LUXEMBOURG Law and Practice Contributed by: Romain Tiffon and Marie Bentley, ATOZ Tax Advisers
If the foreign subsidiary pays a royalty, that royalty is taxable in Luxembourg as ordinary income. If the intangible itself (not just its use) is transferred from Luxembourg to a foreign subsidiary – eg, by migration, business restructuring, or asset transfer – Luxembourg typically imposes exit taxation, unless an exemption or deferral rule is available. If the intangible is used without compensation (free transfer or free use), Luxembourg tax authorities may: • impute a deemed royalty; • recharacterise the transaction; or • treat the benefit as a hidden distribution. Hidden profit distributions can be subject to 15% WHT if the recipient is not eligible for an exemption or treaty relief. Under the IP regime, net income from qualifying IP assets that meet the eligibility criteria may benefit from an 80% exemption from CIT and MBT and qualifying IP assets may benefit from a 100% exemption from NWT. 6.5 Controlled Foreign Corporation-Type Rules Local corporations can be taxed on the income of non-local subsidiaries as earned under CFC-type rules but only in very limited circumstances. Luxembourg implemented CFC rules through the EU ATAD 1 Directive. These rules apply only when: • a controlled foreign company (subsidiary or perma - nent establishment) is essentially set up to obtain a tax advantage; and • the income of the CFC is linked to significant functions performed in Luxembourg by the Luxem - bourg parent. Under these conditions, Luxembourg must tax the undistributed net income of the CFC in proportion to the Luxembourg company’s ownership or control. Luxembourg applies the “significant people func - tions” test, meaning that CFC income is only attrib -
uted to Luxembourg when the value‑creating func - tions connected with that income are performed in Luxembourg. If the foreign subsidiary conducts its own activities and the Luxembourg entity does not perform significant functions (properly documented), no CFC inclusion occurs. Luxembourg also applies two statutory safe harbours: • CFC accounting profits <EUR750,000; or • profits <10% of operating costs. In these cases, the Luxembourg CFC rules do not apply. Luxembourg’s CFC rules may apply to foreign branch - es, but the outcome depends on whether Luxembourg exempts or taxes branch income under applicable double tax treaties. 6.6 The Substance of Non-Local Affiliates Luxembourg’s domestic general anti‑abuse rule (GAAR) applies equally when assessing the substance and arrangements of non‑resident affiliates. Since its amendment on 1 January 2019, the GAAR has been aligned with the wording of ATAD 1 and incorporates the concept of a “non‑genuine arrangement”. Under this rule, a transaction or structure may be ignored or recharacterised if: • it involves the use of one or more legal forms or legal arrangements; • obtaining a tax advantage is the main purpose, or one of the main purposes, of using such form(s) or arrangement(s) in a manner contrary to the object or purpose of the tax law; and • the arrangement is considered non‑genuine because it does not reflect economic reality. In addition, since 1 January 2020, the Principal Pur - pose Test (PPT) has applied to Luxembourg’s tax trea - ties. Under the PPT, treaty benefits may be denied whenever it is reasonable to conclude that one of the principal purposes of an arrangement or transaction – whether directly or indirectly – was to obtain those treaty benefits.
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