Luxembourg Tax Authority clarifies application of real estate levy including reporting requirement for all Luxembourg corporate investment vehicles

Executive Summary

On 4 May 2022, the Luxembourg Tax Authority issued revised guidance (the revised Guidance) addressing the European Union (EU) Directive on the mandatory disclosure rules (MDR) and exchange of cross-border tax arrangements (referred to as DAC6 or the Directive). Under DAC6, taxpayers and intermediaries are required to report cross-border reportable arrangements from 1 July 2020.

Guidance was first issued in May 2020 and was subsequently updated. The newly released revised Guidance is now presented in the form of Frequently Asked Questions (FAQs) and covers certain aspects that were not addressed previously.

For additional details on the previously issued guidance, see previous EY Global Tax Alerts1.

Among other things, the revised Guidance provides clarifications on certain concepts, including “person” and how to determine if an arrangement is to be considered cross-border.

It also provides useful clarifications on how to assess if the main benefit test is met, including a non-exhaustive list of forms that a tax benefit can take. The revised Guidance reconfirms that the main benefit test is not met where the main tax benefit obtained through the arrangement is consistent with the object or purpose of the applicable legislation and consistent with the intent of the legislator.

Additionally, the revised Guidance provides for explanations on the application of some of the hallmarks. In that respect, it analyzes the concepts of standardized documentation (hallmark A3) and marketable arrangements and provides clarifications on the concepts of “income,” “conversion” and “taxed at a lower level” for purposes of applying hallmark B2. The revised Guidance also analyzes hallmark C1 a) with respect to the determination of tax residency and the specific situation of payments made to a tax transparent entity. It further specifies that jurisdictions considered non-cooperative in the context of hallmark C1 b ii) are those that are included in the EU list of non-cooperative jurisdictions for tax purposes as published in the Official Journal of the EU or that are on a list established by the Organisation for Economic Co-operation and Development (OECD). With respect to the concept of “equivalent agreements on the automatic exchange” in the context of hallmark D1, the revised Guidance refers to the list of partner jurisdictions within the meaning of the Common Reporting Standard (CRS) established by the OECD. The revised Guidance also provides for some clarifications on hallmark E2, and more specifically on the concept of “hard-to-value” intangibles,” and on hallmark E3, notably that the transfer of the registered office of a Luxembourg company to another Member State, while maintaining a permanent establishment in Luxembourg with the same functions and/or risks and/or assets, or the tax neutral cross-border merger between intra-EU companies where all assets and liabilities remain attached to a permanent establishment of the acquiring company in the tax jurisdiction of the acquired company, should in principle not fall within the scope of hallmark E3. It also clarifies that “EBIT” (earnings before interest and taxes) is to be understood as referring to the result of the financial year (i.e., the difference between the income and the expenses as shown in the profit and loss account of the year) as defined by the standard chart of accounts increased by interest and tax expenses.

The revised Guidance further analyzes the reporting obligations in specific fact patterns, such as reportable arrangements designed by the in-house tax team of an entity belonging to a multinational group for the benefit of another entity belonging to the same group, and the question of whether a permanent establishment can be considered as an intermediary. It also provides guidance on the reporting obligations in the case of multiple intermediaries, on the reporting obligations of relevant taxpayers and on the reliance on proof of reporting.

Finally, the revised Guidance clarifies certain aspects of the reporting process and the declaration to be made by Luxembourg taxpayers of the use of an arrangement in their tax return.

Clarifications around certain definitions and concepts

The revised Guidance provides for clarifications around certain definitions and concepts, and amends or completes some definitions and concepts that were already dealt with in a previous version of the Guidance.

The concept of “person”

The revised Guidance details that the concept of “person” covers individuals, legal entities, in some circumstances associations that have no legal personality, as well as any other legal structure of whatever nature or form, with or without legal personality, owning or managing assets which, including the income derived therefrom, are subject to one of the taxes to which DAC6 applies.

A transparent entity is thus also covered by this definition and may consequently be a relevant taxpayer; “relevant taxpayer” is defined as any person to whom a reportable cross-border arrangement is made available for implementation, or who is ready to implement a reportable cross-border arrangement or has implemented the first step of such an arrangement. A permanent establishment is not a separate person.

The concept of “cross-border arrangement”

According to the revised Guidance, an arrangement is cross-border if at least one of the following conditions is met:

• All the participants in the arrangement are not tax resident in the same Member State.
• One or more participants in the arrangement are tax resident simultaneously in several jurisdictions.
• One or more participants in the arrangement carry out an activity in another jurisdiction through a permanent establishment located in that jurisdiction, the arrangement constituting part of or all the business of that permanent establishment.
• One or more participants in the arrangement carry out an activity in another jurisdiction without being tax resident nor creating a permanent establishment in that jurisdiction.
• Such an arrangement may have consequences on the automatic exchange of information or on the identification of the beneficial owners.
   

The revised Guidance further clarifies that (unless the arrangement has a possible impact on the automatic exchange of information or the identification of beneficial ownership) there is no cross-border arrangement if:

• All the participants in the arrangement are tax resident in the same Member State (which is not Luxembourg), and the intermediary is not a participant to the arrangement and the only person having nexus with Luxembourg.
• A participant carries out an activity through a permanent establishment in another jurisdiction, the arrangement falls within the activity of that permanent establishment alone and all the other participants in the arrangement are also located in that jurisdiction.

Main benefit test

By reference to the European Commission's recommendations of 6 December 2012 on aggressive tax planning (2012/772/EU), the revised Guidance states that to determine whether an arrangement leads to a tax benefit the amount of tax owed by a relevant taxpayer taking into account the implemented arrangement is to be compared with the amount of tax owed by the same taxpayer in the absence of the arrangement.

The tax benefit can take one or more of the following forms, without this list being exhaustive:

• An amount is not included in the taxable base
• The relevant taxpayer benefits from a tax deduction
• A loss has been realized for tax purposes
• No withholding tax is due
• A foreign tax is credited

The list is not exhaustive, and a tax benefit can take any form. Also, as indicated earlier, tax benefits are not limited to benefits obtained in EU Member States.

The revised Guidance repeats statements made in the parliamentary discussions that the main benefit test is not met where the main tax benefit obtained through the arrangement is consistent with the object or purpose of the applicable legislation and consistent with the intent of the legislator. For purposes of testing this, all the constituent elements of the arrangement must be considered. An arrangement that, taken as a whole, does not comply with this intention, for example by taking advantage of the subtleties of a tax system or of the inconsistencies between two or more tax systems in order to reduce the tax payable, nevertheless satisfies the main benefit test.

The assessment of whether a tax benefit is the main benefit must be made in light of the circumstances and the overall effects of the arrangement. The lack of objectives other than obtaining a tax advantage or circumventing a tax liability clearly demonstrate that the tax benefit is the main benefit. Where commercial reasons are invoked, the tax benefit is also the main benefit if the commercial reasons do not present a sufficient economic benefit beyond the mere tax benefit obtained.

Hallmarks

The revised Guidance provides for some useful clarification on some of the hallmarks.

Hallmark A3 – Standardized documentation and marketable arrangements

Hallmark A3 refers to arrangements that have substantially standardized documentation and/or structure and are available to more than one relevant taxpayer without a need to be substantially customized for implementation.

The revised Guidance indicates that a marketable arrangement will always be considered as standardized in the sense of hallmark A3, but an arrangement meeting hallmark A3 is not automatically a marketable arrangement.

The revised Guidance explains the concept of “standardized” as “precast” tax products that can be used as is, or with minor modifications (e.g., adaptations of interest rate, currency, maturity, amount, contract start date), and without the client needing to receive significant additional professional advice or services to implement such scheme.

According to the revised Guidance, the concept of “standardized documentation” refers to an agreement or similar document that is modeled in such a way that it does not need any substantial adaptation for specific cases. Substantial changes are adjustments in form or presentation so that the content of the documentation no longer appears to be equivalent or standardized as a whole.

A standardized structure is assumed to exist if the arrangement has been designed in such a way, either substantively or conceptually, that it can be used in a similar way in a variety of different situations. If significant modifications are required on a case-by-case basis, then the structure is no longer to be considered standardized.

A standardized documentation or structure that has been designed by an intermediary on the basis of an arrangement developed for a specific individual case, but in such a way that it can be used for a large number of cases, is covered by hallmark A3.

Hallmark B2 – Conversion of income

Hallmark B2 targets arrangements that have the effect of converting income into capital, gifts or other categories of revenue which are taxed at a lower level or exempt from tax.

With respect to this hallmark, the revised Guidance provides for the following clarifications:

• “Income” is to be understood in a broad sense, so as to include, but without being limited to, salaries, dividends, royalties, interest, capital gains and inheritance.
• “Conversion” can take place from any point of view – the payer’s, the payee’s or both points of view.
• “Taxed at a lower level” must be assessed from the beneficiary’s perspective, as this hallmark refers to the income part of the conversion. If applicable, the taxation of the same entity in several jurisdictions must be taken into account.
   

Hallmark C – Specific hallmarks related to cross-border transactions

The revised Guidance first analyzes hallmark C1 a), which covers arrangements that involve deductible cross-border payments made between two or more associated enterprises where the recipient is not resident for tax purposes in any tax jurisdiction.

According to the revised Guidance, tax residency is to be determined by applying the relevant double taxation treaty, or, absent such treaty, in accordance with the criteria of article 4 of the OECD Model Tax Convention. Where, under these criteria, a company is not tax resident in any jurisdiction, the hallmark is triggered, irrespective of whether this lack of tax residency is the result of a conceptual mismatch or difference between the tax systems of the jurisdictions concerned.

The revised Guidance also addresses the specific situation of payments made to a tax transparent entity. To determine if the relevant taxpayer is the tax transparent entity or its partner or beneficial owner, it must first be tested whether the entity is considered to be resident for tax purposes in the relevant jurisdiction based on an existing double taxation treaty or, absent such treaty, under the criteria of article 4 of the OECD Model Tax Convention.

According to Luxembourg tax law, partnerships are generally considered to be tax transparent and can therefore not be considered as recipients of payments for the application of hallmark C1 a). This means that a look-through approach is adopted, meaning that the partnership is disregarded and the partners or holders of the interest in the partnership are deemed to be the recipients.

This look-through approach also applies to partnerships located in a foreign jurisdiction. Where such partnership is however treated as tax opaque in the country of its formation or of location of its effective management by virtue of an anti-abuse measure, this entity should be considered as the recipient of the payments for the application of hallmark C1 a).

Hallmark C1 b) ii) targets arrangements that involve deductible cross-border payments made between two or more associated enterprises where, although the recipient is resident for tax purposes in a jurisdiction, that jurisdiction is included in a list of third-country jurisdictions which have been assessed by Member States collectively or within the framework of the OECD as being non-cooperative. The revised Guidance specifies that jurisdictions considered non-cooperative are those that are included on the EU list of non-cooperative jurisdictions for tax purposes (Appendix I, currently composed of American Samoa, Fiji, Guam, Palau, Panama, Samoa, Trinidad and Tobago, US Virgin Islands and Vanuatu) as published in the Official Journal of the EU or that are on a list established by the OECD (no jurisdiction is currently listed as an uncooperative tax haven). The inclusion on one of or both lists is assessed on the date of the triggering event of the reporting obligation.

Hallmark D1 – Automatic exchange of information

Hallmark D1 focuses on arrangements which may have the effect of undermining the reporting obligation under the laws implementing EU legislation or any equivalent agreements on the automatic exchange of Financial Account information, including agreements with third countries, or which take advantage of the absence of such legislation or agreements. 

With respect to the concept of “equivalent agreements on the automatic exchange,” the revised Guidance refers to the list of partner jurisdictions within the meaning of the CRS established by the OECD. It further specifies that the intent or lack of intent of the taxpayer should not be taken into account to determine if an arrangement is likely to have the effect of undermining the reporting obligations under hallmark D1.

Hallmark E2 – Hard-to- value intangibles

Hallmark E2 covers arrangements involving the transfer of hard-to-value intangibles. By reference to the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2017, the revised Guidance states that the concept of “hard-to-value intangibles” covers intangibles or rights in intangibles for which, at the time of their transfer between associated enterprises: (i) no reliable comparables exist; and (ii) at the time the transactions were entered into, the projection of future cash flows or income expected to be derived from the transferred intangible, or the assumptions used in valuing the intangibles are highly uncertain, making it difficult to predict the level of ultimate success of the intangible at the time of the transfer.

Hallmarks E3 – Cross-border transfers

Hallmark E3 refers to arrangements involving an intragroup cross-border transfer of functions and/or risks and/or assets, if the projected annual EBIT, during the three-year period after the transfer, of the transferor or transferors, are less than 50% of the projected annual EBIT of such transferor or transferors if the transfer had not been made.

The revised Guidance clarifies that “EBIT” is to be understood as referring to the result of the financial year (i.e., the difference between the income and the expenses as shown in the profit and loss account of the year) as defined by the standard chart of accounts increased by interest and tax expenses.

It further explains that a cross-border merger or liquidation that involves a cross-border transfer of functions and/or risks and/or assets within the same group and which results, within three years of the transaction, in a reduction of at least 50% of the annual EBIT realized by the transferor(s) compared to that which they would have realized if the transaction had not taken place, falls within the scope of hallmark E3.

The assessment of the decrease in EBIT is made taking into account the information available at the time of the transfer, and the decrease must be inherent to the functions and/or risks and/or assets transferred.

As per the revised Guidance, the transfer of the registered office of a Luxembourg company to another EU Member State, while maintaining a permanent establishment in Luxembourg with the same functions and/or risks and/or assets, or the tax neutral cross-border merger between intra-EU companies where all assets and liabilities remain attached to a permanent establishment of the acquiring company in the tax jurisdiction of the acquired company, should in principle not fall within the scope of hallmark E3.

Reporting obligations

In-house teams as intermediaries

According to the revised Guidance, in the case of arrangements that are designed, marketed, organized, implemented or made available for implementation internally, there are no intermediaries, so that the reporting obligation is transferred to the relevant taxpayer. However, in the particular situation where the in-house tax team of an entity belonging to a multinational group designs a reportable arrangement for the benefit of another entity belonging to the same group, and where the entity employing the tax team is not itself involved in the arrangement, it will be considered as an intermediary since it designs a reportable arrangement for another group entity.

Permanent establishments as intermediaries

The revised Guidance also analyzes the question if a permanent establishment can be considered as an intermediary. While a permanent establishment is not considered to be a person within the meaning of DAC6, its activity may nevertheless be relevant for the head office to be qualified as intermediary.

The revised Guidance gives four examples of possible situations:

• Luxembourg-resident head office with a permanent establishment in another EU Member State: the head office will be considered as an intermediary in both Member States concerned, but it will only have to report the arrangement in the Member State in which it is resident, i.e., Luxembourg.
• Luxembourg-resident head office with a permanent establishment outside the EU: the head office has EU nexus (tax residency) and the obligation to report the arrangement in Luxembourg.
• Third country resident head office with a permanent establishment in Luxembourg: the head office has EU nexus through the permanent establishment and must report in the Member State of the permanent establishment, i.e., in Luxembourg.
• EU-resident head office with a permanent establishment in Luxembourg: the head office will be considered as an intermediary in both Member States concerned, but it will only have to report the arrangement in the Member State of its residency.

Reporting obligations in the case of multiple intermediaries

In the case of multiple intermediaries involved in the same reportable cross-border arrangement, the obligation to transmit the required information is incumbent on all of them, unless an intermediary can prove, upon request of the Luxembourg tax authorities, that the same information have been transmitted by another intermediary in Luxembourg or in another EU Member State.

Reporting obligations of relevant taxpayers

The revised Guidance indicates that where an intermediary is exempt from reporting due to legal professional privilege, the reporting obligation falls: (i) on all the other intermediaries in case of multiple intermediaries; (ii) on the relevant taxpayer in the absence of any other intermediary; or (iii) on the relevant taxpayer where all intermediaries invoke legal professional privilege.

The reporting obligation also lies with the relevant taxpayer in situations where no intermediary is involved in designing, marketing or organizing, making available for implementation or managing the implementation of a reportable cross-border arrangement.

Finally, the revised Guidance states that the reporting obligation will equally fall on the relevant taxpayer where none of the intermediaries involved in the arrangement has a nexus with an EU Member State.

Where there is more than one relevant taxpayer, the relevant taxpayer that has to file information with the Luxembourg tax authorities is the one that features first in the list below:

• The relevant taxpayer that agreed on the reportable cross-border arrangement with the intermediary.
• The relevant taxpayer that manages the implementation of the arrangement.
   

The relevant taxpayer is exempt from the obligation to report only if it can prove that the information has already been transmitted by another relevant taxpayer in Luxembourg or in another EU Member State.

Reliance on proof of reporting

Intermediaries and relevant taxpayers do not have to report if they can prove that the relevant information has already been reported by another intermediary or relevant taxpayer in Luxembourg or in another EU Member State. Proof of such reporting must be made available to the Luxembourg tax authorities on demand who will assess it on a case-by-case basis, based on the facts and circumstances.

It is furthermore worth mentioning that contrary to the previous guidance, the revised Guidance now considers the Arrangement ID as sufficient proof in principle.

Obligations to inform other intermediaries

Under the revised Guidance, the initial reporting intermediary must communicate, concomitantly with the submission of its report, the Arrangement ID to any other Luxembourg intermediary as well as to any other person he is aware of that is likely to be subject to equivalent obligations in another Member State.

Reporting process

The revised Guidance clarifies that, in addition to information on the value of the arrangement, the legal provisions of the jurisdictions concerned, and the EU Member States concerned or likely to be concerned, the report must contain information on any other person, other than the relevant taxpayer, the associated enterprises and the intermediary, that may be affected by the reportable cross-border arrangement. The fact that a person derives a tax benefit from an arrangement should not influence whether the person is “likely to be affected” by the arrangement.

It is possible to correct a report by importing a new XML file or by manual entry on MyGuichet. Care should be taken to clearly indicate that it is a “correction” type report, to fill in all fields and to provide the Arrangement ID and the Disclosure ID assigned during the initial filing procedure.

Finally, the revised Guidance lists three cases for which the filing of an addition to the initial report is possible:

• An arrangement has already been reported by another intermediary or in another EU Member State: The addition of information to an arrangement that has already been reported applies in the event that there are several intermediaries reporting the same arrangement. The additions are therefore new reports, filed by different declarants and containing the information that the declarants each have separately in relation to the arrangement. It is therefore not a question of "adding" data to an existing report, but of adding a report to an existing arrangement.
• Marketable arrangements: A quarterly update must be filed by the person that has initially reported the marketable arrangement in the event that new information about the arrangement must be reported. In this case, the information concerning the person filing the report, the description of the arrangement, and the Arrangement ID and the Disclosure ID will have to be included, while the other information already communicated in the initial report should not be repeated. “Zero reports” are not expected. The revised Guidance also recommends ticking an arrangement as “marketable” only to the extent it is envisaged to file regular updates in relation with the arrangement and to group the relevant taxpayers in a single arrangement rather than reporting each transaction in relation with the arrangement.
• Arrangements for which some information was not known at the time of filing of the report: Certain information considered mandatory (e.g., value of the arrangement) may not be known by the reporting deadline for the arrangement. In order to enable intermediaries or, where applicable, relevant taxpayers to comply with their reporting obligation, it is still possible to file a report without filling in this mandatory information. Filing an addition is recommended once the mandatory data is known.
   

Declaration of the use of an arrangement in the tax returns

Luxembourg taxpayers are required to declare their use of an arrangement that was reported in Luxembourg or in another EU Member State in their annual income tax returns for the tax period during which the tax advantage of the cross-border arrangement has been realized. The declaration is made by indicating the Arrangement ID.

Implications

Determining if there is a reportable cross-border arrangement raises complex technical and procedural issues for taxpayers and intermediaries. Taxpayers and intermediaries who have operations in Luxembourg should thus carefully consider the revised Guidance and liaise with their tax professional to assess the implications for their business.