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Aug. 1 — A sweeping plan presented to parliament to overhaul Luxembourg's corporate and personal income tax could mean tax cuts for large businesses, increased business tax credits and a stimulus for start-ups.
The proposal, submitted to parliament for review July 26, would progressively reduce the corporate income tax rate from 21 percent to 19 percent in 2017, and drop it to 18 percent in 2018. Companies with a registered seat in Luxembourg City, which imposes a municipal business tax, would thus become subject to a consolidated tax rate of 27.08 percent in 2017 and 26.01 percent in 2018.
In a step aimed at stimulating start-up companies and small businesses, the bill also would pare down the corporate income tax rate from 20 percent to 15 percent for companies with a taxable income under 25,000 euros ($27,923), with a resulting aggregate income tax rate of 22.8 percent.
The bill also would increase complementary and global tax credits for investments, and extends a tax credit for companies that hire unemployed individuals to 2019.
With some exceptions, most of the measures are expected to take effect Jan. 1, 2017, and were part of the budget announced in February (42 TMIN, 3/3/16).
Antoine Badot, international tax partner at KPMG Luxembourg, told Bloomberg BNA that the rate reductions indicate lawmakers are heeding developments in Belgium, the Netherlands and the United Kingdom, which all have announced plans to pare their nominal rates.
“It's a clear sign from the Luxembourg government that they want to actually get closer to the average of the neighboring countries and the OECD average,” he said in a phone interview with Bloomberg BNA Aug. 1. Badot noted that Luxembourg's 21 percent rate is high compared to the average corporate tax rates for European Union countries and those that subscribe to the Organization for Economic Cooperation and Development convention. Even if low rates are not the only determining factor for companies considering whether to invest and maintain operations, he said, “it's a sign that Luxembourg does not want to stay behind in this respect.”
When placed against the background of EU initiatives to combat tax avoidance and the OECD's action plan against base erosion and profit shifting, Badot said, the increased investment in tax credits and rate reductions demonstrate that “while Luxembourg is definitely willing to implement the EU Anti-Tax Avoidance Directive and play according to the rules that have been set up at the OECD level, at the same time there is a willingness to remain competitive within the environment within which we operate.”
One of the measures expected to have the largest impact on corporate taxpayers is a provision that makes directors, trustees and liquidators personally liable for VAT debts, following nonpayment or noncompliance by the taxable persons under their administration or management.
Georges Simon, tax lawyer at Loyens & Loeff Luxembourg, told Bloomberg BNA the broad scope of the new VAT provision making directors and managers personally liable for company VAT debts is especially striking. “It doesn't really say what the circumstances are,” he told Bloomberg BNA in a phone-interview Aug. 1.
The draft bill establishes a “broader liability of managers in matters of VAT than in direct tax matters,” he said. Similar provisions exist under Luxembourg law that can hold managers liable for direct taxation debts but these are conditional upon certain circumstances and upon wrongful conduct by managers, he said. Recent case law has also helped clarify “what the managers have to do” to not be held liable, he said.
However, based on the proposed wording of the VAT provision in the law, “it seems that managers could be held liable without wrongful conduct,” he said.
Simon added that the draft bill isn't definitive and that changes to the wording of the VAT provision that more clearly defined the scope of the liability are likely.
Simon also noted that there had been indications lawmakers would introduce volume as well as time limits to carry forward losses. The percentage of losses incurred, that taxpayers would be able to carry forward, would reportedly be set to 75 percent, he said. He described the absence of such a volume limitation in the draft law as “good news for corporate taxpayers in Luxembourg because such a limitation in percentage would have probably been much more cumbersome than a limitation in the number of years,” he said.
The bill—number 7020—also for the first time introduces a 17-year limit on carrying forward losses accumulated after Dec. 31, 2016, for income tax and municipal business tax purposes. Taxpayers will be able to indefinitely carry forward losses realized prior to this date.
The draft bill mandates that resident companies electronically file corporate tax returns, municipal business tax returns and net wealth tax returns from the 2016 tax return onward. In addition, the proposal broadens the definition of tax fraud and establishes three types of tax fraud with different accompanying sanctions—“simple” tax fraud, “aggravated” tax fraud and “tax swindle.”
The Luxembourg parliament is expected to debate the bill in the coming months so that the final proposal can be ratified before Jan. 1, 2017.
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The Luxembourg draft bill (in French) is at http://www.chd.lu/wps/portal/public/RoleEtendu?action=doDocpaDetails&id=7020.
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