a strong and continuously expanding network of double taxation treaties.

What taxation reforms has Prime Minister Xavier Bettel put forward and to what end?

Announced action points are the extension of the current corporate governance and substance rules, the elaboration of a comprehensive transfer pricing legislation in line with international standards and the development of a uniform procedure for advance tax clearances. The participation exemption and the tax rules applicable to intellectual property will be amended and a tax and legal framework for treasury activities (“cashpooling”) will be introduced. The legal and regulatory framework of investment funds will further be improved and a program will be launched to attract the largest Private Equity funds to Luxembourg. Small- and medium-sized enterprises will also be encouraged via specific mechanisms to achieve sustainable economic development and growth. The government has however also announced a reinforcement of tax collection through a more systematic application of the penalties and fines already foreseen in the current legislation. Finally, VAT standard rate shall be increased (from 15% to presumably 17%) in order to compensate the VAT loss deriving from e-commerce.

If enacted, what key impacts would these have on companies and investors operating in Luxembourg?

It is expected that these measures, fully in line with the OECD and EU principles of taxation, will strengthen the position of Luxembourg in an international context. They should enable Luxembourg to continue to develop itself as prime location and center of excellence for headquarters of multinationals, attracting new businesses and corporate headquarters with adequate material and operational presence of companies and highly skilled workers.

How can companies and investors best prepare themselves for tax reform?

The announced measures express a positive trend and the willingness of the new government to increase the attractiveness of Luxembourg in an international context. As such, companies and investors can face the tax reform with confidence, since the provisions to be introduced or to further develop areas such as e.g. corporate governance, substance and transfer pricing are for most of them a process of legislating principles they have already effectively applied in the past. Companies and investors should however be prepared to a stricter monitoring of filing and payments deadlines, and consequently take appropriate measures to be able to meet them.

Is there anything else you would like to add?

The new government has reconfirmed Luxembourg’s commitment towards the internationally agreed tax transparency standards and the introduction of automatic exchange of information on interest payments within the EU for the fiscal year 2015. The government will also continue participating in the work on the OECD Base Erosion and Profit Shifting project (BEPS) as well as European projects such as the Code of Conduct, which may involve changes in the fiscal legislation. 

Marc Schmitz, Tax Practice Leader and John Hames, Business Tax Leader, EY Luxembourg.


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