Luxembourg Tax Alert 2022-14

On 15 December, the Parliament passed the 2023 budget law including:

• Several new tax measures for individuals, among others, broadening the scope of the impatriate tax regime and the participative premium
• An extension of the filing deadline for corporate and individual tax returns from 31 March to 31 December
• An extension of the scope for the reduced and super-reduced VAT rates
• Last but not least, a modification of reverse hybrid rules under art. 168quater of Luxembourg income tax law effective as from tax year 2022, whereby, for instance, investors which do not qualify as associated enterprises or which benefit from a subjective tax exemption would not be impacted by those rules

Our Luxembourg tax alert gives you more information. 

Cross-border workers

While the freezing of the 25% social security threshold impacting cross-border workers has been extended until 30 June 2023, the tax ceilings are applicable again since last July 2022.

For 2023, said tax ceiling should be:

Belgium:              34 days;

France:                 34 days;

Germany:            19 days.

Company cars

Any company cars other than those registered before 2022 or those registered in 2022 with a leasing contract signed before 31 December 2021 will suffer new rates in order to determine the monthly benefit in kind reportable in the payroll. As a reminder, here is an overview of the applicable rates in 2023:

New VAT Circular 812

On 6 December 2022, the Luxembourg VAT authorities published Circular n°812 on the setting up of new temporary VAT rates for 2023. This circular reminds that the standard, the intermediary, and the reduced VAT rates will respectively be 16%, 13% and 7% between 1 January and 31 December 2023. In this respect, the Luxembourg VAT authorities also underline that it is important to pay attention to the taxable event of the supply to determine the correct VAT rate applicable. Have a look at our VAT alert for more information.

VAT in the digital age (VIDA) package

On 8 December 2022, the European Commission published new reform proposals aimed at setting up an EU VAT system “fit for the digital age”. The package includes one directive (Proposal for a Council Directive amending Directive 2006/112/EC as regards VAT rules in the digital age[1]) and two regulations (Proposal for a Council Regulation amending Regulation (EU) n° 904/2010 as regards the VAT administrative cooperation arrangements needed for the digital age[2] and Proposal for a Council implementing Regulation amending Regulation (EU) n°282/2011 as regards information requirements for certain VAT schemes[3]). These series of measures aim at modernizing the existing EU VAT system and help the fight against carousel fraud increased by the development of the platform economy.

These proposals include as important points:

• The setting up of a new real time digital reporting system based on e-invoicing
• Updated VAT rules for the platform economy (passenger transport and short-term accommodation)
• Single VAT registration for businesses selling to consumers across the EU (on the model of the one stop shop - OSS)

More details on this will follow in the coming weeks.

Tax fraud was defined as a criminal and predicate offence in 2017 and the Luxembourg regulator CSSF has addressed to financial actors the Circulars Nos. 17/650 and 20/744, with 30 tax indicia to comply with the current legal framework.

With its November press release on the latest on-site inspections, the CSSF made very clear what they expect in terms of risk assessment, documentation and controls, with respect to the implementation by supervised entities of the above mentioned Circulars.

Many (tax) audits are expected to be performed by the Luxembourg regulator in 2023. Be prepared, as the CSSF will be even more focused on this area (See our for Blog for more)!

EU law has been affecting the European tax environment for many years, and its consequences for the investment fund industry cannot be underestimated. During the year of 2022, there have been observations of several court cases being rendered by the Court of Justice of the European Union (CJEU), confirming the existing violation of the free movement of capital pursuant to article 63 Treaty of Functioning of the European Union. These decisions led several domestic courts, for example in Italy, Finland, and Portugal, to issue positive decisions for the non-resident claimants, validating the jurisprudence of the CJEU. In 2023, it is expected that other countries may follow, like Germany, where the German Supreme Court will render its decision as to whether its legislation applicable before 2018 is in breach of EU law. If the decision is positive this could lead to reimbursements of billions of EUR in favor of foreign investment funds including 6 percent of late interest per annum.

On 8 December 2022, the CJEU gave its decision in a case concerning compatibility with EU law of the requirement for intermediaries, who are subject to legal professional privilege (LPP), to notify other intermediaries of their reporting obligation under the EU mandatory disclosure rules (DAC6).

The CJEU held that the notification obligation is invalid in light of the fundamental rights guaranteed by the Charter of Fundamental Rights of the European Union - specifically the right to respect for communications between a lawyer and his or her client. The Euro Tax Flash from KPMG's EU Tax Centre can give you more details.

It will be interesting to see what changes this decision will generate to the notification obligations under DAC6 more generally. Member States will have to revisit these provisions to ensure compliance with the CJEU decision. We will of course keep you posted in this regard.

It is worth noting that the same situation applies to the EU fifth Anti-Money Laundering Directive (AMLD) as a result of the recent decision of the CJEU (22 November 2022), which invalidates the AMLD provisions on general public access to the ultimate beneficial ownership (UBO) register. Luxembourg immediately reacted to this decision by restricting the access to the UBO register.

Bill No. 8029, which aims at implementing the DAC7 into Luxembourg law is undergoing the legislative process.

Once adopted, the DAC7 law will require digital platform operators to provide the Luxembourg competent authority with information about certain users (“sellers”) on their platform, to enable such competent authority to exchange this information with other EU Member States.

To comply with DAC7, the transposition law must be adopted by 31 December 2022, and the rules should be applied from 1 January 2023.

The Luxembourg tax authorities are conducting reviews of the FATCA and Common Reporting Standard (CRS) compliance. We expect such audits to intensify in 2023. Their focus seems to be on:

1. Clarifications in case of sudden change of entity classification;
2. Process and procedures including the “Register of Actions” (as introduced by the updated FATCA/CRS law of June 2020); and
3. Request for additional information/explanation on incoherent information (number of investors, account balance, account closure) following their review of the FATCA and CRS reports.

Following the OECD’s Crypto-Asset Reporting Framework (CARF) release in October 2022, the European Commission released on 8 December 2022 a proposal for an amendment to the Directive on Administrative Cooperation (DAC), which is now extended to include crypto assets (DAC8). It is also proposed to amend the CRS or DAC2 to include electronic money products and central bank digital currencies. Under DAC8, crypto asset service providers will be required to report EU resident crypto-asset users engaged in both domestic and cross-border transactions (i.e. “exchange transactions”, as well as “transfers of reportable crypto assets”). In the current proposal, Member States should generally apply DAC8 provisions as of 1 January 2026.

On 7 June 2022, Luxembourg and the UK signed a new double tax treaty (DTT), introducing among others, a land-rich clause, the principal purpose test, a withholding tax exemption on dividends subject to certain conditions, etc.

The date of application of the new DTT will mainly depend on its date of entry into force, which still requires ratification in both countries and exchange of the ratification instruments – see our tax alert for more information in this respect.  

The EU has set a very ambitious agenda for the upcoming years with a long list of new measures and directives. Below is an overview of the most important initiatives which could have an effect both in the near future and in the coming years.

Pillar 2: Now that the EU Council has reached unanimous agreement on the EU directive implementing the Global Anti-Base Erosion Rules (GloBE) in the EU, Luxembourg will have until 31 December 2023 to transpose the Directive into domestic law. The GloBE rules will enter into effect on 31 December 2023 for the Income Inclusion Rule (IIR) and 31 December 2024 for the Undertaxed Profits Rule (UTPR). See our Luxembourg Tax Alert 2022-13 and our Euro Tax Flash for more

Pillar 1: The OECD intends to issue the new multilateral convention to implement Pillar 1 by mid-2023, with an entry into force of the new rules by 2024. Upon request of Poland, the EU has included a specific provision in the Pillar 2 Directive, requiring the EU Commission to submit a progress report to the EU Council on the implementation of Pillar 1 by 30 June 2023. The Commission also committed to issue a new legislative EU proposal in the absence of implementation of Pillar 1 in the international context.

ATAD 3: The first draft of the Unshell Directive was issued on 22 December 2021 and has been subject to discussions since then, as EU Member States have not been able to find an agreement on its scope yet.
On this basis, the gateways and substance indicators of the ATAD 3, as well as its tax consequences, might be reworked and simplified. No timeline is foreseen at this stage about a compromise text and its potential adoption. See our Euro Tax Flash for more

SAFE: The proposal for a Council Directive to tackle the role of enablers that facilitate tax evasion and aggressive tax planning in the European Union (Securing the Activity Framework of Enablers or SAFE) was subject to a public consultation that ended in October 2022.
The aim of SAFE is to be the equivalent of the ATAD 3 for non-EU shells, but it may as well tackle aggressive tax planning within a broader scope. A proposal is expected for Q1 2023. See our Euro Tax Flash for more.

DEBRA: This initiative by the EU proposes a common EU framework that would treat equity and debt financing in the same way. A draft directive was issued in May 2022 and aims to introduce a new notional allowance on equity, together with new interest limitation rules. A final consensus on the text of the directive has not been reached this year and during the 6 December 2022 ECOFIN meeting, it was agreed that the DEBRA proposal should be suspended until other proposals in the area of corporate income taxation announced by the Commission (including BEFIT) have been put forward (See our Euro Tax Flash for more)

Business in Europe: Framework for Income Taxation (BEFIT): In October 2022, the EU Commission issued a call for evidence for an impact assessment and asked for public feedback on proposed policy options for a new corporate tax system in the EU. BEFIT aims to reduce complexity and compliance costs, by providing common rules for determining the corporate tax base of EU-based entities of a group and for the allocation of profits between Member States, based on a pre-defined formula (formulary apportionment). Feedback is due by 26 January 2023 and a draft proposed directive is expected to be released in the third quarter of 2023. See our Euro Tax Flash for more

Public Country-by-Country Reporting: EU Member States have until 22 June 2023 to implement the directive on public country-by-country reporting into domestic law. The new rules would enter into effect on 22 June 2024, but an option for early adoption was included. While many countries have already taken first steps in the implementation, Luxembourg has not issued a draft law at this stage. See our Euro Tax Alert for more.