LUXEMBOURG Law and Practice Contributed by: Romain Tiffon and Marie Bentley, ATOZ Tax Advisers
to external scrutiny, policy pressure and BEPS-driven reform than others. • Cross-border intra-group financing structures – Historically one of Luxembourg’s most prominent offerings, intra-group financing arrangements have come under intense BEPS, ATAD and state aid scrutiny, especially following the EU investigations and the adoption of strict transfer pricing rules. • Use of Luxembourg holding companies (SOPARFIs) – While the participation exemption regime itself is solid and fully BEPS aligned, cross-border profit flows (dividends, interest and royalties) have been specifically flagged by the European Commission as part of broader concerns around aggressive tax planning. There is an increased need for demon - strable economic substance and beneficial owner - ship. • Advanced tax rulings – State‑aid challenges, mainly in the context of tax rulings, have placed selectivity and arm’s length compliance under deep inspection. Luxembourg has adapted its practices, but the area remains more exposed than routine tax provisions. 9.6 Hybrid Instruments and BEPS Implementation Luxembourg implemented EU Directive 2017/952 (ATAD 2), which expands the anti‑hybrid mismatch rules already introduced under ATAD 1. Whereas the initial ATAD rules applied only to intra‑EU hybrid mis - matches, ATAD 2 significantly extends the scope to non‑EU (third‑country) situations. The Luxembourg hybrid mismatch rules follow OECD BEPS Action 2 recommendations and target a wide range of hybrid mismatch scenarios, including: • hybrid financial instruments (equity in one jurisdic - tion, debt in another); • hybrid entities (transparent versus opaque treat - ment); • hybrid permanent establishments; • imported hybrid mismatches (mismatches arising outside Luxembourg but imported via deductions); • hybrid transfers; • dual‑resident entities; and
• reverse hybrids (transparent in Luxembourg, opaque to investors). Hybrid mismatches arise when entities or instru - ments are treated differently across jurisdictions (subject, where relevant to an associated enterprise test), leading to outcomes such as double deductions or deductions without inclusion. ATAD 2 requires EU member states – such as Luxembourg – to neutralise these mismatches either by denying deductions or by including otherwise untaxed income. Luxembourg’s implementation strictly adheres to ATAD 2 minimum standards, without adding extra lay - ers of complexity, but opting into all permitted exemp - tions or safe harbours to avoid unintended double taxation. 9.7 Interest Deductibility and Territorial Tax Regime Luxembourg does not apply a territorial CIT system; it applies worldwide taxation but with exemption, nota - bly for foreign permanent establishment income, via treaty or domestic rules. 9.8 Controlled Foreign Corporation Reform Since Luxembourg does not operate a full territorial system, the CFC rules are not impacted. 9.9 Anti-Avoidance Rules Please refer to 7.1 Overarching Provisions . 9.10 Transfer Pricing and IP Taxation Please refer to 2.2 Technology Investments . 9.11 Country-by-Country Reporting and Transparency Provisions Luxembourg has positioned itself as a highly com - pliant and transparent jurisdiction in line with OECD BEPS standards and EU transparency initiatives. The country has implemented multiple layers of mandatory reporting and disclosure obligations. Transparency is a central policy objective and shapes Luxembourg’s international tax reputation.
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