Luxembourg tax authorities clarify tax compliance for reverse hybrid entities

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On 9 June 2023, the Luxembourg tax authorities issued a Circular on reverse hybrids within the meaning of article 168quater of the income tax law. It is accompanied by an FAQ on new tax form 205, the tax return to be filed by reverse hybrids.

On 9 June 2023, the Luxembourg tax authorities issued a Circular on reverse hybrids within the meaning of article 168quater of the income tax law (“ITL”). It is accompanied by an FAQ on new tax form 205, the tax return to be filed by reverse hybrids.

The Circular is very welcome as it provides valuable information about which provisions of the ITL do or do not apply to reverse hybrids, generally in line with our initial expectations. The FAQ contains general information about how to complete and file the new tax form 205.

Article 168quater ITL implemented the reverse hybrid rule foreseen by Council Directive (EU) 2017/952 of 29 May 2017 (“ATAD II”) into domestic law. Briefly, with effect from tax year 2022, a Luxembourg tax transparent entity (e.g. société en commandite simple (“SCS”) or société en commandite spéciale (“SCSp”)), unless benefiting from the collective investment vehicle exemption, may be regarded as a Luxembourg resident taxpayer whose net taxable income is subject to corporate income tax (“CIT”) on the portion of its net taxable income that is not otherwise taxed in Luxembourg or in any other jurisdiction, if one or more non-resident associated enterprises, holding in aggregate a direct or indirect interest of 50% or more of the voting rights, capital interests or rights to a share of profit, are located in a jurisdiction that regard the Luxembourg entity as a taxable (opaque) person in Luxembourg and do not tax the net income attributable to such associated enterprises because of that difference in characterisation.

More information on this topic here: 2023 budget law amendment_, Law implementing ATAD II_ and Bill of law implementing ATAD II_

 

Main clarifications provided by the Circular

Tax status of the reverse hybrid

According to the Circular, a reverse hybrid is not a Luxembourg resident collective entity within the meaning of article 159 ITL. Therefore, only the specific provisions of the ITL expressly indicated in the Circular apply. In this respect, the Circular indicates that the following provisions of the ITL are not applicable to a reverse hybrid: article 164ter (controlled foreign companies provisions); article 166 (Luxembourg participation exemption regime on dividends and liquidation proceeds, and a fortiori on capital gains); article 168bis (interest deduction limitation rules) and article 168ter (anti-hybrid rules).


Determination of total net income subject to tax at the level of the reverse hybrid

 

Main clarifications provided by the FAQ

How can we help?

The Tax Law partners and your usual contacts at Arendt & Medernach are at your disposal to advise on how the Circular is likely to impact your filing obligations in Luxembourg.

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Luxembourg Newsflash – Luxembourg tax authorities clarify tax compliance for reverse hybrid entities

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