tax update October 2014

Transcription

1 tax update October 2014

2 Summary Luxembourg news 3 Luxembourg budget Luxembourg-France Double Tax Treaty amended: capital gains on the disposal of shares in companies ultimately invested in French real estate assets by Luxembourg resident companies will become taxable in France 4 Introduction of a Bill of Law on VAT regime applicable to the Luxembourg free zone 4 Introduction of a Bill of Law for the annual establishment of Net Worth Tax 5 Circular Letter on non-eur functional currency 5 Circular Letter on exchange of land 6 International news 7 The new EU Parent-Subsidiary Directive 2014/86/EU of 8 July Derogation rule for determining the input VAT deduction right as regards the turnover-based method in the context of leasing transactions (Case C 183/13) 7 Internal invoicing by a company in a third country to its branch belonging to a VAT group within a Member State (Case C 7/13) 7 Useful information 8 Entry into force of the Convention on Mutual Administrative Assistance in Tax Matters 8 Publication by the OECD of the full version of global standard for automatic exchange of financial account information in tax matters 8 OECD BEPS updates published on 16 September 2014 and G20 held on September 2014 in Cairns, Australia 9 Double Tax Treaty Network 9 5th edition of the Arendt Financial Law Forum 10 2

3 Luxembourg news Luxembourg budget 2015 On 15 October 2014 the Luxembourg Minister of Finance presented the budget for 2015 to the Parliament (Chambre des Députés). The main tax-related provisions of the Bill of Law No 6722 (the Bill ) may be summarised as follows: Increase of the VAT rates: the standard rate will be increased from 15% to 17%, the reduced rate from 6% to 8% and the intermediary rate from 12% to 14%. The super reduced rate of 3% will remain unaffected. To date, Luxembourg has had the lowest VAT rates in the European Union ( EU ) and the contemplated adjustments will increase the VAT rates to a competitive level (the increased VAT rates will remain the lowest in the EU); Advance tax confirmations: the practice of advance tax confirmations will be included in the General Tax Law (Abgabenordnung). Accordingly, the heads of the taxation offices may, upon written and motivated request, issue an advance tax confirmation on the application of tax law in respect of one or more transactions contemplated by the taxpayer. Such confirmations will have a legally binding effect on the future taxation of such transactions. The issuance of confirmations may further be subject to an administrative fee. A Grand Ducal decree, to be issued by the government, will provide further details on the applicable procedure. The inclusion of the issuance of the advance tax confirmations in the General Tax Law is intended to provide further certainty and a harmonised tax treatment for taxpayers. It also shows the commitment of the Luxembourg government to maintaining this practice; Transfer pricing: the current provision in the Luxembourg Income Tax Law (Loi sur l impôt sur le revenu) relating to profit adjustments between related enterprises will be updated in accordance with the standard wording of Article 9 of the OECD Model Tax Convention. Accordingly, if (a) an enterprise participates directly or indirectly in the management, control or capital of another enterprise, or if (b) the same persons participate directly or indirectly in the management, control or capital of two enterprises, and if in either case, the two enterprises are bound in respect of their commercial or financial relations by conditions agreed upon or imposed which differ from those which would be fixed between independent enterprises, the profits of these enterprises are determined and taxed on the basis of the conditions agreed upon between independent enterprises. The precise arrangements as to how the transfer pricing provision will be applied will be determined by a Grand Ducal decree to be issued shortly. In addition, the possibility open to the tax authorities to request the appropriate transfer pricing documentation to the taxpayer will be expressly included in the General Tax Law. It is noteworthy that as opposed to the current drafting of the Income Tax Law, the new provision covers not only international but also purely domestic situations; and Creation of a Luxembourg sovereign fund: the fund, to be denominated Luxembourg Future Fund, will be established as a public body with a separate legal personality. The Luxembourg Future Fund may in particular establish one or more Luxembourg specialised investments funds (SIF) which will be governed by the law of 13 February 2007, although they will benefit from an exemption from subscription tax. The Bill has been prepared within the framework of the government s action plan for the future which is intended to establish a new structure in public finances, improving the quality and efficiency of public spending and developing structural savings. 3

4 Luxembourg-France Double Tax Treaty amended: capital gains on the disposal of shares in companies ultimately invested in French real estate assets by Luxembourg resident companies will become taxable in France On Friday 5 September 2014, the Luxembourg and French Finance Ministers signed a 4th amendment to the Luxembourg-France Double Tax Treaty dated 1 April According to the amendment, capital gains derived from the alienation of shares, units or other rights in a company, fiduciary or any other institution or entity whose assets consist for more than 50% of their value directly or indirectly through one or more companies, fiduciaries, institutions or other entities of real estate situated in the other contracting State are taxable only in that other State. The same treatment applies to rights on said real estate. The amendment enters into force on the first day of the month following the reciprocal notifications of its ratification in both States. The new provisions will apply (a) as regards income taxes levied as a withholding tax, to capital gains taxable in the year following the civil year in the course of which the amendment entered into force, (b) as regards income taxes not levied as a withholding tax, to income realised during the entire civil year or any financial year that had commenced after the civil year in the course of which the amendment entered into force and (c) as regards any other taxes, to taxation triggered after the civil year in the course of which the amendment entered into force. Accordingly, the new provisions may possibly be applied as from 1 January 2015 at the earliest. Introduction of a Bill of Law on VAT regime applicable to the Luxembourg free zone On 1 September 2014, the Bill of Law No 6713 (the Bill ) was submitted to the Luxembourg Parliament (Chambre des députés) with a view to amending the Law of 12 February 1979 on VAT and the Law of 17 December 2010 on excise duties. As regards VAT, the main purpose of the Bill is to implement into the VAT legislation several optional rules provided for by the VAT Directive (2006/112/EC) within the context of free zones, i.e. the VAT exemption regime for supplies of services and goods introduced into the free zone. The Bill is also aimed at avoiding the issue of double taxation when the goods leave the suspension regime by considering that the import of the goods will not be subject to VAT. Furthermore, the Bill extends the special margin scheme regime currently applicable to second-hand goods, works of art, collectors items and antiques to organisers of sales by public auction, and provides for the application of a reduced rate (currently 6%) to imports of collectors items and antiques. Finally, the Bill also sets out an increase of the maximum rate of excise duty to 25 EUR (currently 10 EUR). The Bill will most likely be passed this year and enter into force on 1 January

5 Introduction of a Bill of Law for the annual establishment of Net Worth Tax On 17 July 2014, the Luxembourg Ministry of Finance filed the Bill of Law No 6706 (the Bill ) for the annual establishment of Net Worth Tax ( NWT ) with the Luxembourg Parliament (Chambre des députés). The Bill amends, inter alia, the Law of 16 October 1934 (Vermögensteuergesetz) and the Valuation Law of 16 October 1934 (Bewertungsgesetz). Currently, the net worth is established as a rule only every three years (the so-called Hauptveranlagung). The Bill introduces the annual determination of NWT in the hands of collective undertakings. The suggested change is mainly due to practical reasons in the light of the self-assessment procedure (according to which corporate taxpayers may be taxed on the basis of their tax return, subject to subsequent verification by the tax authorities within the 5 year statute of limitation) and the introduction of the electronic filing of tax returns. In addition, the Bill also amends the current NWT reserve system under which NWT may be reduced or avoided if a specific reserve (equal to 5 times the NWT to save) is created before the end of the subsequent tax year and maintained during the 5 following tax years. The maximum NWT to be saved is currently limited to the corporate income tax ( CIT ) amount due for the same year. Since the NWT due for a given year is determined on each 1 st of January, the final NWT amount due may only be determined after the end of the relevant year when the CIT amount is known. The Bill therefore amends the regime by limiting the NWT amount to be saved to the CIT amount due for the preceding tax year. The Bill also extends the powers of the Luxembourg tax authorities to include the authority to recover tax claims against a taxpayer in the hands of a third party, such as a bank or other financial institution (sommation à tiers détenteur). While currently the tax authorities powers to seize the assets of a taxpayer in the hands of a third party applies to so-called privileged tax claims, it is uncertain whether it can be utilised for ordinary claims (e.g. claims for foreign taxes). The Bill clarifies this issue by enabling tax authorities to use this prerogative for both privileged and ordinary tax claims. Circular Letter on non-eur functional currency On 16 June 2014, the Luxembourg tax authorities (Administration des contributions directes) issued a circular letter L.G.-A. n 60 (the Circular Letter ) which introduces a set of rules applying to Luxembourg resident companies using a non-eur functional currency for tax purposes. The Circular Letter confirms that Luxembourg companies may determine their taxable income in a foreign currency as an alternative to drawing up a separate EUR-denominated fiscal balance sheet and thereby avoid the recognition of accounting based foreign exchange gains/losses. The use of a non-eur functional currency for Luxembourg tax purposes is subject to the following main conditions: the share capital must be denominated and the statutory accounts held in the same foreign currency (which could be any currency for which the exchange rate is determined and published by the European Central Bank); the Luxembourg company has to submit a formal request to the Luxembourg tax authorities at least 3 months before the end of the first tax year for which the use of a foreign functional currency is requested. For newly-incorporated companies wishing to opt as from their date of incorporation, the request must be submitted before the end of their first tax year; once a company opts for the use of a foreign functional currency for tax purposes, such functional currency must be used in future fiscal years as long as the share capital is expressed in the same currency; the conversion of the taxable basis from the foreign functional currency into EUR can be made either at the exchange rate at year end or at the average foreign exchange rate. Once the taxpayer elects for one of the conversion methods, it is also irrevocable. 5

6 Even if the taxable income can be determined in a foreign functional currency, amounts reported in the tax returns still need to be expressed in EUR. In addition, tax assessments will remain in EUR and taxes will continue to be paid in EUR. The Circular Letter follows the practice that has been developed and applied by the taxation officer for several years. However, it has the merit of establishing a harmonised framework and thus further certainty for taxpayers. Circular Letter on exchange of land On 25 July 2014, the head of the Luxembourg tax authorities (Administrations des contributions directes) issued a Circular Letter L.I.R. No. 102/1 (the Circular Letter ) which clarifies the scope of the capital gain exemption on an exchange of land. Pursuant to Article 102 (9) of the Luxembourg Income Tax Law, an exchange of land is not considered a taxable event if this exchange is foreseen by a Law and if an additional payment in cash (soulte), if any, does not exceed the value of the land received in exchange. The Circular Letter specifies that this exemption applies to an exchange of land: forming part of an agricultural, forestry or viticulture undertaking pursuant to a consolidation carried out in accordance with the modified Law of 25 May 1964 in respect of the consolidation of urban development; and owned by an individual in its private patrimony pursuant to a consolidation carried out in accordance with Article 63 of the modified Law of 19 July 2004 in respect of urban development. 6

7 International news The new EU Parent-Subsidiary Directive 2014/86/EU of 8 July 2014 The Council Directive 2011/96/EU of 30 November 2011 (the Directive) eliminates double taxation between group companies in the European Union ( EU ) by exempting under certain conditions dividends and other profit distributions paid by subsidiaries to their parent from withholding tax and exempting such income at the level of the parent company. The Directive was amended on 8 July 2014 by the Council Directive 2014/86/EU (the Amending Directive ) in order to avoid situations of double non-taxation deriving from mismatches in the tax treatment of profit distributions between Member States ( MS ). Accordingly, the MS of the parent company or of its permanent establishment should not allow the relevant companies to benefit from the tax exemption on received dividends to the extent that such profits are deductible by the subsidiary of the parent company. The Amending Directive introduces a subject to tax clause providing that MS must refrain from taxing such profits to the extent that they are not deductible by the subsidiary, but should tax such profits where they can be deducted by the subsidiary. The EU Members States are required to implement the Amending Directive into domestic law by 31 December The Amending Directive has a direct impact on certain hybrid financings of subsidiaries: in case a subsidiary is financed by a hybrid instrument that qualifies as a debt in the subsidiary s MS, but is regarded as equity in the parent s MS, the profit derived therefrom may no longer be exempted at the level of the parent if the instrument generates deductible expenses (e.g. interest) at the subsidiary s level. Similar hybrid mismatches are also tackled under the OECD s BEPS action plan. Corporate structures involving hybrid mismatches may therefore need to be revisited. Derogation rule for determining the input VAT deduction right as regards the turnover-based method in the context of leasing transactions (Case C 183/13) The Court of Justice of the European Union ( CJEU ) decided on 10 July 2014 that the VAT Directive does not preclude Member States ( MS ) from using, for a given transaction, a method or formula other than the turnoverbased method, provided that the method used guarantees a more precise determination of the deductible proportion of the input VAT than that arising from application of the turnover-based method. As per the CJEU s decision, MS may require a bank, which, inter alia, carries out leasing activities, to include in the numerator and denominator of the fraction (used to determine a single deductible proportion for all of its mixed use goods and services) merely the part of the rental payments made by customers as part of their leasing agreements which corresponds to interest, where that use of the goods and services is primarily caused by the financing and management of those contracts. Internal invoicing by a company in a third country to its branch belonging to a VAT group within a Member State (Case C 7/13) In its decision of 17 September 2014, the Court of Justice of the European Union ( CJEU ) ruled that supplies of services from a main establishment in a third country to its branch in a Member State constitute taxable transactions when the branch belongs to a group of persons whom it is possible to regard as a single taxable person for VAT purposes and that group, as the purchaser of those services, becomes liable for the VAT payable under the self-assessment rule. Even though Luxembourg has not implemented the VAT grouping into its legislation, Luxembourg head offices or branches may be impacted by such rules should they be supplying or receiving services to or from branches or head offices belonging to a VAT group located abroad. 7

8 Useful information Entry into force of the Convention on Mutual Administrative Assistance in Tax Matters On 1 November 2014, the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (the Convention ) will enter into force in Luxembourg. The Convention was developed jointly by the Council of Europe and the OECD in 1988 and amended by a protocol in 2010 on 29 May The Convention has been ratified in Luxembourg by virtue of the Law dated 26 May 2014 (for further information, please refer to our tax update of April 2014, Publication by the OECD of the full version of global standard for automatic exchange of financial account information in tax matters On 21 July 2014, the Organisation for Economic Co-operation and Development ( OECD ) published the full version of the Standard for Automatic Exchange of Financial Account Information in Tax Matters. The report, having no legal status, calls on governments to obtain detailed account information from their financial institutions and automatically exchange such information on an annual basis. More than 65 countries, including Luxembourg, have already committed themselves to implementing the automatic exchange of information. The final version of the report contains commentary and guidance with respect to implementation, detailed model agreements as well as standards for harmonised technical solutions (e.g. concerning the secure transmission of the information). In particular, part II of the report includes: a Model Competent Authority Agreement which is a base agreement setting out general definitions, the type of information to be exchanged as well as timing and procedures for the exchange, the obligations of the jurisdictions to obtain and exchange information and the procedures for collaborating on compliance and enforcement; and the Common Reporting Standards providing for detailed reporting and due diligence standards for financial institutions to identify reportable accounts. The new global standard does not restrict the other types or categories of automatic exchange of information, but sets out a minimum standard for the information to be exchanged. The Luxembourg government has already announced its commitment to applying the standard for the automatic exchange of information as from 1 January Since the necessary data must accordingly be collected as from 1 January 2016, the government also committed itself to transposing the standard into Luxembourg Law by mid in order to give the industry sufficient time to adopt the necessary infrastructure. 8

9 OECD BEPS updates published on 16 September 2014 and G20 held on September 2014 in Cairns, Australia On 16 September 2014, the Organisation for Economic Co-operation and Development ( OECD ) released recommendations and reports with respect to 7 of the 15 actions set out in the BEPS project. The OECD s work focuses on the following actions: Action 2: Hybrid mismatch arrangements Action 6: Prevention of treaty abuse Action 8 & 13: Transfer Pricing documentation and Country-by-Country Reporting Action 1: Digital economy Action 15: Multinational instruments development Action 5: Harmful tax practices The OECD s different reports were presented to the G20 held in Cairns, Australia on September The G20 emphasises its strong commitment to pursuing its efforts to fight cross-border tax avoidance and evasion. The OECD and G20 expect to finalise all action reports in The meeting was also an opportunity to confirm the finalisation of the Common Reporting Standards for automatic exchange of information which should be enforced by the end of 2018 at the latest. Luxembourg committed itself to apply the automatic exchange of information based on OECD standards as from 1 January Double Tax Treaty Network Over the last 3 months, several Double Tax Treaty and Protocols have entered into force: 25 July 2014, entry into force of the Double Tax Treaty and its Protocol signed between Luxembourg and Taiwan; 31 July 2014, entry into force of the Double Tax Treaty and its Protocol signed between Luxembourg and the Czech republic; 5 August 2014, entry into force of the Double Tax Treaty and its Protocol signed between Luxembourg and Jersey; 5 August 2014, entry into force of the Double Tax Treaty and its Protocol signed between Luxembourg and the Isle of Man; 8 August 2014, entry into force of the Double Tax Treaty and its Protocol signed between Luxembourg and Guernsey; 22 August 2014, entry into force of the Protocol to the Double Tax Treaty signed between Luxembourg and Slovenia; and 1 September 2014, entry into force of the Double Tax Treaty and its Protocol signed between Luxembourg and Saudi Arabia. On 5 September 2014, the Luxembourg and French Finance Ministers signed a 4th amendment to the Luxembourg-France Double Tax Treaty dated 1 April 1958 (for further details please refer to our newsflash dated 8 September 2014 available at On 26 October 2014, Luxembourg and the United Arab Emirates have signed a Protocol to the existing Double Tax Treaty effective since 1 January The purpose of this signed Protocol is to comply with the OECD standard on exchange of information upon request as well as to broaden its scope of application. 9

10 5th edition of the Arendt Financial Law Forum The 5th edition of the Arendt Financial Law Forum held in Luxembourg on 15 October 2014 was a great success with nearly 120 persons in the audience. Many topics were discussed including the one on Taxation of financial instruments in a changing world. If you would like to know more, the slides presented during the Forum are available by clicking here. This tax update of Arendt & Medernach is designed to provide our clients with information on recent developments of important fiscal areas. Published comments are not intended to constitute tax advice and do not substitute for the consultation with tax counsel required before any actual undertakings. For further information please contact: Eric Fort, Partner eric.fort@arendt.com Bruno Gasparotto, Principal bruno.gasparotto@arendt.com Alain Goebel, Partner alain.goebel@arendt.com Thierry Lesage, Partner thierry.lesage@arendt.com