Luxembourg 2023 budget law passed – focus on tax measures

The Luxembourg Parliament adopted the 2023 budget law with minimal discussion of proposed tax measures, except for the clarifications of the reverse hybrid rule and the reduced subscription tax for investment funds (added late in the bill adoption process).

23/12/2022

1. Reverse hybrid rule

A clarification of the conditions of the reverse hybrid rule has been introduced (article 168quater of the income tax law, as amended). The 2023 budget law provides that the rule requiring a reverse hybrid entity to be treated as a resident taxpayer only applies if the non-taxation of the net income received by the investors through the tax transparent entity results from the difference in qualification of the entity under Luxembourg law and in the investors’ jurisdiction.

The reverse hybrid rule, which has been in effect from tax year 2022, is a measure that applies to entities in Luxembourg that are considered tax transparent, meaning that under Luxembourg domestic law their profits are not taxed at the entity level but rather at the level of the investors. However, the investors may be located in a different country where these same entities are considered to be fiscally opaque, leading to a lack of taxation. The reverse hybrid rule aims to ensure that a Luxembourg tax transparent entity that is treated as a taxable entity in the jurisdiction(s) of non-resident associated enterprises holding a majority interest in the entity is subject to Luxembourg corporate income tax on the portion of its net income that is not otherwise taxed in Luxembourg or any other jurisdiction.

The 2023 budget law amendment means that net income realised by an investor through a tax transparent entity established in Luxembourg which benefits from a subjective exemption in its country of residence, is not subject to the rule (even if the investor considers the tax transparent entity to be opaque).

This clarification is effective retroactively for the 2022 tax year.

2. Reduced subscription tax

The 2021 budget law introduced reduced subscription tax rates for investment funds (UCITS and UCI Part II (or their individual compartments with multiple compartments)) that meet the criteria of the European taxonomy for sustainable economic activities under certain conditions. However, in July 2022, the EU Commission amended the taxonomy to include natural gas and nuclear power as sustainable economic activities.

Due to the Luxembourg government’s opposition to nuclear power and its desire to accelerate energy transition, the 2023 budget law expressly excludes investments in natural gas and nuclear power from the reduced subscription tax for the portion of a fund’s net assets invested in sustainable economic activities.

How can we help?

The Tax Law partners and your usual contacts at Arendt & Medernach are at your disposal to further assess and advise on the impact of these new measures on your tax affairs.

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