Denial of Tax Deduction on Interest and Royalties
30 Mar 2020
On 30 March 2020, a draft law was submitted to the Luxembourg Parliament. Read the revised update here.
On 25 March 2020, the Luxembourg Council of Ministers approved in principle a new draft law that will deny the tax deductibility of certain interest and royalties paid to related parties located in any of the countries found on the EU List of Non-Cooperative Jurisdictions for Tax Purposes. The text of the draft law is expected to be released shortly. The timing of the enactment of the new law is unknown.
The New Proposed Luxembourg Measure
The Luxembourg Council of Ministers approved draft legislation1 that provides for the denial of certain interest or royalty expenses paid to a related person located in one of the countries listed on the European Council of Economic and Financial Affairs (″ECOFIN″)’s Annex I List of Non-Cooperative Jurisdictions for Tax Purposes ("Annex I Jurisdictions").
The text of the draft law is expected to be released when it is introduced to the Luxembourg Parliament in the coming days.
Timing of the Draft Law
The actual timing of the implementation of the draft law is unknown, however ECOFIN has recommended that such defensive measures against Annex I Jurisdictions, as this draft law contains, should be enacted by 1 January 2021.
Cayman Islands Anticipated to be Removed from Annex I in October 2020
The Cayman Islands was recently added to the Annex I in February 20202 solely due to a technical timing difference on necessary amendments per the ECOFIN’s recommendations and is expected to be removed from the list in October 2020, the anticipated date of the next ECOFIN meeting.
By way of background, on 18 February 2020, the ECOFIN resolved to move the Cayman Islands to the Annex I as it ″…does not have appropriate measures in place relating to economic substance in the area of collective investment vehicles…″.
However, the Cayman Islands Government's statement, in response pointed out that; (i) the jurisdiction passed the necessary investment funds legislation on 31 January 2020, which came into force on 7 February 2020, (ii) the Cayman Islands has been fully co-operative with the EU's requests and (iii) the Cayman Islands remains fully committed to co-operating with the EU and will continue to constructively engage with them with the view to being delisted as soon as possible.
One of Four Measures
By way of background, Luxembourg is proposing this draft law in light of recommendations by the ECOFIN to implement at least one of four proposed so-called ″defensive measures″ against jurisdictions in Annex I. The ECOFIN has recommended that each EU Member State adapt its choice of defensive measures as from 1 January 2021. These measures include:
1. non-deductibility of costs paid from an EU resident company to a person in an Annex I jurisdiction;
2. application of controlled foreign company (″CFC″) rules requiring current inclusion of the undistributed profits of subsidiaries located in an Annex I jurisdiction;
3. imposition of higher withholding taxes on payments received in an Annex I jurisdiction; or
4. more stringent limitations of any participation exemption benefits with respect to profits distributed from an entity located in an Annex I jurisdiction.
Accordingly, Luxembourg has opted for the first measure regarding denial of costs.
For advice as to how this Law may affect current structures with Luxembourg and the Cayman Islands, please liaise with your usual Maples Group contact or one of the below contacts.
T: +352 28 55 12 43
Managing Partner Luxembourg
T: +352 28 55 12 44