Draft Law On ATAD2

On 8 August 2019, Bill No. 7466 (the "Bill") implementing the Anti-Tax Avoidance Directive (EU) 2017/952 on hybrid mismatches ("ATAD2") into Luxembourg domestic law was published.

ATAD2 amends Directive (EU) 2016/1164, which has already introduced a first set of rules targeting certain hybrid mismatches between EU Member States ("ATAD1"). ATAD2 extends the scope of ATAD1 hybrid mismatch rules to cover a wider variety of mismatches and mismatches between EU Member States and third countries.

The Bill's content largely reproduces that of ATAD2. The Bill also provides some useful clarifications, notably on the concept of "acting together". It is welcome that the Bill also implements ATAD2's carve-outs. Accordingly, the Bill addresses the four categories of hybrid mismatch arrangements provided for in ATAD2, namely:

- Hybrid arrangements arising from payments made under financial instruments; - Hybrid arrangements arising from payments made to a hybrid entity or a (disregarded) permanent establishment; - Hybrid arrangements arising from payments made by a hybrid entity or deemed payments made between the head office and the branch or between two branches; - Double deductions resulting from the payments made by a hybrid entity or a branch. As a preliminary remark, it is to be noted that the scope of the hybrid mismatch rules will be limited to mismatches arising between "associated enterprises", between a taxpayer and an associated enterprise, between a head office and its PE, between two or more PEs of the same entity or under a structured arrangement.

The concept of "associated enterprises" and "acting together"

An "associated enterprise" is defined as (i) an undertaking in which the taxpayer directly or indirectly holds a participation in terms of voting rights or capital ownership of 50 percent or more, or is entitled to receive 50 percent or more of the profits of that entity, or (ii) an individual or undertaking which directly or indirectly holds a participation in terms of voting rights or capital ownership in a taxpayer of 50 percent or more, or is entitled to receive 50 percent or more of the profits of the taxpayer. The 50 percent threshold is decreased to 25 percent where the mismatch is due to the hybrid instrument) or (iii) an undertaking which is part of a consolidated group for accounting purposes or (iv) an enterprise in which the taxpayer exercises a significant influence on the management or an enterprise which exercises a significant influence on the management of the taxpayer.

In order to determine whether the thresholds of 50% or 25% under (i) and (ii) of the definition are met, the direct and indirect interests of persons who are deemed "acting together" have to be aggregated.

The Bill provides important clarification on the concept of "acting together" for the fund industry. Under a rebuttable presumption, an investor in an investment fund would not be considered as acting together with another investor of the same fund if...