Bill n° 6847 – Amendment to the participation exemption regime in Luxembourg

On 5 August 2015, the Luxembourg government presented a bill implementing Council Directives 2014/86/UE and 2015/121/UE amending Council Directive 2011/96/UE of 30 November 2011 on the common taxation applicable in the case of parent companies and subsidiaries of different Member States (the Parent-Subsidiary Directive).

In accordance with Directive 2014/86/UE, the bill provides that dividends and other profit distributions received by Luxembourg companies from their subsidiaries located in another European country will no longer be exempt according to the participation exemption regime (as provided in article 166 of the Luxembourg Income Tax Law (“LITL”)) if such dividends and profit distributions are deductible in the source country. This provision aims at avoiding double non-taxation from the use of hybrid instruments.

In addition, the bill adopts the European general anti-avoidance regime provision (“GAAR”) included in Directive 2015/121/UE. Under the GAAR, the participation exemption regime on inbound dividends (article 166 LITL) and on outbound distributions (article 147 LITL) will not apply “if that income is distributed as part of arrangements which, having been put into place for the main purpose or with one of the main purposes of obtaining a tax advantage that defeats the object or purpose of the Directive, are not genuine having regard to all relevant facts and circumstances. An arrangement may comprise more than one step or part. For the purpose of the GAAR, an arrangement or a series of arrangements shall be regarded as not genuine to the extent that they are not put into place for valid commercial reasons which reflect economic reality”.

In addition to provisions relating to the participation exemption regime, the bill provides for:

• the broadening of the scope of investment tax credit in the case of leasing;
• an amendment to the tax unity regime to allow “horizontal” integration according to a recent decision of the European Court of Justice; and
• the broadening of the scope of the exit tax’s deferral to the transfer of a Luxembourg company, a Luxembourg permanent establishment or business assets to countries with which Luxembourg has concluded a treaty that includes an exchange of information clause in line with the OECD Model, or to countries with which a Tax Exchange Information Agreement (TIEA) has been signed.