In consideration of the comments provided by the Luxembourg State Council to the draft law implementing the Anti-Tax Avoidance Directive (ATAD), the Luxembourg Government adopted various amendments to the initial text, issued publicly on 6 December 2018. These amendments are largely of a linguistic nature and therefore, do not impact the substance of the provisions concerned. The proposed text remains in essence unchanged from the initial draft law.¹ The amendments also do not give further clarification on the interpretation or application of the various provisions of the draft law in practice.

The most important amendments are:

• Replacement of the wording of the grandfathering provision in relation with the interest limitation rule by the exact wording of the grandfathering provision of the ATAD.
• Amendment of the anti-hybrid mismatch provisions, where it has been clarified that only payments (as opposed to “business expenses” in the initial text) may give rise to a deduction without inclusion, to align with the wording of the ATAD.
• Clarification as regards the Controlled Foreign Company (CFC) rules in the sense that only interim dividends (i.e., distributions allocating profits of the same tax year and not distributions in a given tax year of profits from prior years) distributed by the CFC are considered as “distributed” and reduce the amount of CFC inclusion. However, the new wording refers to distributions made “to the taxpayer”, which in the case of CFCs held indirectly implies that distributions made by the CFC to a direct or indirect subsidiary of the taxpayer would not reduce the amount of CFC inclusion. Further amendments to this provision are possible.

Interestingly some of the comments or suggestions made by the State Council on 14 November were not reflected in the amendments. In particular, the amendments do not include the option given by article 4 (1) (a) of the ATAD to extend the interest limitation rules to companies that are within a fiscal unity, meaning that the interest limitation rule will have to be determined at the level of each individual entity. Furthermore, no amendments are made to the proposed new permanent establishment definition either.

No additional material modifications are anticipated, so that the amended version is expected to be essentially the version that will be submitted to the vote of the Parliament. Process-wise, the report of the Finance and Budget Commission of Parliament is still outstanding. While that Commission could suggest further changes, we would not expect this to lead to significant amendments of the draft law. However, the report to be issued by that Commission could provide for some further clarification regarding the interpretation and practical application of some of the provisions.

The Government seems set on passing the law before year-end, which would mean that the law would be applicable to financial years starting on or after 1 January 2019, as initially foreseen.

Consequently, taxpayers should review existing structures in light of the current version of the draft law.

Endnotes

1. See EY Global Tax Alert, Luxembourg’s draft law implementing EU Anti-Tax Avoidance Directive: A detailed review, dated 9 July 2018.

For additional information with respect to this Alert, please contact the following:

Ernst & Young Tax Advisory Services Sarl, Luxembourg City

• Marc Schmitz, Tax Leader | marc.schmitz@lu.ey.com
• Dietmar Klos, Financial Services Tax Leader | dietmar.klos@lu.ey.com
• John Hames, Global Compliance and Reporting Leader | john.hames@lu.ey.com
• Bart Van Droogenbroek, International Tax Services Leader | bart.van.droogenbroek@lu.ey.com
• Olivier Bertrand, Transaction Tax Leader | olivier.bertrand@lu.ey.com
• Nicolas Gillet, Transfer Pricing | nicolas.gillet@lu.ey.com
• Christian Schlesser, OME – Transfer Pricing | christian.schlesser@lu.ey.com

Ernst & Young LLP, Financial Services International Tax Desks – Luxembourg, New York

• Jurjan Wouda Kuipers | jurjan.woudakuipers@ey.com
• Hicham Khoumsi | hicham.khoumsi1@ey.com
• Michel Alves de Matos | michel.alvesdematos@ey.com

Ernst & Young LLP, Luxembourg Tax Desk, New York

• Serge Huysmans | serge.huysmans@ey.com
• Xavier Picha | xavier.picha@ey.com

Ernst & Young LLP, Luxembourg Tax Desk, Chicago

• Alexandre J. Pouchard | alexandre.pouchard@ey.com

Ernst & Young LLP, Luxembourg Tax Desk, San Jose

• Andres Ramirez-Gaston | andres.ramirezgaston@ey.com

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