Is Luxemburg ceasing to be so attractive for international tax structuring?

11 January 2016
Iryna Kalnytska
GOLAW Law Firm Senior Associate

How the  repeal of the IP Tax Regime and introduction of the EU anti-hybrid and anti-abuse provisions will affect the attractiveness of Luxembourg in the international arena, especially with regards to the similar existing tax schemes in other EU Members States?

This concern was raised because the well known Luxembourg IP tax regime that provides for the 80% exemption on income of certain intellectual property (“IP”) rights will be  abolished from 1 July 2016 for corporate income tax/municipal business tax, and as from 1 January 2017 for net wealth tax.

Such favorable regime was amended in order to comply with the "Modified nexus approach for IP regimes" agreed by all DECO and G20 Countries on 5 February 2015.

There is a transition period, however, till 30 June 2021 for tax payers already benefitting from the IP tax regime and, under certain conditions, for IP assets newly acquired after 1 January 2016.

One more nice ‘novelty’ in the Luxemburg IP tax regime is spontaneous exchange of information by the Luxembourg Tax authorities with competent authorities of foreign countries regarding  the identity of the taxpayers benefitting from the current IP regime.

Even though the amendments were introduced in order to comply with OECD recommendation set out in BEPS action 5 the new law does not contain any provisions that are in line with the “nexus” approach.  The nexus approach was designed to require a link between expenditure, IP assets and IP income, and taxpayers must track expenditure and income to IP assets in order to take advantage of the regime.

Thus, in the nearest future it will be more difficult for MNE’s to benefit from only 6% effective tax rate for income (royalties) derived from IPRs in Luxemburg.

Moreover, the new anti-hybrid instruments and general anti-abuse rule (“GAAR”) amending the Parent-Subsidiary Directive (Directive) were implemented into Luxemburg legislation by the Law of 18 December 2015.The changes mean that as of 1 January 2016 the following principles will take effect:

  (1) Impossibility to take advantage of the hybrid entities and hybrid arrangement. This happens when a hybrid arrangement is treated as debt in the source state and thus generating deductible interest and as equity in the recipient state that results in non taxation at the level of recipient. Under the new provision if profit received by the Luxemburg entity was deductible at the level of subsidiary (the source country) the profit will no longer be exempt in  Luxembourg.

(2) Introduction into national legislation GAAR provisions similar to those set forth in the Directive aimed at prevention of any abuse of the Directive. In other words, if the main purpose of the transition is obtaining a tax advantage that defeats the purposes of the Directive and there are no any valid commercial reasons for the transaction the one may not benefit from the favorable tax regime provided by the Directive.

At the same time it should be noted that as for now, distributions made by or to eligible companies located outside the EU are not subjects to those  new measures.

However, considering the global trends aimed at combustion with harmful tax planning  that are reflected in BEPS action plan it is likely that in the future similar measures will be introduced for companies located in OECD Member States and a new IP regime which will be based on the modified “nexus” approach will be implemented in Luxemburg. This means that the main criteria for obtaining benefit  will be a substantial activity requirement of the company that will have to show  a direct connection between the income, receiving benefits and the activity contributing to that income.