Luxembourg finance minister Pierre Gramegna presented the government’s draft 2016 budget to the country’s lower house of parliament, the Chamber of Deputies, on October 14, including the phasing out of the country’s IP tax regime in response to the OECD’s BEPS action plan.
In the light of the modified nexus approach applicable to IP regimes in item 5 of the BEPS action plan, the government proposes to abolish from July 1 next year the Luxembourg IP regime, which exempts from income tax 80% of the income and capital gains derived by a Luxembourg taxpayer from qualifying intellectual property, and a 100% exemption from the net wealth tax.
The draft budget proposes a five-year grandfathering period for qualifying IP created or acquired before next July, running until June 30, 2021. The grandfathering period is limited for qualifying IP acquired from a related entity after December 31 this year, unless the IP in question was already eligible for the Luxembourg regime or an equivalent foreign IP regime before the acquisition, to the end of 2016 for the corporate income tax exemption and until January 1, 2018 for the net wealth tax exemption.
As part of international tax transparency initiatives, the legislation provides for mandatory spontaneous exchange of information regarding the identity of Luxembourg taxpayers benefiting from the regime with respect to qualifying IP created or acquired after February 6, 2015, the date on which the OECD published the revised action plan item 5 incorporating the modified nexus approach.
The previous day Gramegna unveiled a tax bill whose measures will take effect from January 1 next year. It proposes that the annual net wealth tax on corporate taxpayers, currently levied at a rate of 0.5%, should offer a reduced rate of 0.05% for net wealth in excess of €500 million as of the beginning of 2016.
The bill also replaces the current minimum corporate income tax with a minimum net wealth tax following criticism by the European Commission that the existing arrangements may be in breach of the EU Parent Subsidiary Directive. Currently Luxembourg corporate taxpayers are subject to a fixed minimum corporate income tax levy of €3,210 if the financial assets of the entity in any given year exceed 90% of its total balance sheet and total more than €350,000. Otherwise the minimum tax is contingent on the taxpayer’s balance sheet total, ranging from €535 to €21,400 where the balance sheet exceeds €20 million.
Both fixed and contingent corporate income tax minima will henceforth be replaced by a minimum net wealth tax, for which the existing minimum levels of €25 and €62.5 respectively will be removed. The contingent minimum tax can in the future reach €32,100 for a balance sheet total above €30 million.
Unlike the current minimum corporate income tax, the minimum net wealth tax will not be an advance tax and therefore cannot be credited against future liabilities. Previously exempt from net wealth tax, the SICAR, Securitisation Vehicle and SEPCAV/ASSEP investment vehicles now become subject to the minimum net wealth tax, whether contingent or fixed.
The bill also closes a loophole regarding a net wealth tax reduction available under certain conditions where a net wealth tax reserve is created and maintained for at least five years. The reserve currently becomes taxable if it is used for purposes other than increasing the company’s share capital, and it will in future also become taxable in cases where the reserve is converted into share capital, which is then reduced again within five years of the creation of the reserve.
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