LUXEMBOURG Law and Practice Contributed by: Romain Tiffon and Marie Bentley, ATOZ Tax Advisers
• the use of such forms or structures is considered non‑genuine. 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. 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 if it is reasonable to conclude that obtaining the benefit was one of the principal purposes of an arrangement or transaction that directly or indirectly gave rise to that advantage. In addition, Luxembourg applies the full EU anti‑hybrid mismatch rules, which deny tax deductions or other advantages in circumstances involving double deduc - tions or deduction‑without‑inclusion outcomes, ensuring consistency with the ATAD 2 framework. 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 vs opaque treatment); • 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 instruments are treated differently across jurisdictions, leading to outcomes such as double deductions or deductions without inclusion. ATAD 2 requires EU member states – such as Luxembourg – to neutralise these mis - matches 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. Under Article 38 of the Luxembourg Income Tax Law (LITL), exit taxation is triggered where Luxembourg loses, in whole or in part, its taxing rights over assets or business activities as a result of a cross-border transfer. This may arise, in particular, where: • assets are transferred from a Luxembourg head office to a foreign permanent establishment; • assets are transferred from a Luxembourg perma - nent establishment to its foreign head office or to another foreign permanent establishment; • a taxpayer transfers its tax residence outside Lux - embourg; or • a business carried on through a Luxembourg permanent establishment is transferred to another jurisdiction, provided that, as a consequence of the transfer, Lux - embourg no longer has the right to tax any future gains realised on the relevant assets. Upon the occurrence of an exit event, unrealised gains inherent in the transferred assets are deemed to be realised for Luxembourg tax purposes. The taxable gain generally corresponds to the difference between: • the fair market value (or going concern value) of the assets at the date of the transfer; and • their tax book value for Luxembourg tax purposes. Accordingly, gains that accrued while the assets were subject to Luxembourg taxation become taxable at the time of the transfer, notwithstanding the absence of an actual disposal. Where the transfer is made to another European Union member state or to a qualifying European Economic Area State with which arrangements for the mutual recovery of tax claims are in place, the taxpayer may elect to defer payment of the exit tax by paying it in equal instalments over a period of up to five years.
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