The Organisation for Economic Co-Operation and Development (“OECD”) and the G20 countries adopted in 2013 an action plan composed of 15 points to address base erosion and profit shifting (so-called “BEPS”), partly as a response to the 2008 financial crisis. This action plan was consolidated into the issuance of a report in 2015 and each action has been progressively transposed into the domestic legislation of each EU Member State mainly via the different iterations of the Anti-Tax Avoidance Directive (“ATAD”).
Although ATAD heavily impacted Luxembourg’s domestic fiscal legislation, the same cannot be said about the Luxembourg financial market. While the most defeatist voices predicted the doom of Luxembourg, the latter has continued to bloom in particular in the investment fund sector, which has further on grown to an all-time high of EUR 5.9 trillion assets under management as of 31 December 2022.
This text does not purpose to analyse those past initiatives, but rather to provide a sneak-peak into the main changes that are to come with a particular focus on those that may impact the Luxembourg market.
The Unshell (“ATAD 3”) directive aims at providing tax authorities with the most suitable options to ensure that legal entities and legal structures in the EU without a substantial business presence will not benefit from tax advantages contained in double tax treaties or EU directives. This directive is probably the biggest headache of Luxembourg players at the moment, in particular of those in the domiciliation and corporate services sector. The consequences of not passing the different substance tests foreseen by the directive, the contents of said tests and the different carve-outs available are still being discussed at EU Council level, but considering the heavy role these actors play in the Luxembourg market, close monitoring of any developments in this regard is advised.
The Business in Europe: Framework for Income Taxation (“BEFIT”) initiative aims at introducing a common set of rules for EU companies to calculate, based on a formula, their taxable base while ensuring a more effective allocation of profits between EU countries.
The directive implementing pillar 2 of the so-called BEPS Inclusive Framework (“Pillar 2”) was unanimously adopted by EU Member States in 2022. Pillar 2 aims to reduce the scope for tax base erosion and profit shifting by ensuring that large multinationals with an annual turnover of at least EUR 750 million pay an effective minimum global corporate tax rate of 15%. In a nutshell, Pillar 2 imposes a tax surcharge if an in-scope company’s effective tax rate on its covered income is less than 15%. While we would expect the largest multinationals (those exceeding the aforementioned revenue threshold) present in Luxembourg to be impacted at a global level by this initiative, most players in the investment fund space should be kept harmless thanks to the different carve-outs foreseen by the directive.
The Business in Europe: Framework for Income Taxation (“BEFIT”) initiative aims at introducing a common set of rules for EU companies to calculate, based on a formula, their taxable base while ensuring a more effective allocation of profits between EU countries. It will also aim to reduce compliance costs and create a coherent approach to corporate taxation in the EU. The success of this initiative is being largely questioned, as it aims to be the replacement of the Common Consolidated Corporate Tax Base (“CCCTB”), with a lot of the weaknesses that condemned its existence.
The Debt-Equity Bias Reduction Allowance (“DEBRA”) initiative aims at introducing an allowance for equity-financed new investments, to mitigate debt bias. The future of this initiative is also unclear; the examination of this proposal was suspended and will only be reassessed within a broader context only after proposals considered as more relevant by both the EU Council and the EU Commission have been put forward.
Lastly, the initiative on Securing the activity framework of enablers (“SAFE”) aims to tackle the role of enablers involved in facilitating tax evasion and/or aggressive tax planning in the EU. SAFE will interact and build upon existing initiatives, notably the mandatory reporting regime of cross-border arrangements known as DAC 6, ATAD and the Anti-Money Laundering (“AML”) Directive. The stakeholder consultation for SAFE resulted in almost unanimous negative feedback and its expected efficiency has become questionable since the Court of Justice of the European Union issued its Judgment of December 8, 2022 (case C-694/20), in which the DAC 6 obligation of lawyers to communicate reportable cross-border tax planning arrangements to other intermediaries was declared contrary to EU Law due to the legal professional secrecy.
In conclusion, a whole set of new rules, some with a brighter foreseeable future than others, are expected to hit the Luxembourg fiscal codes in the time to come. Whatever those might be, we would expect the Luxembourg financial market to navigate any changes with the same resilience and bravura it has historically shown.