2016: Luxembourg’s business landscape

Increased substance requirements, remaining compliant under BEPS-related law changes and the CRS; find out what organisations operating in Luxembourg need to know.

Luxembourg’s business landscape saw a number of changes in 2015. One such is the creation of a dedicated Tax Ruling Commission, which has a central role in the overall assessment process.

The handling and processing of requests from taxpayers has become more and more complex and intensive; consequently the tax authorities have had to make additional investments in technical and human resources. To a certain extent, costs resulting from this are to be passed on to taxpayers; and since January 2015, requesting an advance decision has become a payable administrative service. Depending on the complexity of the request (excluding advisor’s fees), the amount ranges from €3,000 to €10,000. This fee is payable in advance, and cannot be refunded, even where a request is withdrawn or in the case of a refusal or negative answer after processing.

In order to further increase transparency, in line with various cross-border initiatives, the decisions rendered by the tax authorities will be published in an anonymised summary. This provides useful doctrine for companies that would be in a similar situation, which could avoid unnecessary efforts and costs. 
The codification of the arm’s length principle (for Transfer Pricing) has resulted in a distinction between cross-border and domestic transactions and an increased demand for TP studies and reports. 

Luxembourg’s VAT rate increased last year by 2%, to 17% and the introduction of the new Limited Partnership regime (SCSp) has seen an influx of registrations. 
Following the country’s March 2013 adoption of a law on administrative cooperation between EU member states in the field of taxation, Luxembourg also announced the automatic exchange of information on interest payments from 2015.

So what’s in store for companies in Luxembourg in the next 12 months?

FATCA / CRS

Additional classification and reporting is now required by companies to meet the European Foreign Account Tax Compliance Act (FATCA) and OECD Common Reporting Standards (CRS), reporting for the latter of which will apply from 2017 – however data capture is now required (as of 1 January 2016).

The law approving the US FATCA was passed last year and both new reporting obligations are intended to increase transparency globally, with a uniform approach to the disclosure of income earned by individuals and organisations.

BEPS

The OECD’s release of its final BEPS package three months ago sees an increased demand for substance in Luxembourg. Companies will be expected to show board credibility, local offices with all technical means necessary to perform business activities, corporate governance rules in place and so on.

A number of BEPS-related law amendments were proposed last year, some already approved entered into force on 1 January. Changes in the administrative practice are also in the pipeline:

1. measures preventing treaty abuse (Action 6)

2. measures aiming for more transparency (Action 5/12)

3. measures preventing harmful tax practice (Action 5)

4. measures neutralising hybrid mismatches (Action 2)

5. measures to ensure that transfer pricing outcomes are in line with value creation (Action 8-10)

Other BEPS initiatives to be rolled out in 2016 include amending double tax treaties to include anti-abuse clauses, reforming in depth, the domestic tax law, and the upcoming exchange of tax rulings with tax authorities in other EU Member States.

Download our briefing document on the implementation of BEPS-related measures in Luxembourg at the bottom of this page.

Introduction of a new investment vehicle for well-informed investors: the Reserved Alternative Investment Fund (RAIF)

On 14 December 2015, draft law 6929 creating the Reserved Alternative Investment Fund was deposited with the Luxembourg Parliament.

The RAIF, a new flexible and quick-to-market investment vehicle, comes as the latest addition to the Luxembourg toolbox. A RAIF is comparable to a Specialised Investment Fund (SIF) but will be regulated and supervised only via its AIFM, and does not need prior approval via the CSSF (local regulator for the financial industry).

Key advantages include:

• Full flexibility of a SIF
• Absence of double authorisation and supervision of the AIFM and the AIF
• Quick time to market
• Benefit of the European AIFMD passport
• Benefit of the tax regime applicable to Luxembourg investment funds.

However, the bill has yet to be adopted by the Luxembourg parliament. 

IP tax (50bis) regime 

Luxembourg’s current intellectual property tax regime will be abolished on 30 June 2016, cutting to approximately 5.85% the effective tax rate for income from registered IP and copyright-protected software. The regime will be replaced with the OECD’S BEPS-approved “nexus approach.” However, a grandfathering clause will be in effect until 30 June 2021, allowing taxpayers to continue to benefit from the existing IP regime under certain conditions.

How we can help

Our experts in Luxembourg can help companies meet their increased substance requirements, remain compliant under BEPS-related law changes and the CRS, and provide HR, payroll and relocation services.

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