Corporate Tax Reform 2019 – Part II

On 5 March 2019, the 2019 budget draft law was presented to Parliament.

The draft law introduces mainly the following corporate income tax measures with retroactive effect as from 1 January 2019:

A 1% decrease (from 18% to 17%) of the corporate income tax ("CIT") rate; A broadening of the scope of application of the reduced 15% CIT rate (now applicable up to a taxable income of EUR 175,000); Specific rules on the application of the interest limitation rule in case of tax consolidation. This tax alert provides an overview of the tax measures provided in the draft law. However, the proposed rules may still evolve throughout the legislative process.

DECREASE OF THE CIT RATE

Based on the draft law, effective retroactively as from tax year 2019,

the CIT rate of 18% is brought down to 17%. This rate applies to taxable income exceeding EUR 200,000. Taking into account the 7% solidarity surcharge (applicable on the CIT rate) as well as the municipal business tax ("MBT") of 6.75% for Luxembourg-City, the aggregate corporate tax rate will be reduced from 26.01% (until 2018) to 24.94%. the reduced CIT rate of 15% applies to taxable corporate income not exceeding EUR 175,000 (instead of EUR 25,000 until 2018). Taking into account the 7% solidarity surcharge (applicable on the CIT rate) as well as the MBT of 6.75% for Luxembourg-City, the aggregate corporate tax rate applicable to taxable income up to EUR 175,000 corresponds to 22.80%. Hence, in practice the effective tax rate of many Luxembourg companies will be 22.80% instead of 24,94%. Finally, income above EUR 175,000 but not exceeding EUR 200,000 is taxed at an intermediary rate varying between 15 and 17%. This is to smooth the transition from the reduced CIT rate to the standard CIT rate.

AMENDMENT OF THE TAX CONSOLIDATION REGIME

The draft law amends the Luxembourg tax consolidation regime (Article 164bis of the Luxembourg income tax law, "LITL"). The main amendment aims to introduce retroactively as from 1 January 2019 the optional provision under the EU Anti-Tax Avoidance Directive ("ATAD") regarding the interest limitation rule at the level of the fiscal unity. More precisely, the EBITDA and exceeding borrowing costs can be determined at the level of the consolidated group. In addition, the draft law introduces additional amendments to clarify some aspects of the tax consolidation regime, such as the use of tax losses or tax credits.

Amendments related to the limitation to the deduction of...