Law Implementing ATAD Enters Into Force
OUR INSIGHTS AT A GLANCE
The law of 21 December 2018 implements the EU Anti-Tax Avoidance Directive ("ATAD"), the aim of ATAD being to implement the BEPS (Base Erosion and Profit Shifting) recommendations made by the OECD and the G20 in October 2015 at EU level. The new law introduces the following ATAD measures: a limitation to the tax deductibility of interest payments, an amendment to the current general anti-abuse rule, the introduction of the non-genuine arrangement CFC rule, a new framework to tackle hybrid mismatches and exit taxation rules. Non-ATAD (but still BEPS-related) measures included in the law are an amendment to Luxembourg rules so that the conversion of debt into shares no longer falls within the scope of tax neutral exchange operations and a new permanent establishment definition. Overall, Luxembourg has made the right choices, using all options provided by ATAD in order to remain competitive, even though, on some aspects the Luxembourg government has taken positions which are even stricter than ATAD. Additional work remains to be done in order to clarify the impact of some of the new measures on existing tax law. The Luxembourg Parliament has now adopted the 2019 tax reform implementing the EU Anti-Tax Avoidance Directive ("ATAD") and other anti-BEPS-related measures into Luxembourg tax law. More precisely, the 2019 tax reform includes tax law changes in the following areas:
Interest limitation rules; General anti-abuse rule (GAAR); Controlled foreign companies (CFCs); Hybrid mismatch rules; Amendment of the exit tax rules; Amendment of the roll-over relief; and Amendment of the permanent establishment definition. The interest limitation rule
Since 1 January 2019, Article 168bis of the Luxembourg Income Tax Law ("ITL") limits the deductibility of "exceeding borrowing costs" generally to a maximum of 30% of the corporate taxpayers' earnings1 before interest, taxes, depreciation and amortisation ("EBITDA"). The scope of the interest limitation rule encompasses all interest-bearing debts irrespective of whether the debt financing is obtained from a related party or a third party. However, exceeding borrowing costs up to an amount of EUR 3m may be deducted without any limitation (that is a safe harbour provision).
"Exceeding borrowing costs" correspond to the amount by which the deductible "borrowing costs" of a taxpayer exceed the amount of taxable "interest revenues and other economically equivalent taxable revenues"...
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