Luxembourg exit tax rules aligned
with EU requirements
New exit tax rules have been adopted by Luxembourg into national Law as part of the transposition of the Anti-Tax Avoidance Directive. The new Luxembourg exit tax regime will take effect as of 1 January 2020.
Christophe De Sutter - Sponsoring Partner - Cross-Border Tax - International Tax - Deloitte
Thibaut Barras - Senior Manager - Cross-Border Tax - International Tax - Deloitte
Published on 9 July 2019
The Law transposing the EU Anti-Tax Avoidance Directive (ATAD I or Directive) into Luxembourg domestic law was voted by the Luxembourg Parliament on 21 December 2018.
New measures related to exit taxation have been introduced as part of this transposition in order to adapt to the requirements provided by the Directive. As allowed by the Directive, these rules will come into force as of 1 January 2020 (other ATAD I measures became applicable as of 1 January 2019).
The purpose of such measures is to prevent companies from avoiding tax when relocating either assets, activity, or tax residence to another jurisdiction, and to ensure that a Member State has the right to tax the economic value of any capital gains generated on its territory, even if latent, arising upon transfer.
1. Luxembourg exit tax rules prior to ATAD I
Luxembourg tax law already provides for exit tax rules. Such rules have evolved over time, in particular through the introduction of the possibility of a deferral of the tax liability upon transfer, if requested by the taxpayer.
Luxembourg exit tax rules are laid down in Articles 35 and 43 of the Luxembourg Income Tax Law of 4 December 1967 (LITL) and which covers transfers to Luxembourg; and under Article 38 LITL and paragraph 127 of the General Tax Law (Abgabenordnung or AO) for transfers out of Luxembourg.
2. EU tax requirements with respect to exit tax rules
Unlike most of the new rules introduced by ATAD I (mainly arising from the recommendations of the BEPS action plans—Base Erosion and Profit Shifting), the exit tax provisions have been initiated by the European Commission.
The objective is to protect against tax avoidance through (i) migration of companies or (ii) the transfer of assets to lower jurisdictions or outside the tax net entirely. In other words, and to quote the first lines of the Directive Preamble, "the current political priorities in the field of international taxation highlight the need to ensure that taxes are paid where profits and value are generated”.
In light of this, the Directive introduces an exit tax scheme covering various types of transfers, defined under three articles:
- Article 2 (general provisions and definitions) notably defines the notions of "transfer of assets", "transfer of tax residence", and "transfer of an activity exercised by a permanent establishment"
- Article 5 describes several measures to ensure the application of exit taxation:
- Paragraph 1 describes four situations where a taxpayer might be subject to exit tax, calculated on the difference between the market value of the assets transferred at the time of the disposal of the assets, and the fiscal value of these assets.
- Paragraph 2 entitles the taxpayer to defer the payment of the tax due over five years, under certain conditions.
- Paragraph 3 gives the option to Member States to impute interest in case of deferral of the tax liability.
- In case of risk of non-recovery, an option may also be taken to request that a guarantee is provided by the taxpayer.
- Paragraph 4 indicates several cases where the tax deferral is interrupted and the tax liability becomes immediately payable.
- Under paragraph 5, in case of transfer of assets, tax residence, or activity exercised in an intra-EU context, the value retained by the receiving State for tax purposes is the value established by the Member State of origin—possibility of challenge by the receiving country if it does not reflect the market value.
- Paragraph 6 defines the concept of "market value".
- Paragraph 7 does not include in the scope of the exit tax liability (i) temporary transfers (i.e., with return to the state of origin within 12 months) and (ii) transfers of assets intended to meet prudential rules.
3. Luxembourg exit tax rules post-ATAD I
The exit tax rules currently in place in Luxembourg have been adapted to the Directive requirements and modified in accordance with the existing provisions under domestic law.
Specifically, Article 35 LITL addressing transfers to Luxembourg, now includes two new paragraphs introducing the Directive’s principle of symmetry in Luxembourg law. The first one points out that for a transfer of tax residence, normal place of residence, statutory seat, central administration, or business carried out through a permanent establishment from another jurisdiction to Luxembourg, the value of the assets part of the net invested asset transferred for Luxembourg tax purposes, should be the one established by the country of origin (i.e., application of the symmetry criterion). The second provides that the date of acquisition of the assets should correspond to the actual date of acquisition of the assets (irrelevant of the transfer).
It is worth noting that the LITL uses the terms “going concern value” (valeur d’exploitation), instead of the terms “market value” (valeur de marché) used by the Directive (market value not being defined under Luxembourg law). As foreseen by the Directive, Luxembourg can challenge the value of transferred assets determined by the State of origin if this value is greater than the going concern value of said assets.
Finally, Article 35 LITL covers transfers from any jurisdiction and does not limit its scope to States of origin that are part of the EU.
Article 43 LITL covering contributions to Luxembourg was also amended in the same manner.
One of the most important changes to Luxembourg law in terms of exit taxation is the amendment of Article 38 LITL addressing transfers out of Luxembourg and transposing the cases specifically listed by ATAD I subject to exit taxation.
In accordance with the Directive, the term "other State" indicated in the Article refers to transfers to any State (EU or non-EU). In addition, transfers of assets made to meet prudential capital requirements or for liquidity management purposes and with a temporary nature are not subject to exit tax.
As part of this change, §127 AO was also modified to introduce a payment of exit tax in five-year instalments for any transfers out of Luxembourg foreseen by ATAD I. This option of replacing the current indefinite tax deferral upon exit can only be requested by the client for transfers to EU and EEA States (in line with ATAD I). The Luxembourg legislator did not retain the possibility to impute interests on the instalments nor to request that a guarantee is provided by the taxpayer, although the Directive provides such options. The paragraph is also completed by list of events under which the right to defer the exit tax is terminated and the balance of the tax due becomes immediately due.
Taxpayers can still benefit from the indefinite deferral of taxation as currently foreseen by the law for any transfer performed by 31 December 2019.
Luxembourg, by transposing ATAD I, now complies with European standards. The country decided not to apply some options offered by ATAD I (i.e., no interest applicable on the instalments or no need for the taxpayer to provide a guarantee) which is a favorable approach for the taxpayers, the attractive indefinite deferral regime being abolished as from 2020.
ATAD I follows the objective of global tax harmonization at a European level although exit tax rules could call into question the fundamental principle of freedom of movement of goods and capital within the single market. One may also question the difference in the application of the rules from one Member State to another, depending on their existing rules and the options retained by each country.
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