Auteur
Brent Springael
Advocaat NautaDutilh
Brussels
Onderwerp
Luxembourg 2002 Tax Reform
Datum
februari 2002
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l NautaDutilh
Luxembourg 2002 Tax Reform
Brent Springael, NautaDutilh Brussels
Luxembourg is often used as an intermediary
step for international tax planning. Luxemburg
now strengthens its European competitive
position by reducing the tax rate and
broadening the application of the participation
exemption regime, amongst others.
two commercial companies to the above, namely
the European Economic Interest Grouping (the
EEIG) and the Luxembourg equivalent thereof
(the EIG).
Tax Rates
Brief legislative history
a. corporate income tax 5
The Luxembourg Tax Reform of 2002 is
regulated by a Law and a Grand-Ducal Decree
(Règlement
grand-ducal)
(hereinafter
collectively referred to as the Reform
Regulation). The bill of the Reform Regulation
was introduced in Luxembourg Parliament on
October 12, 2001 and was approved on
December 21, 2001. 1 The Reform Regulation
concerns both individual as corporate tax, and a
few other indirect taxes, such as net worth tax,
registration duties and subscription tax. This
article mainly treats the corporate tax highlights.
The tax rates are reduced from 30% down to
22% for businesses with an income superior to
EUR 15,000. Businesses with a lower income
may benefit an even more reduced rate with a
minimum of 20%. Taking into account the 4%
employment fund contribution, 6 the effective
corporate tax rate is reduced from 31.2% down
to 22.88%. 7
Tax Transparency
b. municipal business tax 8
Aside from the corporate income tax, all
companies are subject to a municipal business
tax. For the City of Luxembourg (and most other
municipalities) the effective tax rate is reduced
from 9.09% to 7.5%. 9
2
The corporate tax rules are not applicable to
certain collective commercial companies 3 that
are lacking a separate legal personality for tax
purposes. 4 Since these companies are no tax
autonomous entities, they are tax transparent
and, therefore, not subject to corporate tax.
The Reform Regulation now clearly enunciates
the tax transparency rules and explicitly adds
Taking both taxes into account, the effective
combined income tax rate for companies located
in the City of Luxembourg is reduced from
37.34% to 30.38%, including the contribution to
the employment fund.
5
Impôt sur le Revenu des Collectivités.
Contribution pour le Fond d’Emploi.
7
Article 173 LITC.
8
Impôt commercial communal.
9
The composition of the effective tax rate is rather unusual to
the extent that the tax rate remains unchanged, i.e. 250%, but
that the tax base rate is reduced. The taxable basis, for the
purpose of this municipal tax, is reduced from 4% to 3% of the
taxable net income. Further, the municipal business tax is no
longer deductible from the corporate income tax and from its
own taxable basis.
6
1
Luxembourg State Gazette (Memorial) 2001, December 27,
2001, A - n° 157, p.3311-3332 – to see publication online:
http://www.etat.lu/memorial/memorial/a/2001/a1572712.pdf.
2
Article 175 Luxembourg Income Tax Code (LITC).
3
Specifically are concerned the “société en nom collectif”, the
“société en commandite simple” and the “société civile”.
4
From a Luxembourg corporate law point of view, these
companies do have a separate legal personality.
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Contrary to the announced tax reform in
Belgium, the Luxembourg reform is not
budgetary neutral. This means that the essential
tax rate reduction is not compensated by other
measures aiming at broadening the taxable basis.
On the contrary, several measures are devised to
give a broader application to some favorable tax
regimes.
from a similar foreign tax. Such
participations cannot benefit from the
participation
exemption.
Dividends
received from such participations are
nevertheless eligible for a 50 percent
exemption.
-
Withholding tax
One of such measures was to reduce the
withholding tax on dividends from 25% to
20%.10 11 The withholding tax on royalties paid
to non-resident companies or Luxembourg 1929
holdings is uniformly fixed at 10%. 12 13
The Reform Regulation enables the possibility
of a tax neutral share exchange (see further
below). When a non-qualifying participation is
transformed into a qualifying participation via
such share exchange transaction (e.g. pursuant
to a merger), the participation will be deemed to
be a non-qualifying participation during the five
fiscal years following the year in which occurred
the share exchange.
Participation exemption
Further, the Reform Regulation aimed at
enlarging the possibility to benefit from the
participation exemption, applicable on dividend
income and capital gains on shares.
b.
a.
qualifying versus non-qualifying
participations
Dividends
15
In principle, dividends
received are only eligible for the participation
exemption, if they proceed from a ‘direct’
qualifying participation. Based on the former
legislation,
dividends
received
from
participations held (indirectly) through tax
transparent entities (see above), in principle, did
not qualify for the participation exemption
regime. Nevertheless, it was a common practice
of the Luxembourg tax administration to treat
such dividends as originating from a ‘direct’
participation, but subject to the condition of a
certain minimum participation in the tax
transparent entity.
Pursuant to the Reform Regulation, such
dividends are now explicitly deemed derived
NORMAL
For the application of the participation
exemption, distinction has to be made between
qualifying
participations
(participations
qualifiées) and non-qualifying participations
(participations non-qualifiées).
-
Qualifying
participations
are
participations in a (Luxembourg or
foreign) share capital company subject to
(Luxembourg
or
similar
foreign)
corporate income tax, or in a qualifying
company for the purposes of the EU
Parent-Subsidiary Directive. 14
Non-qualifying
participations
are
participations in companies that are
partially
or
fully
exempt
from
Luxembourg corporate income tax or
10
Article 148-1 LITC.
Article 146 LITC subjects dividends as defined by article 97
LITC to withholding tax. Liquidation gains, however, are not
considered as dividend distributions for the purposes of article
97 LITC, but as capital gains, and are thus not subject to
withholding tax.
12
Article 152 LITC.
13
Under the former legislation, this 10% withholding tax was
only applicable to author’s rights with respect to literary or
artistic works. The general rate was 12%.
11
14
DIVIDEND
–
Article 2 of the EU Council Directive (90/435/EEC) of June
23, 1990, on the common system of taxation applicable in the
case of parent companies and subsidiaries of different Member
States, OJ L 225, 22.9.1990, p.6.
15
Article 166 LITC.
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from a ‘direct’ participation proportionally to
the fraction held in the invested net assets of the
transparent entity, and therefore, eligible for the
participation exemption, to the extent that they
also meet the other conditions.
subsidiary rebuilds its retained earnings, the
value adjustment of the participation must be
reversed. Under the former legislation, such
subsequent reversal could not benefit from an
exemption or deferred taxation and constituted
another tax burden for the parent company. The
Reform Regulation remedies this situation by
stating that such subsequent reversal is a deemed
dividend, eligible for the participation
exemption if and to the extent a pre-acquisition
dividend was paid and an equal reduction of
value was booked.
Aside from the conversion into Euro, the other
conditions
remained
unchanged:
the
participation must entail at least 10 percent in
the share capital of the subsidiary or have an
acquisition value of at least EUR 1.2 million.
Further, the participation must be held for at
least 12 months (not necessarily prior to the
dividend distribution).
The Reform
Regulation introduced an anti-abuse provision
according to which a 5 year “waiting period” is
imposed for dividends derived from a “via an
exchange of shares transformed” qualifying
participation (see above under point a), in order
to benefit from the participation exemption.
DIVIDEND AFTER SHARE EXCHANGE –
The companies that can invoke the exemption
regime are Luxembourg share capital companies
subject to corporate income tax, states and
public institutions, permanent establishments of
qualifying companies for the purposes of the EU
Parent-Subsidiary Directive, and permanent
establishments of foreign companies resident in
a state which concluded a bilateral tax treaty
with Luxembourg.
c.
Capital gains on shares
16
The exemption regime for
capital gains on shares is relaxed and tuned to
the regime applicable to the dividends.
As such, the participation regime applies to
capital gains realized on a qualifying
participations 17 18 (see above under point a)
held directly or indirectly through tax
transparent entities and the minimum
participation is reduced from 25% to 10%. The
minimum acquisition value is round down from
LUF 250 million to EUR 6 million. 19
NORMAL CAPITAL GAIN –
A pre-acquisition
dividend is a dividend distributed from the
retained earnings of the subsidiary build up prior
to the acquisition of the subsidiary, and
therefore in principle part of the acquisition
price of the participation. When such preacquisition dividend is distributed, e.g. to pay
off the debt engaged by the parent company to
acquire the participation, such dividend does not
qualify for the participation exemption:
Luxembourg tax law does not allow an
exemption if and to the extent a value
adjustment on the acquisition price has been
booked. Nevertheless, such dividend is not
effectively taxed, since the company will have
to book a value reduction on the participation,
equal to the (pre-acquisition) dividend received,
which is tax deductible.
Under Luxembourg law, participations have to
be revaluated when their fair market value is
higher or lower than the book value, but the
value adjustment can not be higher than the
acquisition value. This means that if the
PRE-ACQUISITION DIVIDEND –
Further in order to benefit from the exemption
regime, the requirement of uninterrupted
holding or engagement to continue to hold
uninterruptedly shares for a period of 12 months
must still be met, but no longer on a share-by16
Article 1 Grand-ducal Decree jo. article 166 LITC.
Article 166, paragraph 2 LITC.
18
Under the former legislation, the exemption regime was
limited to participations in fully-taxable Luxembourg share
capital companies and foreign companies subject to taxation
similar to the Luxembourg corporate income tax.
19
It is remarkable that only the minimum participation is tuned
to that for dividends, but not the minimum acquisition value,
which is EUR 1.2 million for dividends.
17
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share basis. It is sufficient to hold a stock of
shares representing the minimum holding
percentage (10% or EUR 6 million). The
overhead participation can be disposed of
without any further holding requirement.
Tax consolidation
23
The optional regime of tax consolidation allows
to set off the losses against the profits realized
by the companies within the periphery of the tax
consolidation and assures the neutrality of the
legal structure of the group, which forms a unity
from an economic point of view. The legislator
understood that this principle actually overleapt
itself by requiring a 99 percent participation, in
order to be integrated in the tax consolidation.
The legislator remedied this situation by
stipulating that the parent company must hold
(directly or indirectly) at least 95% in the share
capital of its subsidiaries.
Under former legislation, only fully-taxable
Luxembourg companies were able to invoke the
exemption regime. By referring to the rules
applicable to dividends, the Reform Regulation
extended the exemption regime to capital gains
realized by states and public institutions,
permanent
establishments
of
qualifying
companies for the purposes of the EU ParentSubsidiary
Directive,
and
permanent
establishments of foreign companies resident in
a state which concluded a bilateral tax treaty
with Luxembourg. 20
Pursuant to several decisions of the European
Court of Justice, 24 the legislator considered it
necessary to allow applicability of the tax
consolidation regime, not only to the
Luxembourg resident corporations, but also to
the Luxembourg permanent establishments of
foreign companies subject to an income tax
similar to Luxembourg income tax. The
European Court ruled that excluding a
permanent establishment of a foreign company,
constituted an infringement of the nondiscrimination principle regarding the freedom
of establishment, pursuant to article 43 of the
EU Treaty.
When a
business or an autonomous part of a business
was contributed to a company in exchange for
shares pursuant to the roll-over relief regime 21
(see tax free reorganizations below) at a value
below market value, this part of any gain on the
shares was not eligible for the participation
exemption on the ultimate disposal of the
obtained shares. The Reform Regulation
removed this “recapture” rule 22 for capital gains
qualifying for the participation exemption.
CAPITAL GAIN AFTER ROLL-OVER RELIEF –
The Reform
Regulation introduced an anti-abuse provision
according to which a 5 year “waiting period” is
imposed, in order to benefit from the
participation exemption for capital gains on
shares from a “via an exchange of shares
transformed” qualifying participation (see above
point a).
Tax free reorganizations
CAPITAL GAIN AFTER SHARE EXCHANGE –
Mergers, demergers and similar
operations constitute for the contributing
companies, in principle, the transfer or the
ceasing of the enterprise and trigger immediate
taxation of any hidden capital gain.
In order to encourage company restructurings,
and subject to certain conditions, companies can
benefit from a tax deferral regime. In general,
the tax neutral restructuring is accepted when
the recipient company applies in its
PRINCIPLE –
20
Article 166, paragraph 1 LITC.
Article 59 LITC.
22
This “recapture” rule was introduced by the Grand-Ducal
Decree of December 24, 1990, but is no longer reflected in the
new Grand-Ducal Decree of December 21, 2001.
21
23
Article 164bis LITC.
ECJ, September 21, 1999, Case C-307/97, Compagnie de
Saint-Gobain, Rec.1999, p.I-6161; to see the judgement online,
http://www.europa.eu.int/cj/common/recdoc/indexaz/en/c2.htm.
24
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bookkeeping the accounting values as they
appear in the balance sheet of the contributing
company. 25
A similar roll-over relief is applied for crossborder restructurings involving EU companies. 26
This article replaces the principle of
“Tauschgutachten”, a jurisprudential principle
according to which a share exchange does not
result in the realization of capital gains, if the
exchanged assets (shares) are economically
identical, i.e. if they carry the same value, the
same nature and the same function. This
principle was applied by the Luxembourg tax
administration upon request by the tax payer,
but since this was a rather subjective matter and
often led to discussion, the legislator decided to
replace this principle with a statutory provision,
article 22bis.
27
When a company emigrates
outside Luxembourg in consequence of a
restructuring, i.e. when its registered office or
head office has been transferred abroad, the
emigration is treated as a deemed fiscal
liquidation and hidden capital gains will be
taxed, unless the net assets remain attached to a
Luxembourg permanent establishment and are
valued at book value. 28 29
EMIGRATION
–
The newly introduced article enunciates the nonrealization of hidden gains for 4 specific
exchange operations:
- the issuance of shares for the exercise of
convertible bonds;
- the conversion from one company form into
another;
- a merger or demerger of a Luxembourg or EU
share capital company;
- the acquisition of shares conferring or
enhancing the majority of votes in the acquired
company.
The Reform Regulation
further clarifies that in the event of a tax neutral
merger, demerger or contribution, assets are
deemed acquired by the recipient company at
the initial acquisition date of the contributing
company. This clarification is important for the
computation of the 12 month holding period for
the purposes of the participation exemption.
ASSET ACQUISITION DATE –
Share exchange 30
Investment tax credit
At shareholder level, certain restructurings result
in an exchange of shares. Starting point of the
Reform Regulation is that capital gains realized
upon the share exchange are in principle taxable,
unless the newly inserted article 22bis explicitly
deviates from it.
31
The Reform Regulation devoted a lot of
attention to the tax credit for investments in
order to encourage companies to invest and
consequently create a favorable economic
environment.
Changes introduced at this level are (i) the
reduction of the depreciation period of eligible
assets 32 from 4 to 3 years, (ii) the explicit
exclusion of used assets and (iii) the abolition of
exclusion of low value assets (with an
acquisition price inferior to LUF 35.000). On the
other hand, the investment tax credit for
25
Articles 22, 54, 59, 170, 171 and 172 LITC.
Articles 59bis, 170bis, 170ter and 172bis LITC.
27
The EU Merger Directive was already to a large extent
implemented in the Luxembourg Income Tax Code, but the
Reform Regulation completed this implementation. Also in view
of the readability of the legislative texts, a clear distinction has
been made between purely national transactions and crossborder transactions.
28
Article 172 LITC.
29
This principle will probably be applied in many EU countries,
especially in the light of the European Company Regulation
dated October 8, 2001. Pursuant to this Regulation, such
company will be able to transfer its registered / head office
abroad or merge across the border.
30
Article 22bis LITC.
26
31
Article 152bis LITC.
The bill of the Reform Regulation envisaged an extension of
applicability to certain intangible assets, such as patents and
software, but this was not recorded in the final Reform
Regulation.
32
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complementary investments is reduced from
12% to 10%. 33
duties over immovable property. When a
shareholder of a company, not subject to
corporate income tax and owning immovable
property situated in Luxembourg, transfers (part
of) his shares in that company for valuable
consideration, such transfer will be assimilated
with a proportional sale of the immovable
property for the purpose of levying registration
duties.
Indirect taxes
a. net worth tax
Luxembourg companies are subject to an annual
net worth tax of 0.5%. Prior to the tax reform,
the net worth tax was creditable against the
corporate income tax and the credit was limited
to this corporate income tax after eventual other
credits.
c. subscription tax
For the investment funds, that are subject to a
subscription tax (taxe d’abonnement), the tax
rate has been reduced from 0.06% to 0.05%.
The Reform Regulation reversed the situation so
that the net worth tax can be reduced with the
corporate income tax, limited to the corporate
income tax before eventual other credits.
Conclusion
The Luxembourg 2002 Tax Reform is not
budgetary neutral, given the tax rate reduction
and the clarification and broadening of the
participation exemption regime, without
expanding the tax base. With these measures,
together with the unchanged beneficial regimes,
such as the exemption of liquidation gains, a
wide range of bilateral tax treaties, etc.,
Luxembourg enhances its competitive position
in Europe and underscores its interesting regime
for international tax planning.
This is a considerable improvement for foreign
parent companies with a Luxembourg
subsidiary, that have their registered or head
office in a country allowing a foreign income
tax credit, but not a foreign net worth tax credit.
When Luxembourg corporate income tax was
reduced by the credit of the net worth tax, such
foreign companies saw their foreign income tax
credit diminished.
b. registration duties
In order to put the sale of immovable property
and the transfer of shares of a company on equal
terms, and in order not to penalize, from a tax
perspective, the sale of real property with
respect to the transfer of shares, a legislative
modification was imposed. 34 Therefore, the
Reform Regulation inserted an anti-abuse
provision regarding the proportional registration
33
Initially, the bill of the Reform Regulation intended a
reduction down to 8.4%.
34
Pursuant to the law of August 7, 1920, transfer of immovable
property is subject to a 5% registration duty, excluding the 2/10
surcharge. Contribution of real property in a collective
commercial company only triggers a 1% registration duty and
the transfer of shares is merely subject a lump-sum registration
duty, since the proportional registration duties thereon have been
lifted by the law of December 29, 1971.
NautaDutilh is a leading law firm on the European continent
with close to 500 attorneys, civil law notaries and tax advisers.
For more information about Belgian or Luxembourg tax issues,
contact Mr. Werner Heyvaert or Mr. Brent Springael, attorneys
at law with NautaDutilh in Brussels, by telephone at 32-2673-0007 or by email at werner.heyvaert@nautadutilh.com
or brent.springael@nautadutilh.com
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