Summary
Further to a communiqué posted on its website on 25 March 2020, on 30 March 2020, the Luxembourg Government tabled a Bill (n°7547) before the Luxembourg Parliament setting out draft legislation that disallows the tax deduction of interest or royalties paid or due to related parties if these are corporate entities established in countries that are “black-listed” as being “non-cooperative” for tax purposes.
Context
On 30 March 2020, the Luxembourg Government adopted a draft bill introducing new defensive measures denying the tax deduction of interest and royalty payments made to a related entity located in a blacklisted jurisdiction (the “Draft bill”).
The Draft bill is released, further to the recently updated EU list of non-cooperative tax jurisdictions adding four jurisdictions – the Cayman Islands, Panama, Palau and Seychelles – to the 8 jurisdictions that were already listed, which are the US Virgin Islands, American Samoa, Guam, Samoa, Oman, Trinidad and Tobago, Fiji and Vanuatu.
The main purpose of the Draft bill is to implement into the Luxembourg legislation the guidelines of the Council of the EU of 5 December 2019.
In these guidelines, EU Member States were invited member States to introduce by 1st January 2021 at least one of the following measures in relation to payments made to and / or income derived from blacklisted jurisdictions:
- Non-deductibility of costs – including, for example interests, royalties and other concessions on intellectual property assets and service fees;
- Controlled Foreign Company (CFC) rules – including for example, requiring the inclusion of all income of the controlled foreign company in a blacklisted jurisdiction, and/or applying a lower ownership threshold or a higher effective tax rate test than the one applied for non-listed jurisdictions;
- Withholding tax measures – e.g. applying higher withholding tax rates for example on payments such as interest, royalties, service fee or remuneration, or alternatively (or in combination) specific targeted withholding tax on such payments;
- Limitation of participation exemption on profit distributions – more stringence towards taxpayers as compared to the rules otherwise applicable (e.g. under the EU ParentSubsidiary Directive).
Effects of the upcoming measures
The draft law amends Luxembourg income tax law in order to disallow the right of deduction of interest and royalty expenses paid or due to individuals or entities located in a non-cooperative jurisdiction at the level of Luxembourg taxpayers.
The Luxembourg draft law has not yet been published. It is therefore too to determine as from when this new measure will enter into force.
Finally, since the EU blacklist evolves regularly and as the Cayman Islands have already adopted some measures which could be assessed as sufficient from an EU point of view, it is possible that the Cayman Islands will be removed from the black list before year-end, potentially before the measure enters into force.
