Luxembourg Tax Unity Regime
Posted - 04.06.2019
On 26 April 2019, the Luxembourg Parliament adopted Budget Law (Bill 7450) for the financial year 2019 (“Law”).
Amongst other tax measures included in the Law, one of the most salient concerns the reshaping of Article 164bis of the Luxembourg income tax law (“LITL”) providing for a tax unity (intégration fiscale) regime. This reshaping was prompted mainly by the option offered by the anti-tax avoidance directive (“ATAD”)1 to apply the new interest limitation rule laid down in Article 168bis LITL at the level of the tax unity.
The Law was also the opportunity to codify into new article 164bis LITL provisions in relation to the tax unity contained until then in different sources, i.e. the Grand Ducal Regulation of 18 December 2015 (the “Regulation”) and Circular L.I.R. No. 164bis/1 of 27 September 2004 of the Luxembourg direct tax authorities (“Circular”).
A. Application of the interest limitation rule at the tax unity level
As a new measure stemming from the ATAD, the deduction of the taxpayer's excess borrowing costs is limited to EUR 3 million or 30% of the taxpayer’s EBITDA (i.e. taxable earnings before interest, tax, depreciation and amortisation), whichever is the higher. According to Article 168bis LITL, the taxpayer’s borrowing costs are in excess if 'interest expenses on all forms of debt and other costs economically equivalent to interest and expenses incurred in connection with the raising of finance' (“Interest Expenses”) exceed the 'interest revenues and other economically equivalent taxable revenues' (“Interest Income”).
With the Law, the above rule applies at group level in the case where a tax unity has been elected (unless the members decide to apply it on a standalone level, see below). Interestingly, Luxembourg did not take this option offered by ATAD when first implementing the interest deduction limitation rule into Luxembourg law2 in the event that the option provided for by the ATAD is not transposed, the calculation method on an isolated basis would in practice trigger unexpected adverse tax consequences for the tax consolidated group.. The new Article 164bis LITL opens up such a possibility in an endeavour to maintain Luxembourg’s competitiveness within the European Union.
As a result, the tax unity’s exceeding borrowing costs will be determined at the level of the integrating company (i.e. the head of the tax unity). The Interest Expenses as well as the Interest Income of the integrating company will correspond to the sum of the Interest Expenses as well as the Interest Income of all the tax unity members. Each group member will, indeed, report its Interest Expenses and Interest Revenue in its own tax return, which will thereafter be aggregated at the level of the integrating company. In this respect, information to be disclosed in the tax returns of the group members has been increased compared to the previous tax unity regime.
By contrast, the integrating company’s EBITDA does not amount to the sum of each tax unity members’ EBITDA but rather to the sum of the total of the net incomes of the tax unity members, increased by the exceeding borrowing costs as determined at the level of the integrating company, the amortisations and the deductions for depreciation of all the tax unity members. The unity members’ tax exempted revenues and operating expenses are not taken into account for the calculation of the EBITDA of the integrating company.
The use of the term “net incomes” is an innovation of the Law. In the anterior tax unity regime, the Regulation referred to the term “taxable result” (résultat fiscal) which, pursuant to the Circular, corresponded to each group member’s commercial balance sheet increased by fiscally non-deductible amounts and reduced by non-taxable amounts. However, the Law does not provide a method to determine the “net incomes”. According to article 103 LITL, the term “net incomes” (revenus nets) specifically refers to income realized by individuals as listed at points 4 to 8 of Article 10 LITL, which do not include commercial profit (bénéfice commercial). The commercial profit is determined pursuant to article 18 LITL and corresponds to the difference of net assets at the end of the fiscal year compared to net assets at the beginning of the fiscal year3. This point will need to be clarified. As mentioned above, the exceeding borrowing costs of Article 168bis LITL are not to be applied for the determination of the net incomes of each group member (but will be computed once at the level of the head of tax unity).
The unused deduction capacity of the integrating company can be carried forward by the integrating company for a period of 5 years. However, exceeding borrowing costs of the integrating company arising during the tax unity period and which are not deductible for a fiscal year may be carried forward only by the integrating company and without time limitation. Non-deductible exceeding borrowing costs of a group member arising from fiscal years before it was admitted to the tax unity cannot be deducted by the integrating company, but may only be deducted by the member after it has left the tax unity. The same applies for the unused deduction capacity of a member arising from fiscal years before being admitted to the tax unity.
Certain exemptions provided in Article 168bis LITL are also applicable to the tax unity. This is notably the case for loans granted to tax unity members before 17 June 2016 (provided that these loans have not been modified) which will not be taken into account for the determination of the exceeding borrowing costs. Also, where tax unity members are financial undertakings (as defined in Article 168bis LITL), the interest deduction limitation provisions shall not be applicable to them.
It should be noted that tax unity members have the possibility to derogate from the calculation of the interest limitation rule at the fiscal unity level upon written request. In that case, the interest deduction limitation rule will be calculated on an individual basis for each member of the tax unity.
B. Reshaping of the existing tax unity provisions
Before the entry into force of the Law, the tax unity regime was governed by three different sources, being:
- Article 164bis LITL which provided for the capital holding conditions required for at least two related entities to form a tax unity;
- the Regulation which contained provisions on, inter alia, filing obligations of the tax unity members and the integrating company, the calculation method of the taxable result of the tax unity, the status of carried forward losses of group members which occurred before the admission to or during the application of the tax unity regime; and
- the Circular which provided for practical details on a variety of topics including the treatment of liberalities (libéralités), carried forward losses, tax bonuses (bonifications d’impôts) and deductible tax credits (impôts imputables sur la côte d’impôt).
Through the new Article 164bis LITL, the tax unity regime is embedded to a greater extent in one piece of legislation.
Notably, all the elements contained in the Regulation have been transferred to, and further detailed by, the new Article 164bis LITL. Consequently, the Regulation has been abolished.
The same applies for certain topics addressed in the Circular such as the treatment of liberalities (libéralités), carried forward losses, tax bonuses (bonifications d’impôts), which are now contained in Article 164bis LITL. However, the treatment of deductible tax credits (impôts imputables sur la côte d’impôt) has not been included in new Article 164bis LITL. The State Council had noticed this point and had suggested including a provision in that respect in the new Article 164bis LITL, but this observation was not taken into account by the legislator.
There are currently no indications as to what the fate of the Circular will be, but it can be reasonably expected that it will be maintained and updated in order to provide more detail on the new tax unity regime.
Despite the amendments introduced by the Law, the functioning of the existing tax unity regime remains substantially unchanged, with however certain clarifications.
- 1. Council Directive (EU) 2016/1164 laying down rules against tax avoidance practices that directly affect the functioning of the internal market
- 2. See the Law of 21 December 2018. According to the parliamentary comments, the reason for not taking this option was the incompatibility between the two sets of rules. However, as highlighted by the Chamber of Commerce (Chambre de commerce)
- 3. Increased by private drawings (prélèvements personnels) and reduced by capital contributions made during the fiscal year