Luxembourg Tax
Collective investment structures in the AIF industry often use so-called Luxembourg holding companies that are normally subject to corporate income tax, municipal business tax, net wealth tax and withholding tax. These entities must annually file their income tax returns.
Draft bill amending Luxembourg procedural law
On 28 March 2023, a new bill of law has been tabled before the Luxembourg Parliament (“Bill”) providing significant amendments to the Luxembourg General Tax Law (Abgabenordning) from 22 May 1931, as amended, dealing with procedural tax aspects.
The amendments will have impact on, amongst other, the tax assessment objection procedure and various other formal requirements in relation thereto, transfer pricing aspects and the functioning and cooperation of and between different administrative bodies. Most of the provisions are further to be clarified within the grand-ducal decrees that would be subsequently issued.
Subject to the parliamentary procedure, once adopted, the provisions of the Bill should be in effect as of 1 January 2024, or applicable to the fiscal year 2024.
Tax assessment objection procedures and various formal requirements
In case of ex officio assessments, notably those issued in the absence of a tax return for the relevant fiscal year, the taxpayers will no longer be able to have the assessment revoked or adjusted based on a simple request to the tax inspector. As a consequence, a formal objection letter would need to be filed. Furthermore, ex officio assessments can only be successfully challenged in case the amount of tax due on the ex officio assessment would be considered excessive for more than 10%.
The Bill introduces a 12 months deadline for filing an appeal before the administrative tribunal against the decisions that are deemed negative, i.e. in case of objections that are not responded to within 6 months, calculated from the expiry of the 6 months period.
For an objection to be admissible, it should be a written signed submission containing (i) precise names and address of the claimant (ii) designation of the relevant decision (iii) object of the claim (iv) summary of factual and legal background of the claim (v) a proof of mandate (if applicable) and (vi) supporting documentation.
Tax payers will only be able to rely on their annual accounts for an objection against any decision of the tax administration only if the annual accounts have been filed and registered within the prescribed legal deadlines.
The Bill introduces a possibility for a tax assessment to be issued, withdrawn or amended further to a mutual agreement procedure or an arbitration decision in accordance with the provisions of a double tax treaty, subject to the conditions required within the relevant mutual agreement procedure or arbitration decision. This new procedure may open up opportunities to avoid double taxation in cross-border situations.
Any and all documentation and data requested by the tax authorities that exists in electronic format should be communicated to the tax authorities in such format and it has to be readable, directly comprehendible and true to the original.
Transfer Pricing Aspects
Luxembourg tax law currently provides for a procedure to obtain an advance tax agreement or an advance pricing agreement. A possibility has been introduced for obtaining an advance pricing agreement pursuant to a mutual agreement procedure or an arbitration decision as provided within the applicable tax treaty entered into with Luxembourg. In addition, the Bill sets the administrative fee for issuance of advance pricing agreement in the range between EUR 10,000 and EUR 20,000, depending on the complexity of the request and required volume of work.
Further, the Bill provides for clarifications on the requirements in respect to the documentation that can be requested by the tax administration in order to support the arm’s length conditions and prices in case of transactions between associated enterprises.
Functioning and cooperation of and between administrative bodies
Tax inspectors will be able, in case where the taxpayer is facing considerable financial difficulties, to allow a tax payment deferral or payment in instalments, under the conditions that such decision dfoes not jeopardize the claim of the tax authorities nor it precludes the treasury from exercising its mortgage rights. Finally, such deferral does not suspend the penalty interest for late payment.
The Bill introduces provisions reinforcing the intra-administrative and judicial cooperation in the aspects of exchange of information between the tax administration and regulatory bodies (CSSF and CAA).
The tax authorities are able to confide certain enumerated elements of their work to contractors and subcontractors. To the extent some computer tasks are delegated by the contractors and sub-contractors to CTIE, the existing legal sanctions applicable in case of breach of tax secrecy apply to the contractors, subcontractors and CTIE accordingly.
Withholding tax on redemption of classes of shares
On 27 January 2023 the administrative tribunal decided, in line with previous decisions, that a redemption of a class of shares is not to be considered a dividend distribution and therewith not subject to withholding tax provided the redemption price is determined at fair market value. The Luxembourg tax administration did not file an appeal against this decision.
Luxembourg holding companies in the AIF industry are often structured with different classes of shares. This decision is welcomed by practitioners as it supports the standing practice.