Luxembourg - Tax
New double tax treaty between Luxembourg and the United Kingdom
On July 19, 2023, the Luxembourg Parliament ratified a new double tax treaty (DDT) between Luxembourg and the United Kingdom which was concluded on June 7, 2022, further amending the original treaty, signed on May 24, 1967, and subsequently amended three times.
From an alternative investment funds perspective, this new DDT extends its benefits to certain collective investment vehicle incorporated under Luxembourg corporate law such as undertakings for collective Investment in transferable Securities, undertakings for collective investment subject to Part II of the lax of December 17, 2012, specialised investment funds, reserved alternative investment funds and any other investment fund incorporated under Luxembourg corporate law which are regard as collective investment vehicle by both Luxembourg and the United Kingdom.
The provisions of the new DTT have been described in more detail in our Q2 2022 quarterly update.
According to the Article 29 of the new DDT, the new provisions will entry into force on January 1, 2024.
A draft law implementing Pillar 2 Directive in Luxembourg national law
On August 2, 2023, a draft law implementing the so-called Pillar 2 Directive1 has been introduced before the Luxembourg Parliament.
The main purpose of the Pillar 2 rules is to create a common framework for a global minimum level of taxation for multinational enterprise groups (MNEG) and large-scale domestic groups (LSDG) in the EU with consolidated financial revenue of at least EUR 750m per year.
The draft law creates a system through which an additional amount of tax (a ‘top-up tax’) should be collected each time the effective tax rate (ETR) of an MNEG in a given jurisdiction is below 15 %. This is achieved through two interlocked rules (GloBE rules), comprised of the Income Inclusion Rule (IIR) and the Undertaxed Profit Rule (UTPR). Under the IIR, the parent entity of an MNEG should be obliged to apply the IIR top-up tax equal to the top-up tax of the low-taxed constituent entity, whether that entity is located within or outside the EU, multiplied by the parent entity’s allocable share in such top-up tax for the fiscal year, in order to ensure that such group is liable to tax at an effective tax rate of 15 %.
The new rules apply to constituent entities located in one of the EU Member States that are members of an MNEG or a LSDG with annual consolidated revenues in their ultimate parent entity’s (UPE) consolidated financial statements of at least EUR 750m, in at least last 2 of the 4 fiscal years immediately preceding the relevant year.
However, specifically excluded from the personal scope of the draft law are, amongst others, investment funds or real estate investment vehicle that are UPE of a multinational group, since the income earned by those entities is taxed at the level of their owners.
Furthermore, entities held by the excluded entities previously mentioned are excluded, to the extent (i) an interest of at least 95% in such entity is held and such entity operates exclusively to hold assets or invest for the benefit of those entities listed above or (ii) an interest of at least 85% in such entity is held and almost all income of such entity consists of dividends, capital gains (or losses) which are excluded from the calculation of the qualifying income.
It is to be closely monitored if investment vehicles within the AIF industry may be considered exempt from the Pillar 2 rules.
1 Council Directive (EU) 2022/2523 of 14 December 2022 on ensuring a global minimum level of taxation for multinational enterprise groups and large-scale domestic groups in the Union.
Modernisation of the Luxembourg accounting law
On 28 July 2023, the Minister of Justice introduced the draft law before the Luxembourg Parliament, which aims to regroup and consolidate the general accounting provisions, while the more sector-specific accounting rules will remain separate, but with a clear connection to the new law.
The main provisions of the draft law that could have an impact on the AIF industry players are the following:
- The draft law introduces the concept of micro-enterprises, being companies which do not exceed two of the three following thresholds for two consecutive financial years: (i) total balance sheet EUR 350,000; (ii) net turnover of EUR 700,000; and (ii) average number of 10 employees. Micro-enterprises would mainly be exempted from establishing notes to the annual accounts. Micro-enterprises will also benefit from some other simplification measures applicable to small businesses, including (i) the exemption from the requirement to produce a management report, (ii) the exemption of the statutory audit, and (iii) the option of publishing only their balance sheet (where the income statement would still have to be filed but could remain confidential and be accessible only to public authorities). It is important to note that under the draft law, holding companies, credit institutions and other entities subject to the supervision by the supervisory authority of the Luxembourg financial sector (Commission de Surveillance du Secteur Financier (the CSSF), insurance companies, securitisation companies governed by the law of 22 March 2004 not subject to prudential supervision by the CSSF and reserved alternative investment funds (RAIF) are expressly excluded from the scope of application of the concept of micro-enterprises.
- The draft law provides that Special Limited Partnerships (SCSp) are generally exempt from the obligation to prepare annual financial statements if they annually submit their trial balance as outlined in the Luxembourg Standard Chart of Accounts (SCA). However, certain SCSp, namely those falling within the sector of insurance companies, credit institutions, and other SCSp subject to prudential supervision by the CSSF, as well as those preparing their annual financial statements according to IFRS, those with the status of securitisation companies not subject to prudential supervision by the CSSF, and those with the status of RAIF, are exempt from filing their trial balance under the SCA format but are required to establish financial statements in accordance with Title III of the new law.
- The draft law clarifies that the general accounting principles continue to apply mutatis mutandis before and after dissolution or liquidation. Accordingly, dissolved and liquidated entities will have to establish annual financial statements (balance sheet, profit and loss accounts, notes) listing their assets to be realised and the liabilities to be discharged, recognising and valuing them appropriately. Those annual financial statements will not be subject to approval by the shareholders' meeting but will have to be filed with the RCS and published in the RESA after having been presented to the shareholders. Only the closing financial statements will be subject to approval by the shareholders' meeting and subject to filing and publication under the same conditions.