On 12 October 2016, the Luxembourg Finance Minister presented the budget law for 2017 to the Parliament (Chambre des Députés). The main tax-related provisions of the Bill of Law N° 7050 (the “Bill”) may be summarised as follows:
• Introduction into domestic law of the basic transfer pricing principles foreseen by Actions 8 - 10 of the OECD Base Erosion and Profit Shifting (“BEPS”) Report:
Luxembourg’s transfer pricing legislation has to date been limited to a general provision enacted under article 56 of the Luxembourg Income Tax Law (“ITL”) which (following article 9.1. of the OECD Model Tax Convention) basically states that if associated enterprises deal with each other under conditions that differ from those which would be made between independent enterprises, then the profits of these enterprises will be determined under conditions prevailing between independent enterprises and taxed accordingly. No specific technical guidance was provided given that article 56 ITL implicitly referred to the OECD’s Transfer Pricing Guidelines which were therefore applied.
The Bill proposes changing this situation and giving a clear legal foundation to the application of the OECD Transfer Pricing Guidelines by introducing a new article 56bis which will implement the conclusions of Actions 8 - 10 of the OECD BEPS Report. Actions 8 - 10 of the OECD BEPS Report revise Chapter I Section D of the OECD Transfer Pricing Guidelines regarding in particular the technique and methodology used for the application of the arm’s length principle.According to the revised guidelines, a “comparative analysis” is at the heart of the application of the arm’s length principle: the arm’s length principle is based on a comparison of the conditions of a controlled transaction with the conditions that would have been made had the parties been independent and undertaking a comparable transaction under comparable circumstances. While from a practical perspective the inclusion of these principles will not fundamentally change the current transfer pricing legislation, it is expected that it will leave no room in the future for any lump-sum valuations.
The Bill has further the merit of giving the necessary legal background to the application of the OECD Transfer Pricing Guidelines and shows the Luxembourg government’s commitment to complying with the conclusions of the OECD BEPS Report.
• Increase of the annual turnover threshold of the special VAT scheme for small enterprises:
The Bill proposes increasing the turnover threshold for the application of the small business regime from EUR 25,000 to EUR 30,000. In cases where a taxable person’s annual turnover does not exceed this threshold, the taxable person is considered to be a small business for VAT purposes and has the possibility of opting for the application of the small business regime.
Under this regime, the taxable person (although required to register for VAT purposes) does not have to charge and account for VAT on his supplies of goods and/or services and is exempt from most VAT compliance and reporting obligations.
The small business regime is limited to local activities. If the taxable person becomes involved in cross-border operations (e.g. intracommunity acquisitions or supplies of goods or services), it will be required to meet any related VAT obligations. Under the small business regime, the taxable person is in principle not entitled to deduct input VAT.
The increase in the threshold is motivated by a further reduction of the administrative burden for small enterprises.
• Cancellation of the tax guarantee for immigrants:
Under the current rules, the Luxembourg tax authorities may require citizens of other countries who immigrate to Luxembourg and who do not own any real estate situated in Luxembourg to provide a deposit or guarantee for the payment of their taxes for an entire year. Since this requirement, as regards EU or EEA citizens, does not comply with European Union law, the Bill proposes cancelling the relevant provision.
The introduction of the Transfer Pricing Guidelines is the most significant tax-related provision of the Bill. Other tax measures, such as the reduction of the current corporate income tax rate from 21% to 19% in 2017, are included in a separate Bill of Law N° 7020, which is expected to be adopted before year end (see also our newsflash dated 27 June 2016).