Outward migration: deferral of exit taxes enacted
The law dated 26 May 2014 puts an end to the incompatibility of the Luxembourg exit tax rules 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, N and National Grid cases. It introduces the possibility to opt for a payment deferral of the tax normally due upon outward migration of (i) the statutory seat and place of effective management of a resident company and of (ii) a Luxembourg undertaking or permanent establishment to another Member state of the European Economic Area (EEA). At the same time, the law eliminates a further inconsistency with EU legislation by modifying the existing roll-over of capital gains regime provided for by article 54 of the Income Tax Law. As from now on, the regime is also granted if the replacement asset is allocated to a permanent establishment situated in an EEA Member state in order to ensure an equal taxation as if the asset would have been allocated to a Luxembourg permanent establishment.
Optional and unconditional tax deferral upon outward migration
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 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 permanent establishment. Latent gains built up in assets allocated to the Luxembourg PE will, in principle, be taxed upon the transfer abroad of such permanent establishment. Likewise, if a nonresident individual transfers its Luxembourg undertaking or permanent establishment abroad, Luxembourg income tax law qualifies this transfer as a deemed alienation of the undertaking or permanent establishment for valuable consideration. The transfer price is deemed to be equal to the fair market value of the undertaking or permanent establishment.
Until now, payment deferral (sursis de paiement) of the exit tax was at the discretion of the Luxembourg tax authorities and was granted only if the collection of the tax resulted in a considerable hardship for the taxpayer and the claim was not endangered by the payment deferral. Generally, the granting of a deferral was conditional on the providing of a guarantee.
The new law introduces 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 permanent establishment 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 law provides for 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. 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.
The payment deferral rules for the exit tax are also applicable to resident individual taxpayers who transfer their Luxembourg undertaking or Luxembourg permanent establishment 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
The law furthermore introduces an amendment to the roll-over of capital gains regime. 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.
Luxembourg tax law used to require the replacement asset to be allocated to a Luxembourg permanent establishment. To make this roll-over regime compliant with EU law, the new law states that that the replacement asset can also be allocated to a permanent establishment of the Luxembourg company located in another EEA Member state provided that the assets are clearly identified and that certain specific rules (accounting entries, amortization, etc.) are respected.
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