The Luxembourg Minister of Finance recently introduced two new tax bills: one on the 13 October 2015 and one, which represents the draft state budget for 2016, on 14 October 2015 (the “Tax Bills”).

In accordance with the new Tax Bills, the following changes are to be expected:

  • Replacement of the minimum Corporate Income Tax by a minimum Net Worth Tax;
  • Amendments to the Net Worth Tax Law;
  • Step up in value for significant shareholdings (more than 10%) owned by non-residents when they become Luxembourg resident taxpayers; and
  • Abolishment of the current IP regime and grandfathering rules for existing IP boxes.

Replacement of the Minimum Corporate Income Tax by a Minimum Net Worth Tax

Effective as from 2016, it is intended to abolish the minimum Corporate Income Tax considered in conflict with EU rules and to replace it by a minimum Net Worth Tax that will be determined based on the same provisions that are currently applicable to the minimum Corporate Income Tax.

  • The minimum NWT applicable to companies having financial assets representing more than 90% of their balance sheet (and more than EUR 350,000) will be of EUR 3,210 (same amount as the current amount applicable under the minimum CIT).
  • For other companies the minimum NWT will range between EUR 535 and EUR 32,100 depending on threshold amounts of the balance sheet footings (i.e. from EUR 350,000 to EUR 30,000,000).

Amendments to the Net Wealth Tax Law:

  • Declining tax rate for Net Wealth Tax bases higher than EUR 500 million:
  • - Existing tax rate of 0.5 % will still be applicable to tax bases not exceeding 500 million.
    - For the portion of the tax base exceeding EUR 500 million, a reduced rate of 0.05% will be applicable.

  • Previously exempt entities will now be subject to a minimum NWT.

Securitization vehicles and SICARs, which were previously exempt from NWT, will become subject to the minimum NWT of EUR 3,210 as a final NWT tax charge.

Step-up in value for substantial shareholdings (i.e. more than 10% in the form of shares or convertible loans) owned by non-residents when they become Luxembourg resident taxpayers:

As a matter of fact, significant shareholdings are the only securities that give rise to taxation as far as long term capital gains are concerned.

This new rule is introduced to the Tax Law so as to eliminate some existing situations of double taxation of non-residents that become Luxembourg resident taxpayers, by allowing a step-up in value for tax purposes on these securities.

For a non-resident who has a substantial shareholding of more than 10% in a Luxembourg company, the valuation of these assets will be made in accordance with their fair market value at the time the non-resident becomes a Luxembourg resident (except for certain former residents of Luxembourg).

This new rule will become applicable as from the tax year 2015.

Abolishment of the current IP regime and grandfathering for existing IP boxes

In a nutshell, the current Luxembourg IP regime allows for an exemption of 80% on income and capital gains derived from eligible IP rights, as well as a full exemption of these IP from the Net Worth Tax.

Following the recent release of the OECD’s final report on BEPS Action 5 related to countering harmful tax practice and its EU corollary plan which sets out the modified nexus approach to be considered for IP regimes, the Government proposes to repeal the so called Luxembourg IP box regime, effective as from 1st July 2016.

In accordance with an agreement reached within the OECD, a transitional period for existing Luxembourg IP boxes will run until 30 June 2021, grandfathering the full regime for these Luxembourg companies.

However, the Tax Bill also specifies that the benefit of the IP regime will be denied to the IPs, starting from 31 December 2016, in case the IP is acquired directly or indirectly from a related party between 1st January 2016 and 1st July 2016 (except if the IP rights acquired were already benefiting from the Luxembourg IP regime or a foreign one similar to it).

Moreover, within the context of transparency enhancement, Luxembourg will exchange information with foreign tax authorities on IP structures benefiting from the regime since 6 February 2015. This exchange of information will happen at the earlier of (i) 3 months after the date the information has been made available and (ii) one year after the filing of the tax return for the relevant year.