ATAD II Implementation In Luxembourg: Bill Submitted To The Parliament

On 8 August 2019, the Luxembourg government filed with Parliament Bill N° 7466 (the "Bill") implementing into domestic law Council Directive (EU) 2017/952 of 29 May 2017 ("ATAD II") amending Council Directive (EU) 2016/1164 ("ATAD I") as regards hybrid mismatches with third countries. The new measures, which amend Article 168ter Income Tax Law ("ITL") and introduce a new article 168quater ITL are generally in line with the provisions of ATAD II. They should apply to financial years starting as from 1 January 2020 except for the rules on reverse hybrids which should apply as from 1 January 2022.

Background

Article 168ter ITL was introduced into domestic law with effect as from 1 January 2019 to transpose inter alia the provisions of ATAD I covering intra-EU hybrid mismatches involving hybrid instruments or entities that give rise to a double deduction ("DD") or a deduction without inclusion ("D/NI") of the same payment.

The former rules applied either in the context of commercial or financial relationships between the taxpayer and an associated enterprise in another EU member State, or in the case of a structured arrangement concluded between a taxpayer and a party in another EU member State.

Associated enterprises imply a direct or indirect participation of 25% or more of the voting rights or capital or an entitlement to 25% or more of the profits in the case of hybrid instruments. In the case of hybrid entities, this percentage is increased to 50% or more. The concept of structured arrangement was not defined.

If an arrangement falls in the scope of the rule, operating expenses were not tax deductible in Luxembourg to the extent that they are already tax deductible in the source member State, or to the extent that the corresponding income is not taxed in the other member State.

The Bill revamps Article 168ter to transpose the provisions of ATAD II1, which extends the material scope of ATAD I to additional type of arrangements, introduces the "acting together" concept, and extends the territorial scope to transactions with third countries. In addition, a new article 168quater transposes the provisions of ATAD II on reverse hybrids.

In line with ATAD II, the commentaries to the Bill clarify that the applicable explanations and examples in the OECD-BEPS report on Action 2 can be used as a source of illustration or interpretation to the extent that they are consistent with the provisions of ATAD II and with the European Union law.

Hybrid mismatches covered by the new Article 168ter LITL

In line with ATAD II, the Bill includes a list of hybrid mismatches that fall in the scope of the rule. The hybrid mismatches are generally defined by reference to the notion of "payments", which include a distribution, credit or accrual (and no longer by reference to operating expenses).

1. Payment under a financial (hybrid) instrument

   A payment under a financial instrument giving rise to a deduction without inclusion will now fall in the scope of the rule if it is not included in the hands of the payer within a reasonable period of time (i.e., within 12 months starting from the end of the Luxembourg payer's tax period, or if the terms of the payment are at arm's length) and if the mismatch outcome is attributable to differences in...