Article Post on 06 April 2020

New Bill: Non-tax Deductibility of Interest and Royalty Payments to Blacklisted Countries

_On 30 March 2020 the Luxembourg Minister of Finance filed before the Luxembourg Parliament the bill n°7547 (“Bill”) aiming at amending Article 168 of the Luxembourg income tax law dated 4 December 1967 as amended from time to time (“LITL”).

The purpose of the Bill is to propose the introduction of a specific rule – by adding a paragraph 5 to Article 168 LITL – which would derogate to the general principle foreseen in article 45 LIR which provides for the tax deductibility of operating expenses caused exclusively by a company. Indeed, the Bill provides for the non-tax deductibility of interest or royalties paid or due by a collective undertaking (within the meaning of Article 159 LITL) to an associated enterprise (within the meaning of Article 56 LITL) established in a country or territory appearing on the list of non-cooperative countries or territories for tax purposes (“Blacklist”).

Accordingly, the Bill consists in establishing the non-tax deductibility of such interest or royalty expenses, unless the taxpayer provides proof that the operation in relation to interest or royalties paid or due is used for valid commercial reasons that reflect economic reality. In case the new rule provided by the Bill applies, the interest limitation rule as provided in Article 168bis LITL would no longer apply.

Further, it is to be noted that the Government will present to the Chamber of Deputies the Blacklist that will apply under the Luxembourg measure as from 1 January 2021. It also specifies that this Blacklist should be the same as the most-recent list then published by the EU Council of countries and territories that the EU regards as “non-cooperative” for tax purposes. Currently, and since 18 February 18, this EU Blacklist includes 12 countries or territories, i.e. American Samoa, Cayman Islands, Fiji, Guam, Oman, Palau, Panama, Samoa, Trinidad and Tobago, US Virgin Islands, Vanuatu and the Seychelles.

The Government will repeat this process, of presenting the relevant Blacklist, annually as part of the annual budget bill based on the latest updated version of the EU list of non-cooperative jurisdictions for tax purposes available at this time. It is worth noting that the proposed new rule would cease to apply as soon as the country or territory concerned is removed from the EU published Blacklist.

The provisions of the Bill should apply for interest/royalties paid or due as from 1 January 2021.

The Bill could have a significant impact for certain investors having structured their activities through Luxembourg. It could worth to anticipate such impact by using alternative financing structures (or other ways) in order to limit any adverse tax consequences.

Our tax team is available to answer any questions you may have in relation to the Bill.

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