The bill adds a paragraph to Article 168 of the Luxembourg income tax law (the “LITL”) extending non-tax-deductibility to interest and royalties due to a related party established in a country or territory appearing on the EU list of non-cooperative jurisdictions¹ (the “EU list”). The new measure will apply to accruals made as of 1 March 2021, based on the version of the EU list published in the Official Journal of the European Union on that date.

Following formal oppositions made by the State Council during the parliamentary process, the bill has undergone several amendments. In particular, the initial bill of law rendered both accruals and payments falling within the scope of the new measures non-tax deductible. The final text no longer includes language making payments a triggering event for non-deductibility, as this would not have been in line with the principle of non-retroactivity of the law (the initial provisions would have included payments made after the law’s entry into force, but stemming from accruals made before that time). In addition, the provisions referring to the EU list that must be considered when assessing whether accruals are non-deductible have been simplified.

The new provisions apply subject to the following cumulative conditions:

1. The recipient of the interest or royalties must be a collective entity (as indicated in Article 159 of the LITL, which by definition does not include partnerships). If the recipient is not the beneficial owner, the actual beneficial owner of the payments must be taken into account.

2. The recipient must be a related party within the meaning of Article 56 of the LITL (dealing with Luxembourg transfer pricing rules).

3. The recipient must be established in a country or territory appearing on the applicable EU list as published in the Official Journal of the European Union.

The current EU list, which was last revised in October of last year,² includes the following jurisdictions: American Samoa, Anguilla, Barbados, Fiji, Guam, Palau, Panama, Samoa, Seychelles, Trinidad and Tobago, the US Virgin Islands and Vanuatu. The next revision is due to be performed in February 2021.

From 1 March 2021, the new provisions will apply to the countries and territories appearing on the latest version of the EU list published in the Official Journal of the European Union. As of 1 January of each subsequent year, they will apply to the countries and territories appearing on the version of the EU list applicable as of 1 January of that year. The delisting of jurisdictions can be taken into account for accruals made on or after the date of publication of the EU list that withdrew the relevant jurisdictions in the Official Journal of the European Union (or an earlier version of the EU list published during the same year).

Importantly, where the taxpayer provides evidence that a transaction was made for valid business reasons that reflect economic reality, the relevant accruals remain tax-deductible.

For more information on the new provisions, see our previous Newsflash: New Luxembourg bill on payments to EU ‘black-list’ countries_

Concluding remarks

Taxpayers undertaking transactions with related entities located in jurisdictions included on the EU list will need to carefully assess the impact of this new measure on their operations, bearing in mind that the list may be updated in the course of 2021, and in subsequent years.

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 this new measure on your investments.

¹ Countries and territories appearing in Annex I of the conclusions of the Council of the European Union on the revised list of the European Union of non-cooperative countries and territories for tax purposes.

² Please refer to our newsflash on the revised EU list_