Tax analysis advised in Luxembourg after Budget law passed

Stéphanie Raffini and Jérémie Ferrian of Pinsent Masons were commenting after the budget bill, approved by the Luxembourg parliament last month, made changes to Luxembourg income tax law. The changes affect Luxembourg tax transparent entities operating in Luxembourg with foreign shareholders where those shareholders hold at least 50% of voting rights or capital in the Luxembourg entity or hold entitlements to at least 50% of its profits.

A so-called reverse hybrid mismatch rule has applied to such companies and governs situations where the income of the entity is not subject to tax in other jurisdictions. The new reverse hybrid rule means that if the Luxembourg entity’s income is not taxed in the jurisdiction of the foreign shareholders, that income will generally be subject to taxation in Luxembourg – unless the reason for non-taxation is the tax exempt status of the investor.

“This clarification is more in line with the spirit of the law which is to tackle non-taxation due to hybrid mismatches,” Raffini said. “It is valuable for the taxpayer concerned to get more certainty on their taxation and thus more comfort. The tax analysis of the status of Luxembourg tax transparent entities that should be done from a shareholders’ jurisdiction’s perspective will be eased in case of investors having a tax-exempt status in their jurisdictions.”

The new reverse hybrid rule was just one change confirmed in the budget legislation. Another change is the alteration of the deadline to file yearly tax returns, to 31 December from 31 March for individuals and 31 May for corporate taxpayers.

Ferrian said: “Companies have, from a corporate law point of view, six months after the closing of the financial year to approve the annual accounts, meaning that a company closing its financial year on 31 December has until June of the following year to approve its annual accounts. Consequently, unofficially, the Luxembourg tax authorities tolerated taxpayers filing corporate tax returns up until 31 December of the year following the closing. This provision makes official the current practice and gives more certainty and comfort to the taxpayer.”

Also confirmed in the budget legislation are new exclusions from the 20% tax levied on certain interest income from savings paid to individuals who are resident in Luxembourg and further changes to Luxembourg’s tax regime on employee profit schemes and which affect foreign workers who come to Luxembourg to work.

In relation to employee profit schemes, employees can now benefit from a 50% exemption on tax payable on the remuneration they receive from profit schemes up to the value of 5% of the annual profits made by the whole group, rather than just the individual company in the group as was previously the case provided the other conditions required are met.

The threshold at which foreign workers coming to Luxembourg to work will benefit from tax reliefs on premium compensation employers may issue them to compensate the difference of cost of living has also been altered. Now, employees earning over €75,000 stand to benefit from the tax advantages. Previously, the threshold was €100,000.

Raffini and Ferrian said the move to lower the threshold is designed to attract talent to Luxembourg. They said around 70% of the workers in Luxembourg are estimated to come from abroad and that approximately 45% of workers are workers who commute to Luxembourg every day from another country.