[co-author: Charlène-Adline van van Eysinga]

The most important tax changes for businesses

TAX RULINGS PRACTICE

The validity and binding character of advance tax agreements is currently based on the principle of good faith, an unwritten principle of administrative law. However, the absence of any formal legal basis and procedures has often caused misconceptions in other jurisdictions regarding the Luxembourg tax ruling practice. To avoid these issues as much as possible in the future, the Budget Bill proposes to introduce an explicit provision allowing taxpayers to obtain binding advance tax agreements from the tax administration to confirm the tax treatment of their transactions. According to the Budget Bill, a Grand-Ducal decree, which is not yet available, will formalise the procedures applied in practice today, while also modernising certain aspects thereof. It is not entirely clear, but the introduction of this formal legal basis could also mean that the tax offices which currently do not grant advance tax agreements will be required to do so in the future.

On the downside, the Budget Bill will allow the Luxembourg tax administration to charge a fee to cover administrative costs in relation to requests for advance tax agreements. The Budget Bill does not set out any fee rates, but clarifies that the fee cannot exceed EUR 10,000. Ultimately, the charging of a fee may allow the tax administration to further enhance its infrastructures and human resources to efficiently handle the staggering number of requests.

TRANSFER PRICING

The Budget Bill proposes to introduce a new provision affirming the requirement that intra-group transactions must comply with the arm’s length principle. The proposed provision does not change anything in and of itself, given that the arm’s length principle is already set out in other tax provisions. However, it is mentioned that a Grand-Ducal decree will provide further measures to implement the arm’s length requirement. It is expected that this Grand-Ducal decree, which is not yet available, will introduce general transfer pricing rules for Luxembourg businesses. In contrast, the transfer pricing rules in existence today are only applicable to Luxembourg companies mainly carrying out intra-group financing transactions.

VAT

In line with the Government’s announcement in April 2014, the Budget Bill increases three of the four VAT rates by 2% with effect on 1 January 2015. As a result, the standard VAT rate will be raised to 17%, the intermediate VAT rate to 14% and the reduced VAT rate to 8%. With a standard VAT rate of 17%, Luxembourg continues to have the lowest rate throughout the European Union.

The Luxembourg VAT administration has published a set of frequently asked questions dealing with some of the practical aspects of the transition from the current rates to the new rates. As a general rule, the date of the taxable event determines the applicable VAT rate. In principle, the taxable event occurs on the date that a service is supplied or a good is delivered. As a result, a car ordered in 2014, but delivered in 2015, will be subject to the VAT rate applicable in 2015 (i.e. 17%). However, with respect to deposits paid in advance for the delivery of goods or the provision of services, the applicable VAT rate is determined, except in the case of intra-Community acquisitions of goods, by reference to the date on which VAT becomes chargeable (i.e. in principle the date of the deposit). Hence, if a deposit is paid in 2014 for a car, which is delivered in 2015, the deposit will be subject to the VAT rate applicable in 2014 (i.e. 15%). The remainder of the purchase price, paid in 2015, will be subject to the VAT rate applicable in 2015 (i.e. 17%).

It is further proposed to amend the VAT refund procedures. In particular, an administrative appeal procedure will be introduced, together with a judicial review process, in favour of VAT taxable persons requesting a VAT refund. The Budget Bill also provides for late payment interests to be paid by the tax administration at the same rate as those due to non-established EU taxable persons. Requests for refunds will no longer be subject to any minimum threshold requirements.

OTHER MEASURES

Since 1 January 2013, Luxembourg companies are subject to an annual minimum corporate income tax of EUR 3,000 if the sum of their fixed financial assets, transferable securities, intra-group receivables and cash at bank exceeds 90% of the balance sheet. Luxembourg companies whose financial assets do not exceed EUR 350,000 will henceforth be subject to the minimum corporate income tax rates applicable to non-financial companies (i.e. EUR 500, if the balance sheet is less than EUR 350,001, or EUR 1,500, if the balance sheet exceeds EUR 350,000).

Finally, the possibility for Luxembourg taxpayer to get a refund for Luxembourg dividend withholding taxes exceeding the (corporate) income tax due will be abolished. However, Luxembourg companies benefiting from the participation exemption will still be able to get a refund for Luxembourg dividend withholding taxes levied before the end of the 12 month holding period.