We have more than 15 years’ experience of working with UK, US and Nordic multinationals, supporting them with their multi-jurisdictional reorganisations, US tax inversions, group cash repatriations and treasury management, in both the legal and tax aspects. We have the proven expertise to handle complex cross-border reorganisation projects, including tax, company law, corporate finance and regulatory matters in a fully integrated fashion.
On 8 November 2019, the EU Council reached a general agreement on new measures proposed by the European Commission to improve cooperation between tax authorities and payment service providers and facilitate the detection of tax fraud in cross-border e-commerce transactions.
The new set of rules will enter into force on 1 January 2024 and require payment service providers to transmit payment data electronically to tax authorities in EU member states using a standardized approach.
Concretely, this new set of rules consists of two legislative texts:
The objective of these new rules is to put in place EU rules which will enable Member States to collect in a harmonised way the records made electronically available by the payment service providers. In addition, a new central electronic system (CESOP) will be set up for the storage of the payment information and for the further processing of this information by anti-fraud officials in the Member States within the Eurofisc framework.
These new rules will complement the VAT regulatory framework for e-commerce that is coming into force in January 2021 and which will introduce new VAT obligations for online marketplaces and simplified VAT compliance rules for online businesses.
With effect from 1 January 2005, Luxembourg put in place a legislative and regulatory framework for ATAs/APAs. The process was only based on administrative practice until 2015 (the Act of 19 December 2014 introduced §29a into the General Tax Act of 22 May 1931 complemented by a Grand Ducal Regulation of 23 December 2014 ). As from 2015, any tax ruling granted is be valid for a maximum period
of five years.
The Bill proposes the introduction of a new provision in domestic law, which provides that tax rulings issued prior to 1 January 2015, which in most cases do not indicate an end date, will expire by operation of law at the end of tax year 2019.
In order to ensure legal certainty and a smooth transition for companies having their ATA/APA ending by end 2019 the LTA issued additional guidance (only available in French).
The LTA is making considerable effort to tackle the transition, by instauring notably a hotline handled by the Secrétariat de la Commission des decisions anticipées (“CDA”) reachable at seccda@co.etat.lu or (+352) 247-52134. The aim of this service is to cover operational questions that can be raised by taxpayers and that are not already covered in the guidance.
The LTA further highlighted the fact that for ATA/APA covering a cross-border operation, the filing of “Standard form for the international exchange of information on advance cross-border rulings and advance princing agreements” Form n°777 E, is mandatory.
Finally it should be noted that, the Bill still needsto go through the legislative process and is thus subject to amendment.
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any loss or damage however incurred which may result from reliance on the content of this publication.
The Luxembourg Bar has recently expressed its opposition to the bill implementing DAC6 into Luxembourg law. According to Mr François Prüm, departing chairman of the Luxembourg Bar Association, the bill affects the professional secrecy obligation of lawyers.
DAC6 of 25 May 2018 aims at enabling Member States to identify new risks of tax evasion more quickly and take measures to block harmful arrangements. It requires intermediaries who develop or become aware of a « potentially aggressive » tax planning scheme to report such scheme to the tax authorities.
Intermediaries means tax advisers, accountants, bankers, trustees and lawyers.
It should be noted that DAC 6 leaves the door open to certain exemptions from the reporting obligations. Each Member State can take the necessary measures to grant intermediaries the right to be exempted from the obligation to provide information concerning a cross-border arrangement if such obligation to report is contrary to the professional secrecy applicable under the national law of that Member State. For example, in implanting DAC6 into their national laws Germany and Austria have provided for a full exemption for lawyers from the reporting obligation. However, in Luxembourg, the bill thus far does not mention such exemption. If the bill is enacted as it is, it would have as consequence the violation of the lawyer’s professional secrecy obligation, which might undermines the legal profession as a whole since lawyers’ non-disclosure privilege is a corner stone of their profession.
According to figures made available by the European Commission.1 there are around 24 million companies in the EU, of which approximately 80% are limited liability companies. Around 98-99% of these limited liability companies are small and medium-sized enterprises. These enterprises will be affected by the upcoming measures.
The aim of the Directive is to remove unjustified barriers to EU companies’ freedom of establishment in the EU and to facilitate EU companies’ cross-border conversions, mergers and divisions (collectively, “Cross-Border Operations”), while at the same time providing adequate protection for stakeholders such as employees, creditors and members.
The Directive introduces comprehensive procedures for cross-border conversions and divisions and provides for additional rules on cross-border mergers of limited liability companies established in EU member States. It also offers further simplifications that will apply to all such operations. These include the possibility of speeding up the procedure by waiving reports for members and employees in the event that shareholders agree, or if the company or any of its subsidiaries do not have any employees.
The Directive sets out procedures to check the legality of Cross-Border Operations against the relevant national legislation and introduces a mandatory anti-abuse control procedure. The procedure will allow competent authorities, such as the Luxembourg notary, to block a cross-border operation when it is carried out for abusive or fraudulent purposes, i.e. when it is designed to evade or circumvent national or EU law or is intended for criminal purposes.2
The Directive provides for similar rules for Cross-Border Operations on employee participation rights. It also ensures that employees will be adequately informed and consulted about the expected impact of the operation.
The protection of the right of minority and non-voting shareholders’ rights would be enhanced. Indeed, members of a company who vote against the approval of the draft terms of the cross-border operation will have the right to dispose of their shares for adequate cash compensation4 (the “Withdrawal Right”).
Finally, the Directive encourages the use of digital tools throughout the cross-border operation. It will be possible to complete formalities, such as the issuance of the pre-operation certificate, online. All relevant information are planned to be exchanged through existing digitally interconnected business registers.
In addition to the above described benefits, the Directive might have a negative impact on Cross-Border Operations. Indeed the increased protection given to certain stakeholders would result in introduction of more formalities.
With the new rules one can foresee that the European policy makers are trying to thwart the prevailing liberalism in cross-border operations and are suspicious regarding these operations within the EU. The EU therefore wants to add procedural requirements to de facto counter such liberalism.
Under the Directive, the regime for divisions is aligned with the mergers regime, which is the heaviest of the three existing ones (requirement of a draft terms of the cross-border division, 5 notary certificate, expert report) and will therefore be subject to more detailed and complicated requirements than before. The common draft terms of the cross-border merger is still a mandatory requirement and need to be prepared and remain similar to the current one. In addition to the this common draft terms, the Directive also requires the drafting of a report regarding the employees of the companies.
Moreover, the new Withdrawal Right might be a barrier to a merger because of this compensation has to be paid by the company, which implies additional costs for the operation. The Withdrawal Right raises other issues. The Withdrawal Right would also constitute a blocker of a Cross-Border Operation if a shareholder exercises its withdrawal tight but the relevant company does not have sufficient funds to pay the compensation.
As mentioned above, the Directive sets out procedures to check the legality of Cross-Border Operations. In Luxembourg, this check will be made by the notary. In practice, how will the notary do this and with which means? The new checks will hence add a new step to the Cross-Border Operations and render them more complex.
1 Council of the European Union (18 November 2019), press release, visited here | 2 Article 86m, 127 and 160m of the Directive. Article 127-9 of the Directive : ”Where the competent authority […] has serious doubts indicating that the cross-border merger is set up for abusive or fraudulent purposes leading to or aimed at the evasion or circumvention of Union or national law, or for criminal purposes […] The assessment for the purposes of this paragraph shall be conducted on a case-by-case basis, through a procedure governed by national law.” | 3 Article 86e, 124 and 160e of the Directive. Article 124 of the Directive : “The administrative or management body of each of the merging companies shall draw up a report for members and employees explaining and justifying the legal and economic aspects of the cross-border merger, as well as explaining the implications of the cross-border merger for employees.” | 4 Article 86i, 126a and 160i of the Directive. Article 126a of the Directive: “[…] the members of the merging companies who voted against the approval of the common draft-terms of the cross-border merger have the right to dispose of their shares for adequate cash compensation, […] as a result of the merger they would acquire shares in the company resulting from the merger which would be governed by the law of a Member State other than the Member State of their respective merging company.” | 5 Article 160f of the Directive: “Member States shall ensure that an independent expert examines the draft terms of the crossborder division and draws up a report for members.”
In the case at hand, the taxpayer, a Canadian pension fund holding indirect interests of less than 1% of the shares in various German resident companies received dividends. The dividends were subject to a 25% withholding tax (reduced to 15% according to the double tax treaty between Canada and Germany).
The fund introduced a request for the refund of the 15% tax withheld. The request was denied by the German tax authorities.
The ECJ ruled that Germany’s tax treatment was incompatible with EU law on two grounds:
The ECJ concluded that German tax treatment of dividend distributions to pension funds infringed EU law. The court observed that the higher withholding tax burden on a cross-border payment compared to the combined withholding tax and corporate income tax liability resulting from a payment to a domestic pension fund resulted in less advantageous treatment. Indeed both pension funds are subject to two different taxation regime in respect of dividends received. In the case of a non-resident pension fund, the tax on income from capital on such dividends becomes definitive. Conversely, dividends paid to resident pension funds are incorporated in the pension fund’s balance sheet, which is subsequently used to determine the taxable profit, on which corporation tax will be charged at the rate of 15%. When that tax becomes payable, the tax on income from capital can be set off in its entirety against the amount due.
As a consequence, non-resident pension funds are treated less favourably than resident pension funds hich constitutes a restriction on the free movement of capital. Furthermore, the Court noted that resident and non-resident pension funds are in a comparable situation. the German legislation does not only provide for different tax regimes depending on the residence of the fund, but its application may also lead to the full exemption of the dividends paid to resident funds.The German courts must consider whether the Canadian fund added the dividends received to its pension reserve, either voluntarily or based on Canadian law. If the fund did so, the ECJ stated that there was no justification for the difference in treatment.
The Court then examined whether the restriction can be justified by overriding reasons in the public interest. The Court considered and rejected possible justifications based on the need to ensure a balanced allocation of taxing rights, the need to safeguard the coherence of the German tax system, and the need to ensure the effectiveness of fiscal supervision.
This clause allows a derogation from the prohibition on all restrictions existing on December 31, 1993 to the free movement of capital between Member States and third countries, where such capital movements involve direct investment, establishment, the provision of financial services or the admission of securities to capital markets. In the case at hand, the ECJ ruled that since the fund held interests of less than 1% in the German companies, it held a portfolio investment rather than a direct investment and portfolio investments do not fall within the scope of the standstill clause.
On 10 October 2019, the European Commission reviewed the list of countries classified as tax heavens and removed Switzerland from the grey list after deciding that the country had delivered its commitments to make its tax rules compliant with EU standards.
In order to avoid foreign investors leaving Switzerland, it is very likely that cantons will replace some tax privileges with other forms of incentive measures, such lower standard company tax rates.
Additionally, the EU removed the Indian Ocean island of Mauritius, Albania, Costa Rica and Serbia from its grey list, leaving 32 grey-listed jurisdictions. Jurisdictions remaining on this list include Australia, Thailand, Turkey and Morocco.
Nine jurisdictions remain blacklisted: Belize, Fiji, Oman, Samoa, Trinidad and Tobago, Vanuatu and the three US territories of American Samoa, US Virgin Islands and Guam.
IMPRESSUM Praxio Law & Tax is a Luxembourg business law firm with legal, regulatory and tax experts. We advise businesses with respect to all issues and questions related to Tax structuring, Merger & Acquisition, Business Law, Corporate Finance, International Tax Structuring, Tax Compliance, Tax Litigation, Investments Funds, Banking Finance/Capital Markets. Our core markets are private equity and asset management, venture capital, capital markets, real estate, high net wealth and family offices
