LUXEMBOURG Law and Practice Contributed by: Romain Tiffon and Marie Bentley, ATOZ Tax Advisers
6.7 The Sale of Shares in Non-Local Affiliates Capital gains derived by a Luxembourg taxable resi - dent company from shares in a subsidiary company are subject to CIT and MBT, unless the domestic par - ticipation exemption applies (see 2.7 Capital Gains ).
tions or deduction‑without‑inclusion outcomes, ensuring consistency with the ATAD 2 framework.
8. Audit Cycles 8.1 Regular Routine Audit Cycle
7. Anti-Avoidance Provisions 7.1 Overarching Provisions
Luxembourg does not operate a universal, time-based routine audit cycle (eg, “every three years”). Instead, the Luxembourg tax authorities follow a risk-based, thematic and event-driven approach. In practice, companies can go many years without an on-site audit – or be selected sooner if their profile or filings raise risk indicators. For CIT, MBT and NWT, taxpayers must file an annual tax return, which forms the basis for determining tax - able income and the resulting tax liability. Following submission, the Luxembourg tax authorities gener - ally issue a preliminary tax assessment reflecting the return as filed. The authorities retain the right to issue a revised assessment within a five‑year statute of limitations if they disagree with the preliminary assessment. This statute of limitations is extended to ten years where the tax return is found to be incomplete or incorrect, even absent fraudulent intent. Luxembourg also maintains specialised audit depart - ments empowered to conduct on‑site tax audits. The Service de révision is responsible for examining tax - payers’ accounts and supporting documentation and for preparing audit reports that may propose adjust - ments to the taxpayer’s tax position. 9. BEPS 9.1 Adoption of BEPS Recommendations Luxembourg has implemented the majority of the OECD BEPS Action Plan recommendations, several of which have been incorporated through EU direc - tives. These include: • Action 2 – anti‑hybrid mismatch rules; • Action 3 – controlled foreign company (CFC) rules; • Action 4 – interest deduction limitation rules;
Luxembourg’s tax framework incorporates multi - ple layers of anti‑avoidance rules operating at the domestic, EU and treaty levels, complemented by long‑standing substance‑based doctrines applied through administrative practice and case law. At the domestic level, Luxembourg has long applied a general anti‑abuse rule (GAAR) empowering the tax authorities to disregard arrangements that are pure - ly artificial or whose main purpose is the improper obtainment of a tax advantage. Since 1 January 2019, the domestic GAAR has been aligned with the ATAD 1, expressly incorporating the concept of a “non‑gen - uine arrangement”. Under this standard, tax benefits may be denied where legal forms or arrangements are used with the main (or one of the main) purposes of securing a tax advantage that is inconsistent with the object or purpose of the applicable tax rules. These principles are further reinforced by Luxem - bourg’s substance‑over‑form doctrine, under which the tax analysis focuses on the economic reality of a structure or transaction rather than its legal form. This doctrine is embedded in Luxembourg legislation and case law and remains a central interpretative tool for the tax authorities and courts. At the treaty level, since 1 January 2020, Luxem - bourg’s double tax treaties include the Principal Pur - pose Test (PPT). The PPT allows treaty benefits to be denied where it is reasonable to conclude that one of the principal purposes of an arrangement or transac - tion was to obtain those benefits. In addition, Luxembourg applies the full EU anti‑hybrid mismatch rules, which deny tax deductions or other advantages in circumstances involving double deduc -
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