Implementation Of Anti-Tax Avoidance Directive (ATAD 1)

On 19 June 2018 the bill of law 7318 ("Bill") was introduced to the Luxembourg parliament relating to the transposition of measures included in EU anti-tax avoidance Directive 2016/1164 ("ATAD 1") into national legislation. The Bill contains the ATAD 1 provisions concerning the following measures:

Interest limitation rules (Art. 4 of ATAD 1) Exit taxation (Art. 5 of ATAD 1) General anti-abuse rule ("GAAR", Art. 6 of ATAD 1) Controlled foreign company ("CFC") rule (Art. 7 and 8 of ATAD 1); Intra-EU anti-hybrid rule (Art. 9 of ATAD 1) Based on the ATAD 1, these measures have to be implemented by the EU Member States by 31 December 2018.

With the exception of the provisions on exit taxation which should apply as of 1 January 2020, it is expected that the above measures should come into force on 1 January 2019.

The Bill targets taxpayers subject to Luxembourg corporate income tax, with the exception of the GAAR and the exit tax provisions which apply to all taxpayers.

The Bill also includes additional BEPS-related provisions proposing amendments to the Luxembourg domestic tax legislation in relation to the following aspects:

the tax neutral conversion of debt into shares; and the recognition of foreign permanent establishments (PEs) under tax treaties. The proposed provisions are still subject to amendments before the final vote by the Luxembourg Parliament.

Key features

For each proposed amendment by the Bill, we have briefly developed what we deem to be its salient points and features:

Interest limitation rules The Bill introduces a new Article 168bis according to which the deductibility of exceeding borrowing costs (i.e., interest expenses exceeding interest income and other similar taxable income) should be limited to the higher of:

(i) 30% of the taxpayers taxable earnings before interest, tax, depreciation and amortisation ("EBIDTA"); or (ii) EUR 3,000,000. Tax exempt income as well as expenses related to such exempt income is excluded from the EBIDTA computation.

Exceeding borrowing costs that cannot be deducted in a given tax period can be carried forward without time limitation. Unused interest capacity may be carried forward for up to five years.

Luxembourg however excludes from the scope of application of the interest limitation rules "financial undertakings" and "standalone entities", as defined in ATAD 1.

The financial undertakings listed in the Bill are entities subject to EU Directives or Regulations and include amongst others...