To print this article, all you need to do is be registered or log in to Mondaq.com.
On January 28, 2021, the Luxembourg Parliament approved Law No. 7547 implementing measures on the tax deductibility of interest and royalty payments to companies in non-cooperative countries.
The bill adds a paragraph to Article 168 of the Luxembourg Income Tax Act (“LITL”) which extends the tax-free deductibility to interest and royalties of a related party in a country or territory that is on the EU Non-Cooperative List Jurisdictions1 ( the “EU list”). The new measure applies to provisions from March 1, 2021 based on the version of the EU list published in the Official Journal of the European Union at that time.
Following formal contradictions by the State Council during the parliamentary process, the draft law was amended several times. In particular, the original bill made both provisions and payments that fall within the scope of the new measures non-tax deductible. The final text no longer includes language that would make payments a triggering event for non-deductibility, as this would not have been in line with the principle of non-retroactive effect of the law (the original provisions would have included payments after the law came into force but due to provisions, which were made before this point in time). In addition, the provisions on the EU list that must be taken into account when assessing whether provisions are non-deductible have been simplified.
The new provisions apply under the following cumulative conditions:
1. The recipient of the interest or royalties must be a collective entity (as specified in Article 159 of the LITL, which by definition does not include partnerships). If the recipient is not the beneficial owner, the actual beneficial owner of the payments must be taken into account.
2. The recipient must be a related party within the meaning of Article 56 of the LITL (in relation to the Luxembourg transfer pricing rules).
3. The recipient must be located in a country or territory that appears on the EU list published in the Official Journal of the European Union.
The current EU list, last revised last October, 2 includes the following jurisdictions:
American Samoa, Anguilla, Barbados, Fiji, Guam, Palau, Panama, Samoa, Seychelles, Trinidad and Tobago, the US Virgin Islands, and Vanuatu. The next revision is to be carried out in February 2021.
From March 1, 2021, the new provisions will apply to the countries and territories that are listed in the latest version of the EU list published in the Official Journal of the European Union. From January 1 of each subsequent year they apply to the countries and territories that are listed in the version of the EU list that is valid from January 1 of this year. Jurisdiction delisting can be taken into account for provisions made on or after the date of the publication of the EU list by which the relevant jurisdictions withdrew in the Official Journal of the European Union (or an earlier version of the EU list published in the same year) were).
It is important that the relevant provisions remain tax deductible if the taxpayer can prove that a transaction was made for valid business reasons that reflect economic reality.
For more information on the new rules, see our previous newsflash: New Luxembourg draft law on payments to EU countries that are on the blacklist.
Final remarks
Taxpayers doing transactions with affiliated companies in countries included on the EU list must carefully consider the impact of this new measure on their business operations, taking into account that the list will be updated in the course of 2021 and in subsequent years can be.
How can we help?
The tax law partners and your usual contact persons at Arendt & Medernach are at your disposal to further evaluate and advise the effects of this new measure on your investments.
Footnotes
1. Countries and territories listed in Annex I of the conclusions of the Council of the European Union on the revised European Union list of non-cooperative countries and territories for tax purposes.
2. Please note our newsflash on the revised EU list_
The content of this article is intended to provide general guidance on the subject. A professional should be obtained about your particular circumstances.
POPULAR ARTICLES ON: European Union Taxes
Expatriate assistance for employment in Cyprus
AGP law firm | AG Paphitis & Co. LLC
A law amending the Income Tax Act has been submitted to the Cypriot Parliament in order to broaden the framework for recruiting foreign workers to Cyprus and to maintain its attractiveness.
Benefits for foreigners in Cyprus
Oxford Management
Cyprus’ full EU membership, strategic location, warm climate, highly skilled workforce and list of personal tax incentives have made Cyprus an ideal place for foreigners
New VAT burden for company cars?
Arendt & Medernach
On January 20, 2021, the Court of Justice of the European Union (ECJ) ruled in a case that raised the question of whether the provision of a company car for an employee …
Tax diary for 2021
Areti Charidemou & Associates LLC
Payment of PAYE in relation to the salaries of employees for the previous month …
Cyprus revises VAT for yacht leasing
A. Karitzis & Associates LLC
The Cypriot Tax Administration published Interpretative Circular 240 on December 23, 2019, which relates to the registration in the VAT register of Cypriot companies operating in the business of leasing pleasure yachts in Cyprus.