The Luxembourg government has laid down draft legislation to enact the second EU Anti-Tax Avoidance Directive 2017/952 (ATAD 2) into domestic law.
ATAD 2, which refreshes an earlier EU Anti-Tax Avoidance Directive, aims to combat current avoidance practices which utilise the hybridity of an instrument or an entity to mitigate the tax liability for transactions both within and outside of the EU.
The legislation, however, also contains exemptions such as certain financial traders payments under financial instrument rules.
As the bill is based on an EU directive, the Luxembourg government has a degree of discretion as to how it is implemented and the scope of its application.
William Jean-Baptiste of the offshore law firm Ogier said: “The draft law provides clarification on some crucial questions, in particular regarding the application of the new rules to investment funds.
“However, at this stage, the draft law still needs to go through the Luxembourg legislative process and we expect that some amendments will be made, in particular further to the input of the Luxembourg Council of State.”
EU member states have until 1 January 2020 to implement ATAD 2 domestically. Luxembourg’s draft bill mirrors much of the language of the Directive and applies all the exceptions granted by ATAD 2, however it has yet to complete its legislative passage and it is likely that amendments will be made.
Certain Luxembourg entities which are liable for corporation tax, including Luxembourg permanent establishments of foreign entities, will be subject to the legislation from 1 January 2020.
In addition, the bill contains provisions to target reverse hybrid mismatches which will apply to Luxembourg tax transparent partnerships which would otherwise be as treated as opaque by their foreign-domiciled owners from 1 January 2022.
Hybrid mismatches can arise when there is a “double deduction” (the same payment is deducted for tax purpose both in the source jurisdiction and in foreign jurisdiction where the investor is domiciled) or where there is a “deduction without inclusion” – when a transaction is tax deductible at the level of the payer but not included in the taxable income of the recipient.
The law aims to tackle tax advantages received by vehicles through hybrid mismatches where the transaction has been deliberately structured to achieve these and where the transaction is between group and/or associated entities.