LUXEMBOURG Law and Practice Contributed by: Stefanie Ferring, Oliver Zwick and Geoffrey Scardoni, Clifford Chance
(which may or may not be limited), either at a premium or not. Amortisation There is usually a bullet repayment. 3.9 Call Protection There are no specific concerns with call protec - tion provisions as a matter of Luxembourg law and this is not Luxembourg specific. Under Luxembourg law, no Luxembourg with - holding tax should apply on interest payments on loans/debt instruments granted to Luxem - bourg borrowers provided that the loans/debt instruments (i) qualify as debt for Luxembourg tax purposes, (ii) are not profit-participating, and (iii) the interest rate adheres to the arm’s length standard. 4.2 Other Taxes, Duties, Charges or Tax Considerations 4. Tax Considerations 4.1 Withholding Tax According to the law of 21 December 2018, introducing the interest barrier rules into the Luxembourg legislation, the portion of interest expenses exceeding interest income (ie, the so- called “exceeding borrowing costs”) would be tax deductible up to the higher of (i) 30% of the adjusted EBITDA of the Luxembourg taxpayer, and (ii) EUR3 million. In this respect, a Luxem - bourg taxpayer receiving or recognising income in its tax return that does not qualify as interest or economically equivalent income (eg, taxable dividend, rental income and capital gains derived from a Luxembourg building) may potentially fall within the scope of these provisions.
According to the law of 19 December 2019 intro - ducing ATAD 2 into the Luxembourg legislation, the tax deductibility of an expense incurred by a Luxembourg borrower may also be restricted if (i) such expenses result in a hybrid mismatch (which can notably be defined as a situation where, because of a difference in the legal characterisation of a financial instrument, a tax deductible expense is not included in the tax - able base of the ultimate recipient/beneficiary), and (ii) (a) the ultimate recipient/beneficiary of the expense and the Luxembourg borrower are “Associated Enterprises” or (b) the ultimate recipient/beneficiary and the Luxembourg bor - rower have entered into a structured arrange - ment which entails this hybrid mismatch. The term “structured arrangement” is defined in the ATAD 2 law as an arrangement involving a hybrid mismatch where the mismatch outcome is priced into the terms of the arrangement or an arrangement that has been designed to pro - duce a hybrid mismatch outcome, unless the taxpayer or an “Associated Enterprise” could not reasonably have been expected to be aware of the hybrid mismatch and did not share in the value of the tax benefit resulting from the hybrid mismatch. Furthermore, according to the ATAD 2 law, the interest of various parties may be aggregated to assess the “Associated Enter - prise” thresholds, if they are considered as act - ing together. A hybrid mismatch would however not arise if the absence of taxation at the level of the recipient/beneficiary of the expense will in any case occur due to its own tax status (ie, the recipient/beneficiary is a tax-exempt vehicle). “Associated Enterprise” means: • any entity which is a part of the same con - solidated group for financial accounting purposes;
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