3 minute read 7 Dec 2020

Draft Budget Law 2021: Reduced subscription tax for sustainable investment funds

By Renaud Breyer

EY Luxembourg Partner, Sustainability Leader

ACCA. 19 years at EY. Consulting services for CFO. Passionate about sustainability.

3 minute read 7 Dec 2020

Background

Tax incentives may play an important role in accelerating the shift towards sustainable finance. The bill of law n°7433 tabled in Parliament in 2019 already foresaw a reduced subscription tax rate for sustainable undertakings for collective investment (“UCIs”). However, the bill of law was rejected by the Council of State and the Commission on Finance and Budget put further amendments on hold anticipating the legislative proposal from the government.

Primary change

Unlike the bill of law n°7433, the draft budget law 2021 clearly links the definitions of sustainable investments with the definition of sustainable economic activities in the EU Taxonomy Regulation [1], with the objective to minimize risks of greenwashing and reducing fiscal income. To this end, the draft budget law does not provide for a blanket exemption for all sustainable UCIs but reduced subscription tax rates for UCIs or individual compartments of such UCIs that invest a specific portion of their net asset value in determined sustainable economic activities, as defined in the EU Taxonomy Regulation.

Key points

  • Scope

    The proposal only impacts certain types of UCIs under the regime of the Law of 17 December 2010, as amended. Institutional share classes, specialized investment funds and reserved alternative investment funds already benefit from a subscription tax rate at 0.01% which is the floor rate foreseen in this new regime.

  •  The following scale is foreseen:

Percentage of the net asset value invested in qualifying sustainable economic activities

Subscription tax rate

At least 5%

0.04%

At least 20%

0.03%

At least 35%

0.02%

At least 50%

0.01%

  • Verification

    The portion of the net assets invested in qualifying economic activities at the year end date of the UCI must be audited by an independent auditor as part of the annual audit of the financial statements, or, alternatively, an independent auditor can issue a separate ad hoc assurance report in accordance with International Standard on Assurance Engagements.  The portion, as well as the percentage this portion represents of the total net assets of the UCI/sub-fund, should be included in either the annual report of the UCI, or the separate ad hoc report.

    An attestation certified by the independent auditor must furthermore be transmitted by the UCI to the tax administration in charge of collecting the subscription tax (Administration de l’enregistrement, des domaines et de la TVA). The portion of net asset value invested in sustainable economic activities will be used as the basis to determine the taxation rate applicable to these assets.

  • Timeline and transitory measure

    These provisions should apply from 1 January 2021. A transitory measure provides for a derogation to the obligation to file subscription tax returns electronically in respect of the declaration of the portion of total net assets qualifying to a reduced tax rate. UCIs will be authorized to use a form provided by the tax administration to rectify their quarterly electronic reporting until 1 January 2022.

Practical considerations

In a rapidly evolving environment where the first high-level sustainability-related disclosures will kick in as from 21 March 2021 while granular disclosures  will only apply from 1 January 2022, the reduced subscription tax rate and its early application represent further financial incentive for UCIs targeting a qualification as products that promote environmental characteristics (light green products) or with a sustainable investment objective (green products). 

While rewarding the first movers, these provisions come with significant challenges for the UCIs willing to benefit from these new rules as soon as possible since they need to source sufficient quality data and obtain reasonable assurance that their investments comply with the minimum criteria established in the taxonomy.

1. Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment, and amending Regulation (EU) 2019/2088

2. complying with upcoming technical standards under the Regulation 2019/2088 on sustainability-related financial disclosures, see EY alert

Summary

The draft budget law provides for reduced subscription tax rates for UCIs or individual compartments of such UCIs that invest a specific portion of their net asset value in determined sustainable economic activities, as defined in the EU Taxonomy Regulation.

About this article

By Renaud Breyer

EY Luxembourg Partner, Sustainability Leader

ACCA. 19 years at EY. Consulting services for CFO. Passionate about sustainability.