LEGAL ALERT BILL N 6891 AMENDMENTS TO THE NET WEALTH TAX AND INTRODUCTION OF THE MINIMUM LUXEMBOURG NET WEALTH TAX REGIME

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1 LEGAL ALERT BILL N 6891 AMENDMENTS TO THE NET WEALTH TAX AND INTRODUCTION OF THE MINIMUM LUXEMBOURG NET WEALTH TAX REGIME BILL N 6900 REPEAL OF THE IP BOX REGIME OCTOBER

2 I. INTRODUCTION 1. Bill N 6891 The Luxembourg Bill N 6891, presented and filed by the Luxembourg Minister of Finance on 13 October 2015, foresees to (i) reduce the net wealth tax rate for taxpayers with a net wealth tax base exceeding EUR 500 million, and (ii) replace the existing minimum corporate income tax regime (as laid down under Article 174 paragraph 6 of the Luxembourg Income Tax Law, in effect as of January 1 st, 2011) by introducing a minimum net wealth tax regime. This proposal to abrogate the minimum corporate income tax follows a European Commissions notice communicated to Luxembourg in September 2014 analysing the Luxembourg minimum taxation regime in light of the EU Parent Subsidiary Directive 2011/96/EU (the Directive ). The European Commission is of the view that the Luxembourg minimum taxation regime may contravene the Directives principle of nondouble taxation avoidance of group revenues and should be amended. 2. Bill N 6900 The Luxembourg Bill N 6900 concerning the Luxembourg budget for 2016, filed by the Luxembourg Minister of Finance on 14 October 2015, includes inter alia a proposal to repeal the Luxembourg IP Box Regime (as currently stated in Article 50bis of the Luxembourg Income Tax Law and 60bis of the Luxembourg Evaluation Law or Bewertungsgesetz ) with a five-year grandfathering period. The proposed repeal of the IP Box Regime is in line with the OECD recommendations on action 5 of the base erosion and profit shifting ( BEPS ) action plan final report as released in October 2015, notably, the so-called Modified Nexus Approach for IP Regimes. The Nexus Approach allows a taxpayer to benefit from an IP Box Regime in line with the expenditures, such as research and development expenses ( R&D ), linked to generating the IP income, and only in the country where the related R&D is conducted. The implementation of the amended Nexus Approach will most likely result in a considerable standardisation of the IP Box Regimes in the EU member states. It is worthwhile to note that for both Bill N 6891 and Bill N 6900 the parliamentary approval process is on-going, therefore the Luxembourg Parliament may still propose amendments to the bills before their final approval. II. THE NET WEALTH TAX REGIME AS FROM JANUARY 1 ST, Reduced net wealth tax rate Luxembourg taxpayers are subject to net wealth tax at the rate of 0.5% on their net wealth determined as at January 1 st based on the annual commercial accounts of the preceding year. Under the Bill N 6891 it is proposed to amend 8 of the net wealth tax law (dated 16 October 1934, as further amended or Vermögenssteuergesetz hereinafter VStG ) to introduce a reduced rate of 0.05% that will apply to net wealth in excess of 500 million so that the net wealth tax due will be equal to EUR 2.5 million increased by 0.05% of the portion of the net wealth tax base above EUR 500 million. It is foreseen that the reduced net wealth tax rate will apply as from January 1 st,

3 2. Minimum net wealth tax regime 2.1 General Under the current minimum corporate income tax regime Luxembourg taxpayers holding financing assets representing at least 90% of their total assets, are subject to a fixed minimum corporate income tax of EUR 3,210 (including the solidarity surcharge). All other taxpayers are liable to a minimum corporate income tax that is progressive and linked to their total balance sheet, in a range of EUR 535 (including solidarity surcharge) for taxpayers with a balance sheet not exceeding EUR 350,000, up to EUR 21,400. The minimum corporate income tax is an advance payment that becomes final only if no corporate income tax is incurred in the following years. Luxembourg corporate taxpayers that are part of a fiscal unity are subject to the minimum tax, payable by the parent company, capped at EUR 21,400 (including the solidarity surcharge). The proposed minimum net wealth tax regime is intended to abrogate the corporate minimum taxation regime as from January 1 st, Based on the Bill N 6891, 8 (paragraph 2) VStG should provide for a fixed net wealth tax of EUR 3,210 for all fully resident corporate taxpayers holding fixed financial assets, receivables on related entities, transferable securities and cash at bank exceeding 90% of their balance sheet in a given year and in an amount of EUR 350,000. For all other corporate taxpayers (i.e. in essence, companies that do not qualify as pure holding and financing companies) the minimum net wealth tax will be progressive: Total Balance sheet of the company Minimum Net Wealth Tax Up to EUR 350,000 EUR 535 From EUR 350,001 up to EUR 2,000,0000 EUR 1,605 From EUR 2,000,001 up to EUR 10,000,000 EUR 5,350 From EUR 10,000,001 up to EUR 15,000,000 EUR 10,700 From EUR15,000,001 up to EUR 20,000,000 EUR 16,050 From EUR 20,000,001 up to EUR 30,000,000 EUR 21,400 As from EUR 30,000,000 EUR 32, Securitization companies and SICAR Securitization companies and undertakings for collective venture capital investments (Société d investissement en capital à risque or SICAR ) which are presently exempt from net wealth tax, should as from January 1 st, 2016 become liable to net wealth tax. Although such Securitization companies and SICAR are excluded from the general net wealth tax rates they should fall within the scope of the minimum net wealth tax. Therefore, contingent to their annual commercial accounts, either the fixed EUR 3,210 minimum net wealth tax or the progressive minimum net wealth tax between EUR 535 and EUR 32,100 should apply. 2.3 Interaction with income tax In order to avoid an increased tax burden on the concerned corporate entities, the Bill further foresees that the amount to be paid as minimum net wealth tax will be reduced 3

4 by the corporate income tax of the preceding year. However, concerning the 2016 tax year the minimum net wealth tax will be reduced by the 2016 corporate income tax. Such reduction will only apply up to the amount of tax which would have been due applying the general rates of 8 (paragraph 1) VStG. In addition, for Luxembourg corporate taxpayers that are part of a fiscal unity, the fiscal unity is not applicable to net wealth tax. It follows that each company being member to the fiscal unity must pay the minimum net wealth tax. However, the Bill foresees a cap of EUR 31,200 as the total amount of minimum net wealth tax to be paid by all companies part of a fiscal unity. Based on the foreseen reduction regime, the minimum net wealth tax should, contrary to the current minimum corporate income tax, not be considered as advance payment. Furthermore, as no relation is made to any tax year preceding 2016 when applying the reduction, the minimum corporate income tax paid as advance in those preceding years should not impact the new minimum net wealth tax. Nevertheless, the advance payments of minimum corporate income tax performed before January 1 st, 2016 should from our point of view still be available to reduce the corporate income tax for the coming tax years. 3. Net wealth tax reserve 8a VStG Under the minimum net wealth tax regime, taxpayers may, under specific conditions, be entitled to reduce their net wealth tax liability by creating a net wealth tax reserve to be maintained for 5 years. The Bill foresees to limit such reduction to the amount that needs to be paid by the respective company as minimum net wealth tax according to 8 (paragraph 2) VStG. Furthermore, in case of a share capital reduction of a company having created a net wealth tax reserve, such reserve will be deemed as distributed first. Following this approach, the net wealth tax liability of the respective company will be raised for one fifth of the reserve for the year concerned. Such increase in the net wealth tax liability will only occur in case the amount as deemed distributed out of the reserve has not been kept for 5 years. III. REPEAL OF THE IP REGIME The Bill N 6900 proposes to repeal the Luxembourg IP Box Regime as from July 1 st, 2016 for corporate income tax and as from January 1 st, 2017 for net wealth tax purposes. In accordance with the provisions stated in the BEPS final report addressing action 5, a five-year grandfathering period starting as from July 1 st, 2016 and ending on June 30 th, 2021 is foreseen to apply to: existing Luxembourg IP Box Regimes;; and IP rights acquired, constituted, or modified/improved before July 1 st, 2016 (under certain conditions). It is nevertheless noted that the Bill provides for anti-abuse rules to restrict the benefit of the transitional period and ensure strengthened transparency vis-à-vis foreign tax authorities. In this respect, the contemplated measures are twofold: a) a reduction of the grandfathering period to December 31 st, 2016 (January 1 st, 2018 for net wealth tax) for IP rights acquired from related parties, unless the concerned IP rights were eligible to the existing IP Box Regime;; and 4

5 b) a spontaneous exchange of information concerning existing IP Box Regimes in connection with IP rights acquired or created after February 6 th, The Luxembourg tax authorities will in this respect have to disclose the identity of the taxpayer benefitting from the Luxembourg IP Box Regime to the competent tax authorities of the concerned foreign country at the earlier of (i) three months from when the information is made available to them, or (ii) one year following the filing by the taxpayer of its annual tax return. It is worthwhile to highlight that the Bill N 6900 does not provide for a new Luxembourg IP Box Regime compliant with the OECD guidance on BEPS and the Nexus approach. However, since there are strong indications that other states are currently willing to introduce a BEPS compliant IP Box Regime (e.g. Germany, Ireland and the US), or to amend their IP Box Regime (e.g. UK), a new Luxembourg IP Regime is expected and would hopefully be released within the coming months. For further information or assistance please contact one of the following persons: LIONEL NOGUERA lnoguera@bonnschmitt.net GAËLLE FELLY gfelly@bonnschmitt.net ANNE SELBERT aselbert@bonnschmitt.net *** BONN & SCHMITT OCTOBER

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