Update as of 23 December 2022. Adoption of the Luxembourg Draft Law on the 2023 Budget

ADMIN / September 27th

On 12 October 2022, the Luxembourg Minister of Finance, Yuriko Backes, submitted to the Chamber of Deputies a draft law on Luxembourg’s state budget for 2023, the “Budget.”[1] The Budget contains few measures for the year ahead, most of which are aimed at supporting households in a context of crisis. From a tax perspective, two proposals are relevant: The first one concerns the treatment of Luxembourg partnerships with foreign partners. The second one is a deadline extension for filing of the annual tax returns.

Luxembourg Partnerships with Foreign Partners (Article 168quarter Para. 1 L.I.R.)

Scope of Article 168quater L.I.R.

Article 168quater of the Luxembourg Income Tax Act (“L.I.R.”) was introduced into Luxembourg tax law with the implementation of the European ATAD II Directive[2] with effect from 1 January 2022. The Article applies to Luxembourg partnerships with foreign partners where the Luxembourg partnership is not treated as a partnership for tax purposes in one or more countries of residence of the partners, but rather as a company subject to corporate income tax (“reverse hybrid structure”). Another condition for the application of Article 168quater L.I.R. is that the partners are associated persons or enterprises for the purpose of this Article. The possible consequence of this unequal tax treatment of the Luxembourg partnership is that neither Luxembourg imposes taxes on the income of the partnership nor the country of residence of the foreign partner. In such a situation, Article 168quater L.I.R. provides that the Luxembourg partnership will be subject to Luxembourg corporate income tax on the portion of its income that is not taxed in the foreign partner’s country of residence. However, this does not apply to municipal business and net worth tax.

Article 168quarter L.I.R., however, does not apply to collective investment vehicles as defined in Article 168quater paragraph 2 L.I.R.[3] These include partnerships set up as Reserved Alternative Investment Funds or “RAIFs” as defined in the Law of 23 July 2016, partnerships set up as Specialized Investment Funds or “SIFs” as defined in the Law of 13 February 2004, and other alternative investment funds as defined in the Law of 12 July 2013 on alternative investment fund managers.

Proposed Adjustment

According to the Budget, Article 168quater L.I.R. should be clearly defined with respect to tax-exempt foreign partners investing in Luxembourg partnerships. As such, the provision should apply exclusively to cases where the country of residence of the foreign partners classifies the Luxembourg partnership differently for its national tax purposes, thus creating situations of non-taxation. The provision should therefore not apply if the non-taxation of the foreign partner has its cause in a subjective tax exemption of the foreign partner under the national tax law. This is the case, for example, if the foreign partner is a tax-exempt investment fund.

Entry into Force

This adjustment to Article 168quater, paragraph 1 L.I.R. should in principle apply retroactively to the 2022 fiscal year. However, as the Budget is still under examination by the Chamber of Deputies, it may still be modified following the comments of the Luxembourg State Council and the Professional Chambers.

AIQUTAX Observation: The clarification regarding the condition of hybridity is in line with BEPS Action 2, recommendation 4.[4] The proposed adjustments should therefore provide more clarity as to the application of the provision in practice.

Deadline Extension for Luxembourg Corporate Tax Returns

The Budget provides for a deadline extension for filing the annual income tax return, the annual corporate and municipal business tax returns and the annual net worth tax return (amendment of Section 167, paragraph 3 of the Luxembourg General Tax Code).[5] The deadline is now set to 31 December instead of 31 March each year. This extension would apply for the first time when filing the annual income tax return as well as the annual corporate and municipal business tax returns for the fiscal year 2022 and when filing the net worth tax return for the fiscal year 2023. Therefore, the annual tax returns would be due by 31 December 2023 for companies with a financial year corresponding to the calendar year once the Budget is transposed into law. The deadline extension upon request according to Section 167 paragraph 4 of the Luxembourg General Tax Code would be deleted.

AIQUTAX Observation: This adjustment is welcomed as it transposes the current administrative practice into law.

[1] De Budget 2023, No. 8080.

[2] Council Directive (EU) 2017/952 of 29 May 2017 amending Directive (EU) 2016/1164 as regards hybrid mismatches with third countries.

[3] According to Article 168quater, paragraph 2 L.I.R., a collective investment vehicle is an investment fund or a vehicle that is widely held, holds a diversified portfolio of securities and is subject to investor-protection regulation in the country in which it is established.

[4] OECD (2015), Neutralising the Effects of Hybrid Mismatch Arrangements, Action 2 – 2015 Final Report, 5 October 2015, page 55.

[5] Luxembourg General Tax Code (“Abgabenordung”) of 22 May 1931, as amended.

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