In October and November 2018 respectively, France and Luxembourg launched the ratification process of the new double tax treaty (“DTT”) they signed on 20 March 2018. The aim of the new DTT is to replace the existing treaty that was signed in 1958, and amended 4 times in subsequent years. The DTT follows the structure and, for the most part, the content of the 2017 OECD Model Tax Convention.
Since both France and Luxembourg did not manage to finalise the ratification process and exchange the instruments of ratification prior to the end of 2018, the new DTT has not yet entered into force and thus did not become applicable as from 1 January 2019, as initially expected. Instead, provided the instruments of ratification will be exchanged before the end of 2019, the new provisions will apply as from 1 January 2020.
The DTT shall enter into force on the date on which the latter of these notifications has been received. Assuming that this will take place in the course of 2019, as far as Luxembourg is concerned, the new DTT shall have effect as follows:
- in respect of taxes withheld at source, for income derived on or after 1 January 2020; and
- in respect of other taxes on income and taxes on capital, for taxes chargeable for any taxable year beginning on or after 1 January 2020.
To get an overview of the provisions of the new DTT, please read our 16 November 2018 tax alert: https://www.atoz.lu/sites/default/files/atoz_articles/atoz-alert-16112018-lux-france-dtt.pdf
MLI will impact covered tax treaties by 1 January 2020 at the earliest
The draft law ratifying the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (“MLI”) was presented to the Luxembourg Parliament on 3 July 2018 and passed by the Parliament on 14 February 2019. The ratification of the MLI follows its signature by Luxembourg which took place on 7 June 2017.
The MLI is a comprehensive and flexible convention that allows countries to implement a wide range of tax treaty related BEPS measures with many options and alternatives. Luxembourg took the approach to have all its DTTs in force covered by the MLI. However, for a covered tax treaty to be amended, it is required first that both contracting states decide to have this specific DTT covered and second that both countries adopt matching options/alternatives. Hence, if one contracting state is in favour of a certain provision while the other contracting state has not adopted an identical option/alternative, the existing tax treaty will not be amended in this respect. In our tax alert dated 9 June 2017, we presented the approach taken by Luxembourg: https://www.atoz.lu/sites/default/files/atoz_articles/atoz_tax_alert_2017_09_june_mli.pdf
The ratification procedure has not been finalised yet. However, now that the law has been passed by the Parliament, it can be expected that Luxembourg will deposit its instruments of ratification either by the end of February or in the course of March 2019.
Assuming that Luxembourg will deposit the instruments of ratification in February 2019, what would this mean for the Luxembourg DTTs covered by the MLI?
- For Luxembourg, the MLI would enter into force on the 1st day of the month following the expiration of a period of 3 calendar months beginning on the date of the deposit, i.e. the MLI would enter into force on 1 June 2019;
- the entry into force of the MLI would only affect covered DTTs concluded with countries in respect of which the MLI has entered into force as well; to check the status of ratification by all countries which signed the MLI, please click here: http://www.oecd.org/tax/treaties/beps-mli-signatories-and-parties.pdf
- As far as the application of the MLI to the DTTs referred above is concerned (i.e. to DTTs concluded with countries for which the MLI has already entered into force or will enter into force at the latest at the same time as in Luxembourg), the MLI would apply as follows:
- with respect to taxes withheld at source on amounts paid or credited, where the event giving rise to such taxes occurs on or after the first day of the next calendar year that begins on or after the latest of the dates on which this Convention enters into force for each of the DTT contracting States (i.e. 1.1.2020);
- with respect to all other taxes, for taxes levied with respect to taxable periods beginning on or after the expiration of a period of six calendar months from the latest of the dates on which the MLI enters into force for each of the DTT contracting States (i.e. tax years beginning on or after 1.12.2019). For companies with a tax year corresponding to the calendar year, this would mean that the MLI provisions would impact the DTT as from the tax year beginning on 1 January 2020.
Should the deposit of the instruments of ratification take place in the course of March 2019, the entry into force of the MLI would take place on 1 September 2019 and the MLI provisions would become applicable as from tax years starting on or after 1 January 2020.
Should the deposit of the instruments of ratification be delayed until April 2019, the entry into force of the MLI would take place on 1 August 2019 and the MLI provisions would become applicable as from tax years starting on or after 1 February 2020. For companies with a tax year corresponding to the calendar year, this would mean that the MLI impact would be differed until tax year 2021.
However, since the deposit of the instruments of ratifications will most probably occur before the end of March 2019, it can be expended that the MLI changes will apply as from 1 January 2020.
More to come in 2019 and beyond
On 3 December 2018, the coalition agreement of the recently elected Luxembourg government was signed, including several tax measures, which the government intends to introduce in the course of the upcoming 5 years.
While for most measures the date as from which they will be introduced remains to be confirmed, some few other are expected to be introduced with retroactive effect as from 1 January 2019:
- Decrease of 1% of the CIT rate (of currently 18%) as from 2019; taking into account the 7% solidarity surcharge as well as the Municipal Business Tax of 6.75% for Luxembourg-city, this would bring the aggregate corporate tax rate from currently 26.01% down to 24.94%;
- Application of the reduced CIT rate of 15% to taxable corporate income not exceeding EUR 175,000 (instead of currently EUR 25,000), meaning that an increased number of Luxembourg companies will be able to benefit from the reduced 15% CIT rate;
- Taxation at EU and global level: adaptation of the Luxembourg tax system to recent and upcoming developments both at EU level (ATAD 1 & 2, EU Directive Proposals on the Common Corporate Tax base, CCTB, and the Common Consolidated Corporate Tax base, CCCTB) and at international level (BEPS); no opposition to the temporary solution on digital taxation proposed by the EU to the extent it is limited in time; opposition to the introduction of a financial transaction tax (FTT);
- Simplification of the income tax and corporate income tax system to make it more user-friendly;
- Modernisation of the tax regime applicable to charities and non-profit organisations;
- Making sure to counteract abuses when using the tax regime of SICAV-SIFs for investments in Luxembourg real estate;
- Improvement of the tax regime applicable to impatriates to make it more attractive;
- Adoption of a new law to promote the participation of employees to the profits of their companies. As a consequence, it is intended to withdraw progressively the stock option/warrant regime;
- Introduction of a 3% VAT rate on E-books and home repairs;
- No increase of the subscription tax applicable to UCITS or alternative investment funds and, development of the alternative investment fund sector, with a specific focus on the legal and regulatory aspects; and
- Review of the regime of “carried interest” for individuals working in the alternative investment fund sector in order to assess whether improvements of the regime are needed so as to attract “front office” individuals to Luxembourg.
Other individual tax measures:
- Reform of the individual tax class system;
- Promotion and further development of the e-filing system for individual taxpayers;
- Launching of some negotiations with France and Germany to make it easier for cross-border workers to work from home;
- Review of the inheritance and gift tax regime applicable to transfers other than in direct line so as to take into account the evolution of house prices; and
- Increase of the minimum monthly wage with effect from 1 January 2019.