VCL Luxembourg Flash Tax News – January 2023

Budget Law 2023 – Tax


  1. Reverse Hybrid Rules – Clarification
  2. Tax Returns – Extension of the filing deadlines
  3. Temporarily reduction of VAT rates
  4. Impatriate Regime
  5. Profit participating scheme
  6. RELIBI Law
  7. Conclusion

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On 12 October 2022, the Luxembourg Government presented the 2023 Budget bill (n°8080) which was later on 23 December 2022, adopted (the “Budget”). In general, and as expected, the Budget does not contain any major tax changes, rather clarifications to certain existing rules.

  1. Reverse Hybrids Rules – Clarification

The Budget clarified the scope of application of article 168quater of the Luxembourg Income Tax Law (“LITL”) on so-called ‘reverse hybrid rules’. The current rules in place provide that Luxembourg tax transparent entities will become liable to corporate income tax on the portion of the income which is not taxed in Luxembourg nor in any other jurisdiction, where one or more associated non-resident persons/entities holding in aggregate a direct or indirect interest in 50 % or more of the voting rights, capital interests or profit entitlement in such entity are located in a jurisdiction that regard the Luxembourg entity as an opaque entity.

The proposed changes aim to clarify that the reverse hybrid rules would only apply if the non-taxation of the income realized by the investor result from the difference in qualification of the Luxembourg entity. In case the income realized by the investor benefits from a subjective exemption in its state of residence, such investor and the portion of income realised by the Luxembourg entity allocable to him would not fall within the scope of the reverse hybrid rules.

This clarification is especially welcome for situations where a Luxembourg investment fund has an investor base composed of, for instance, foreign pension funds, sovereign wealth funds, other tax-exempt funds or entities set up in jurisdictions that do not levy a tax similar to a corporate tax or that apply a territorial tax system where foreign income is exempt from taxation as in these cases the reverse hybrid rules should not apply as these would be subjective exemptions.

Therefore, the clarification means that the reverse hybrid rules would only apply in cases where the double non-taxation would arise from an actual hybrid mismatch (i.e., transparent vs. opaque) and not from other factors, such as the tax-exempt status of the investors.

This clarification shall already apply for tax year 2022.

  1. Tax Returns – Extension of the filing deadlines

As per the Budget, the deadline for the filing of corporate income tax, municipal business tax, net wealth tax and personal income tax returns would be extended to 31 December compared to the current deadline of 31 March. The new filing deadlines apply for tax returns as from tax year 2022.

  1. Temporarily reduction of VAT rates

As from 1 January 2023, the standard, intermediate and reduced VAT rates will decrease by 1% to reach 16%, 13% and 7%, respectively. In principle, the measure is of a transitional nature and should end on 31 December 2023. The super-reduced rate will remain at 3%.

  1. Inpatriate Regime

A special tax regime exists in Luxembourg where the costs incurred in moving highly skilled employees (impatriates) which are borne by the company may be reported as operating expenses. Furthermore, an impatriate may, under certain conditions, and for a limited period of time (up to 8 years), receive a full or partial tax exemption for the allowances received (in cash or in kind) and directly linked to the move to Luxembourg.

As laid in the Budget, the limit of the gross wage to be earned (before benefits in cash and kind) in order to apply this regime shall be lowered from EUR 100,000 to EUR 75,000.

  1. Profit Participating Scheme

Currently the Luxembourg Law allows employees to participate in the beneficial tax regime under the profit participating scheme (prime participative) which allows a tax exemption of 50% of the renumeration in the form of a profit participating scheme, subject to certain conditions, such as that the profit participating scheme does not exceed 5% of the profit of the employing company in the relevant financial year.

The Budget brought greater flexibility, so that instead of assessing the 5% positive result at the level of each company, those companies that are part of a tax unit group may opt to be assessed jointly, rather than individually.

  1. RELIBI Law

The Budget also brought further clarification to the Luxembourg Law of 23 December 2005 (“RELIBI Law”). Currently the law states that a final withholding tax (“WHT”) of 20% will be imposed on certain interest income realized by natural persons who are resident in Luxembourg. The 20% withholding tax must be levied by a paying agent.

The Budget clarifies the definition of a paying agent to only consider professionals of the financial sector who pay interest as part of their normal economic activity. Furthermore, the Budget specifies that should a bank intervene in a passive way, the bank should not be considered as a paying agent. Additionally, it is further stated that the RELIBI Law does not apply in cases where the interest payments have been made between private persons.

  1. Conclusion

As can be seen from this short summary to the Budget, no major tax changes were brought up. From an alternative investment view, the major takeaway is the clarification on the anti-hybrid rules for them to only apply in cases where the mismatch arises from a pure classification of the entities and not of subjective situations.

Feel free to reach out to our tax team should you have any question or require any assistance.

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