The Luxembourg government has laid down draft legislation to enforce a crackdown on tax avoidance, following EU regulation
The country is implementing the second EU Anti-Tax Avoidance Directive 2017/952 (ATAD 2) into domestic law. ATAD 2 aims to combat current avoidance practices which utilise the hybridity of an instrument or an entity to mitigate the tax liability for transactions both within and outside of the EU.
ATAD 2 targets a wider range of tax reliefs and advantages obtained by taxpayers resident in EU member states as it nets hybrid mismatches, including the hybridity of a financial instrument or an entity within the context of tax transactions involving non-EU countries. ATAD 1 only covered intra-EU member state activity.
The draft law still needs to go through the Luxembourg legislative process and we expect that some amendments will be made, in particular further to the input of the Luxembourg Council of State"
EU member states have until 1 January 2020 to implement ATAD 2 into domestic law, although there is a two-year deferral for provisions targeting reverse hybrids, which the Luxembourg government has retained.
William Jean-Baptiste, from offshore law firm Ogier said: "The draft law provides clarification on some crucial questions, in particular regarding the application of the new rules to investment funds.
"However, at this stage, the draft law still needs to go through the Luxembourg legislative process and we expect that some amendments will be made, in particular further to the input of the Luxembourg Council of State."
When the rules come into force from 1 January 2020, they will affect Luxembourg permanent establishments (PEs) of foreign entities. In addition, provisions targeting reverse hybrid mismatches will be applicable to Luxembourg transparent partnerships that would be treated as opaque by their non-resident owners as from 1 January 2022.