Global Tax Alert Luxembourg presents 2015 Budget and Package for the

24 October 2014
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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
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
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
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
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
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.
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]
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