On 2 August 2016, the Luxembourg Government submitted the draft bill n°7031 ("Bill") to the Parliament aiming at transposing into Luxembourg law the EU Directive 2016/881. This Bill, which is now in the final legislative phase before adoption, extends the scope of mandatory exchange of information on tax matters in imposing country-by-country ("CbC") reporting obligations to Multinational Enterprises Groups ("MNE Groups"). An MNE Group is any Group that includes two or more enterprises the tax residence for which is in different jurisdictions.
Such a Directive is in line with Action 13 of the OECD Base Erosion and Profit Shifting (BEPS) ("Action 13") initiative which notably sets out recommendations and a three-tiered standard documentation on CbC reporting with the global purpose of increasing tax transparency so that MNE Groups abandon certain (aggressive) practices and pay their fair share of tax in the country where profits are made in.
The Bill requires the "ultimate parent entity" of an MNE group which is Luxembourg resident for tax purposes to file a CbC report with the Luxembourg tax authorities. In order to ensure an appropriate balancing of reporting burden and benefit to tax administrations, only MNE Groups with total consolidated group revenue equal or higher than EUR 750,000,000 will be required to file the CbC report.
Under certain circumstances, a "surrogate parent entity" (i.e., another entity of the Group appointed as a sole substitute for the ultimate parent entity by such MNE Group) or any "constituent entity" of the Group which is not the ultimate parent will have to be designated as the reporting entity of the Group and file a CbC report accordingly.
An MNE Group entity resident in Luxembourg for tax purposes will need to notify the Luxembourg tax authorities whether it is the ultimate parent entity or a surrogate parent entity. If it is neither, it will have to provide the Luxembourg tax authorities with information on the ultimate parent entity or surrogate parent entity (such as identity and tax residency).
Content of the CbC report
MNE Groups must provide annually and for each tax jurisdiction in which they do business certain information including the amount of revenue, the profit before income tax, the income tax paid and accrued, the number of employees, the stated capital, the retained earnings and the tangible assets, the nature of the activities of the involved entities as well as any other additional information that could be relevant. This information will enable the tax authorities to react to harmful tax practices through changes in the legislation or adequate risk assessments and tax audits.
The mandatory exchange of CbC reports will be initiated with EU Member States but also with other jurisdictions which are signatories to the OECD Multilateral Competent Authority Agreement on the Exchange of CbC Reports foreseen by Action 13 (a Luxembourg Grand-Ducal Regulation will be published separately in this respect).
The CbC report relates to financial years starting 1 January 2016 and onwards and must be filed annually within 12 months of the last day of the relevant financial year (extended to 18 months for the first year). The Luxembourg tax authorities must pass on such information to the relevant foreign tax authorities within 3 months of the submission of the CbC reports (extended to 6 months for the first year).
In case of late, incomplete or inaccurate filing, the reporting entity may be subject to a penalty of up to EUR 250,000.