Luxembourg ATAD I Implementation Creates Uncertainty In Capital Market Transactions

Voted into Luxembourg law on 18 December 2018, the Anti-Tax Avoidance Directive I (ATAD I) now applies, with its provisions applicable as from fiscal years starting on or after 1 January 2019, except for the exit tax provisions that will apply as from 2020.

The directive triggers a number of tax impacts including inter alia Interest Limitation rules (new article 168bis LITL) which will apply to “exceeding” borrowing costs and will be deductible in a tax period only up to the higher of i) 30% of the taxpayer's net revenues before interest, tax, depreciation and amortization (“EBITDA”) or ii) 3 million Euros. Certain exemptions apply, i.e. grandfathering, stand/alone exemption, EU securitisation compliance, etc.

While ATAD I provides a non-exhaustive explanation of borrowing cost, it doesn't define interest income at all. There are some arguments for a symmetric definition of borrowing cost and interest income, but Luxembourg tax authorities may apply an asymmetric definition. Consequently, there is an uncertainty to which extent ATAD I may impact the tax neutrality of Luxembourg securitisation companies. However, we understand that Luxembourg tax authorities are working on a circular to reduce the recent uncertainty. Dependent on the content if such circular, the worst case could be that neither the transaction details nor the ATAD I exemptions support the tax neutrality and the exceeding borrowing cost would be subject to taxation at the usual corporate...