24 October 2014 EY Global Tax Alert Library Access both online and pdf versions of all EY Global Tax Alerts. • Copy into your web browser: http://www.ey.com/GL/en/ Services/Tax/InternationalTax/Tax-alert-library#date Global Tax Alert Luxembourg presents 2015 Budget and Package for the Future to rebalance public finances and overhaul the tax system Executive summary On 15 October 2014, Luxembourg’s Minister of Finance, M. Pierre Gramegna, presented the Budget of a new generation. The Luxembourg Parliament will not only have to vote on the Budget Law 2015, but also on a multi-annual financial programming covering the period 2014-2018 and a draft law on the implementation of the first part of this Package for the Future. The 258 measures of the Package for the Future aim at saving more than €1 billion in 2018 and thus to rebalance the public finances by that date. As regards tax measures, next to an increase of Value Added Tax (VAT) and the introduction of a specific contribution of 0.5% on income realized by individuals, this Package formalizes the transfer pricing and the tax ruling practice through amendments to the various tax laws. The new measures will take effect as of 1 January 2015. Detailed discussion Budget Law 2015 VAT increase As already announced earlier this year, the current VAT rates will be increased by two points, except as regards the so-called super-reduced rate of 3%. As from 1 January 2015, VAT will thus apply at a rate of 17%, 14%, 8% or 3%. The super-reduced rate of 3% will continue to apply as in the past, except for the delivery of alcoholic beverages in catering services and the acquisition of dwellings intended for rental. The VAT rate applicable to dwellings intended for rental will raise from the current 3% to 17% whereas renovation work of rented dwellings will continue to benefit from the 3% VAT rate. Furthermore, a transition period is proposed, since the superreduced rate will be applied until 31 December 2016 for construction projects (intended for renting) for which the authorization request has been filed before 1 January 2015. The Budget Law furthermore introduces a reimbursement procedure in favor of taxpayers of input VAT for unassessed periods. Direct taxes Article 9 of the Income Tax Law will be abolished. It grants the Minister of Finance the possibility to determine a lump-sum taxation for individuals establishing their fiscal domicile in Luxembourg. This provision has been considered as being incompatible with the national and international legal framework. A further possible incompatibility with EU laws, pertaining to the taxation of dividends, is also to be removed. Withholding tax is levied on dividend distributions made by a Luxembourg resident company at a rate of 15%, unless a lower rate is foreseen by the double tax treaty concluded between Luxembourg and the country of residence of the beneficiary or an exemption applies based on domestic law (participation exemption). The Luxembourg withholding tax can normally be credited in the recipient’s country of residence against income tax payable by the recipient. If the nonresident recipient does not pay any income tax in its country 2 of residence because of low or nil taxable income, the Luxembourg withholding tax on this income from capital is a final tax. However, Luxembourg-resident recipients (who are obliged to file an annual tax return according to the provisions of article 153 of the Income Tax Law) suffering tax losses or having no taxable income, will be reimbursed for the difference between the tax withheld at source and the amount of income tax due. The Budget Law intends to modify the current provisions by introducing the principle that taxes withheld on income from capital cannot be reimbursed, thereby securing the same treatment for resident and nonresident recipients of dividends. An exception applies, however, for taxes withheld upon distributions falling under the provisions of the participation exemption. Accordingly, a recipient not fulfilling, at the time of the distribution of the dividend, the sole condition of the 12-month holding period of the participation in the Luxembourg distributing company, is entitled to claim the reimbursement of the withholding tax as soon as the recipient proves that the aforementioned condition is fulfilled. Additionally, the minimum corporate income tax regime is adapted in order to take into account the more specific situation of small and medium-sized enterprises. Going forward, the €3,000 minimum corporate income tax for entities exercising mainly a financing activity will no longer be applicable to entities whose sum of qualifying Global Tax Alert financial assets does not exceed €350,000. If this ceiling is not achieved, the minimum corporate tax is €500 instead of €3,000. Finally, a ”contribution for the future of our children” is introduced. This contribution will be levied at a rate of 0.5% on each category of income received by individuals, without minimum or ceiling as regards the assessment basis, but after deduction of an allowance corresponding to 25% of the minimum social salary. Furthermore, the child-raising and maternity allowances will be abolished. The Government has also expressed its commitment to further support research and development (R&D) activities, as well as innovation by increasing the credits in favor of the National Research Fund by 15.38% as compared to 2014. The benefits of the 2009 law on the promotion of research, development and innovation (R&D law) have been extended and the aid program foreseen by the law of 18 February 2010 on the aid program for environmental protection and rational utilization of natural resources is also maintained until 31 December 2015. On the other hand, in the context of reducing expenses, the Government has projected to reduce the level of subsidies granted to enterprises by 10%. Finally, as announced by M. Gramegna in his speech to the members of the Parliament, tax evasion will be increasingly combatted. Consequently, an appropriate budget has been put aside to reinforce the Tax Inspection Departments of both the direct and indirect tax administrations. Implementation Law of the Package for the Future This Implementation Law is the framework for the introduction of long-awaited measures that aim to reinforce the position of Luxembourg in an international context. Tax ruling practice The first measure to be highlighted is the incorporation into the General Tax Law (Abgabenordnung) of a provision dedicated to the tax ruling practice (procedure des décisions anticipées). Upon a written and motivated request, the officer of the tax competent taxation office will deliver an advance decision relating to the application of Luxembourg tax law to one or more transactions envisaged by a taxpayer. This decision will be binding on the tax office when issuing future tax assessments. The detailed procedure will be laid down in a grand-ducal regulation to be issued at a later stage. These provisions reflect and formalize the existing administrative practice, enabling taxpayers to obtain adequate upfront legal certainty. It should also ensure a harmonized and uniformed application of the tax laws across the various taxation offices and an increased transparency towards foreign tax authorities. In this context, and since it involves an increased administrative and functional burden, the direct tax authorities will be authorized to levy a specific duty of up to €10,000 per request, payable by the requesting individual or entity. Transfer pricing legislation Given the globalization of transactions and consequently the increased focus on transfer pricing matters, the Luxembourg Government has decided to forge a more solid framework for the arm’s length principle to be applied between associated enterprises. The wording of the current transfer pricing rule of article 56 of the Income Tax Law will be replaced by a provision largely inspired by the arm’s length principle as set forth by article 9 paragraph 1 of the Organisation for Economic Co-operation and Development (OECD) Model Tax Convention on Income and on Capital (in its version dated 22 July 2010) as well as legislations of other European countries, in particular the Netherlands. Where associated enterprises enter into transactions which do not meet the arm’s length principle, their profits will be determined according to normal market conditions and taxed accordingly. Furthermore, the taxpayer’s obligation to be able to justify the data contained in its tax returns with appropriate information and documentation will be formally extended to transfer pricing matters. Global Tax Alert Multi-annual financial programming covering the period 2014-2018 To outline the medium-term direction of the public finance policy, the Government has developed 258 measures to be adopted in the course of the following years. Measures that may impact taxpayers are, among others, the revision of the rules for granting aid to enterprises, abolishment of the support for entrepreneurship and the decrease of subsidies granted for further professional education. The next steps will be the parliamentary debate on this Package, which may result in the adoption of amendments to the current version of the various documents. The vote on the final version should take place before year-end. Impact A major tax reform as per the Government’s announcement is currently being evaluated and is expected to apply starting fiscal year 2017. Given the current European and international context, the fact that the Government has already at this stage proposed two very important measures for Luxembourg, being the formalization of transfer pricing regulations and tax ruling practice which will contribute to strengthening the position of Luxembourg in its international relations, may be viewed as a positive development. 3 For additional information with respect to this Alert, please contact the following: Ernst & Young TAX Sarl, Luxembourg City • Marc Schmitz +352 42 124 7352 • John Hames +352 42 124 7256 • Dietmar Klos +352 42 124 7282 • Frank Muntendam +352 42 124 7258 • Katrin Lakebrink +352 42 124 7298 [email protected] [email protected] [email protected] [email protected] [email protected] Ernst & Young LLP, Luxembourg Tax Desk, New York • Jurjan Wouda Kuipers +1 212 773 6464 • Julien Paradowski +1 212 773 9005 • Sebastian Klein +1 212 773 1235 [email protected] [email protected] [email protected] Ernst & Young LLP, EMEIA Financial Services Luxembourg Tax Desk, New York • Hicham Khoumsi +1 212 773 9836 [email protected] Ernst & Young LLP, Luxembourg Tax Desk, Chicago • Alexandre J. Pouchard +1 312 879 3007 • Damien Sergent +1 312 928 1611 [email protected] [email protected] Ernst & Young LLP, Luxembourg Tax Desk, San Jose • Xavier Picha +1 312 879 3263 [email protected] Ernst & Young Tax Services Limited, Luxembourg Tax Desk, Hong Kong • Domitille Franchon +852 2846 9957 [email protected] 4 Global Tax Alert EY | Assurance | Tax | Transactions | Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. © 2014 EYGM Limited. All Rights Reserved. EYG No. CM4833 This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com