Luxembourg - Tax
Amendment to the SPF Law
On 17 July 2024, a draft law with number 8414 (“Draft 8414”) was presented to the Luxembourg Parliament introducing inter alia a modification to the law on private wealth management companies (Société de Gestion de Patrimoine Familial, “SPF”).
Draft 8414 plans on raising the annual minimum subscription tax applied on SPF from EUR 100 to EUR 1,000.
In addition, Draft 8414 clarifies that the assessment of the value of the debt forming part of the tax basis of the subscription tax is to be determined on the first day of the financial year of the relevant SPF.
More importantly, Draft 8414 introduces a new sanction regime applicable in case of infringement by an entity of its obligations under the SPF Law. Under the current regime, the only existing sanction is the removal of the SPF status by the director of the Indirect Tax Administration on a discretionary basis.
The new framework offers now a two-step procedure of sanctions. The first sanction is a penalty fee of a minimum of EUR 10,000 (or half the subscription tax paid) for certain administrative infringements, and a maximum of EUR 250,000 for infringement of corporate form choice, type of investments, etc.
The second type of sanction is that, if in the following six months the entity has not paid the penalties and corrected the situation, the director of the Indirect Tax Administration will remove the SPF status. To take such drastic decision, the director of the Indirect Tax Administration must consider all facts and circumstances. If the entity continues to use the mention SPF after the removal of the SPF status by the director of the Indirect Tax Administration, it will risk a penalty fee of EUR 5,000.
Once Draft 8414 is passed, the provisions will enter into force the day following publication in the Luxembourg Official Journal.
Suppression of the subscription tax for active ETF UCITS
Draft 8414 also introduces a new exemption from subscription tax for Exchange-Traded Fund (“ETF”) UCITS and their compartments. This measure intends to promote the competitiveness of this branch of the Luxembourg fund industry on the global stage.
The exemption may apply to the ETF UCITS that are traded on at least one regulated market or trading facility where, in brief, it is assured that the value of their units does not deviate from its net asset value.
This measure has been criticised by some members of the Chamber as constituting a large budget cut, but the government re-assured that this would not have an impact on the state’s budget.
Case law: Anti-Abuse with respect to the participation exemption regime
On 31 July 2024, the Luxembourg Administrative Court recognised in a Belgian/ Luxembourgish case an abuse of law under the Anti-Abuse rule embedded in the participation exemption regime.
In short: a Luxembourg private limited liability company (“LuxCo”) received promissory notes (at par value) in a US corporate entity (“USCo”) from its Belgian wholly held subsidiary (“BelCo”) as a repayment (in kind) of its Profit Participating Facility (“PPF”). Immediately afterwards, the LuxCo sold the promissory notes at market value to another entity within the group. For tax purposes, LuxCo re-characterised the gain made on the promissory notes when sold to another entity within the group into a hidden distribution of dividends from BelCo and claimed the application of the participation exemption to the dividends deemed received.
The Tax Authorities refused the application of the exemption and qualified the transaction as abusive under both the General Anti-Abuse Rule (“GAAR”) of §6 of the General Tax Act (Steueranpassungsgesetz) and the Specific Parent-Subsidiary Directive (“PSD”) Anti-Abuse Rule implemented in Luxembourg Income Tax Law under article 166 2bis (“SAAR”). The Administrative Court confirmed the decision of the Administrative Tribunal, clarifying, however, that under the legal principle of lex specialis derogate legi generali, the abuse of law must be analysed [Bv1] first under the SAAR.
With respect to the recognition of an abuse of Law, the Administrative Court examined whether the transaction was non-genuine with the sole or main purpose of obtaining a tax advantage defeating the purpose of the PSD. That questions if there are no economic valid reasons to support the arrangement put in place.
The Administrative Court rejected all arguments provided by LuxCo justifying the transfer of the promissory notes at par value and also alleged the existence of a more adequate way for this transaction to take place. For example, that BelCo could have directly sold the promissory notes to the other entity within the group and use the gains to repay the PPF (which LuxCo had been done for other similar transactions).
Therefore, the Administrative Court concluded that the transactions were non-genuine and that they were conducted with the sole or main intention to abuse the PSD to benefit from the participation exemption regime.
This is the first time that the Administrative Court analyses the application of the SAAR provisions in one of its decisions.
[Bv1]Not sure this is the correct word. Perhaps ‘acknowledged’ or ‘recognised’ was meant?
Pillar Two – Amendments to the Pillar 2 Law
On 12 June 2024, a draft law was presented before the Luxembourg Parliament incorporating clarifications in respect to the Pillar 2 Law, as explained in previous quarterly updates (Q3 2023 and Q4 2023). The main purpose of the draft law is to introduce certain elements not previously included in the Pillar 2 Law, derived from the OECD guidance published in February, July and December 2023.
The provisions relevant for the AIF industry are those concerning the possibility to consider the special purpose vehicle (SPV) held by the investment funds or real estate investment vehicles as an Excluded Entity under certain conditions (i.e. entities excluded from the scope of the Pillar 2 Law). According to the reading of the current law, the above-mentioned SPVs of the investment funds and real estate vehicles may classify as Excluded Entity if the investment or real estate funds are considered ultimate parent entity of the reporting group (UPE).
For an entity to be considered an UPE, such entity should, in principle, be subject to consolidation. Luxembourg investment funds are, in principle, not subject to consolidation obligations.
However, the draft law, in line with the OECD guidance, clarifies that the SPVs owned by the real estate investment vehicle or an investment fund, which is not an UPE only because it is not subject to consolidation obligations under the applicable accounting standards, may still be considered Excluded Entity if the other conditions are met. This is a very welcome clarification.
Other provisions provide clarifications in respect to the deemed consolidation test, country-by-country reporting safe harbour rules, deferred tax assets, divergent tax years situations, etc.