Hybrid Mismatch Rules In Luxembourg

Addressing base erosion and profit shifting (BEPS) is a key priority of governments. In 2013, OECD and G20 countries, working together on an equal footing, adopted a 15-point Action Plan to address BEPS. This publication is the final report for Action 2.

Over the last years, the Luxembourg tax environment has undergone a comprehensive transformation following the OECD Base Erosion and Profit Shifting ("BEPS") Project and subsequent initiatives at EU level. 00With the transposition of the two Anti-Tax Avoidance Directives (?ATAD? and ?ATAD 2?) and the implementation of other tax measures into Luxembourg tax law, the Grand-Duchy contributed to a level playing field in international taxation. ATAD and ATAD 2 resulted in the implementation of a number of anti-abuse provisions including:0- Interest limitation rules;0- Controlled foreign company (?CFC?) rules;0- Hybrid mismatch rules;0- General Anti-abuse Rule (?GAAR?);0- Exit tax rules .00In addition, the Luxembourg legislator changed in 2019 the definition of permanent establishments (?PE?) and abolished the roll-over relief applicable to conversions of debt instruments into equity. 00This book provides a 360° view on the transformation of the Luxembourg tax environment.

Luxembourg transposed the OECD and European Union's tax avoidance measures into domestic law in December 2018, addressing hybrid mismatch rules, CFC rules, and interest limitation rules, among others. This article explores the potential impact for taxpayers.

The Anti-Tax Avoidance Directive (ATAD) Bill constitutes a comprehensive and coherent implementation of the ATAD I provisions. It includes significant changes in the Luxembourg tax laws which may impact MNCs and international investors. Given that most provisions will enter into force as early as 1 January 2019, investors and taxpayers concerned should check the potential impacts of the ATAD Bill on their activities in Luxembourg and abroad. In addition, given the forthcoming implementation of ATAD II as of 1 January 2020, current operations and future transactions should be reviewed in order to assess the impact of expected anti-hybrid mismatch rules.

This report sets out recommendations for domestic rules to neutralise the effect of hybrid mismatch arrangements and includes changes to the OECD Model Tax Convention to address such arrangements. Once translated into domestic law, the recommendations in Part 1 of the report will neutralise the effect of cross-border hybrid mismatch arrangements that produce multiple deductions for a single expense or a deduction in one jurisdiction with no corresponding taxation in the other jurisdiction. Part 1 of the report will be supplemented by a commentary, which will explain the recommended rules and illustrate their application with practical examples. Part 2 of the report sets out proposed changes to the Model Convention that will ensure the benefits of tax treaties are only granted to hybrid entities (including dual resident entities) in appropriate cases. Part 2 also considers the interaction between the OECD Model Convention and the domestic law recommendations in Part 1.

This 2017 report sets out recommendations for branch mismatch rules that would bring the treatment of these structures into line with the treatment of hybrid mismatch arrangements as set out in the 2015 Report on Neutralising the Effects of Hybrids Mismatch Arrangements (Action 2 Report). Branch mismatches arise where the ordinary rules for allocating income and expenditure between the branch and head office result in a portion of the net income of the taxpayer escaping the charge to taxation in both the branch and residence jurisdiction. Unlike hybrid mismatches, which result from conflicts in the legal treatment of entities or instruments, branch mismatches are the result of differences in the way the branch and head office account for a payment made by or to the branch. The 2017 report identifies five basic types of branch mismatch arrangements that give rise to one of three types of mismatches: deduction / no inclusion (D/NI) outcomes, double deduction (DD) outcomes, and indirect deduction / no inclusion (indirect D/NI) outcomes. This report includes specific recommendations for improvements to domestic law intended to reduce the frequency of branch mismatches as well as targeted branch mismatch rules which adjust the tax consequences in either the residence or branch jurisdiction in order to neutralise the hybrid mismatch without disturbing any of the other tax, commercial or regulatory outcomes. The annexes of the report summarise the recommendations and set out a number of examples illustrating the intended operation of the recommended rules.

Over the past several years, there has been a steady increase in the number of resident taxpayers subject to the various taxes on income and net worth in Luxembourg. However, until now, no complete and up-to-date documentation has been available to guide taxpayers in the preparation of their tax returns. This book, which is both detailed and highly readable, is a practical response to that information gap. This first English edition is based on tax legislation which is effective in Luxembourg as at 31 December 2018 and provides guidance on how to complete the online corporate income tax, municipal business tax and net worth tax return for resident corporations and how to submit the mandatory electronic declaration. This book undertakes a page-by-page analysis of the tax return form for commercial companies and the annexes to that form and draws attention to the most important laws, regulations and administrative circulars currently in force. The book also incorporates many practical examples. These features make this book an ideal reference guide for resident corporations in Luxembourg.