Background
On 15 December 2022, the Parliament approved the text of the Draft Law. As a general rule, Parliament should have held a second vote on the text of the Draft Law within three months of the first vote. However, in the case at hand, both the Parliament and the State Council decided to waive the second vote.
Due to the current economic situation, no substantial tax reforms have been proposed. The approved law (“Budget Law”) provides clarifications on the reverse hybrid rule and extends the deadline for filing the tax returns. Moreover, among other, it provides amendments to the profit-sharing bonus rules and makes the conditions of the impatriate regime more beneficial for highly skilled workers.
Budget Law 2023
Most of the tax measures proposed by the Draft Law have been adopted in the Budget Law as such. However, certain measures, as explained below, have been further clarified or introduced.
One of the most important aspects of the Budget Law is the clarification provided on the reverse hybrid rules (article 168quater of the Luxembourg Income Tax Law (“LITL”)). These rules aim to eliminate situations where double non-taxation occurs further to the qualification of a Luxembourg entity as a reverse hybrid, i.e., tax transparent in Luxembourg and tax opaque in the jurisdiction of its investors.
The Budget Law clarifies that, in order for the reverse hybrid rules to apply, the absence of taxation of the net income at the level of the investors must result from the different tax qualification of the Luxembourg transparent entity and not, e.g., from the subjective tax exemption of the investor.
Further to the comments provided by the Luxembourg State Council during the legislative process, it is clear that this explanation should be regarded as an additional condition for the application of article 168quater of the LITL. The revised rule will apply retroactively, as from 1 January 2022.
Additionally, a new tax measure concerning subscription tax on investment funds was added to the Budget Law. Due to the Luxembourg government’s opposition to nuclear power and its desire to ensure efficient channelling of funds in favour of the energy transition, the Budget Law now excludes investments in natural gas and nuclear power from the reduced subscription tax.
For a more detailed overview of the measures introduced by the Budget Law, please refer to our previous newsletter available here.
Our observations
We are at your disposal to further assess and advise on the impact of the measures introduced by the Budget Law on your business. If you would like to discuss any aspect of the Budget Law, please do not hesitate to contact Grant Thornton Luxembourg.
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