On 30 March 2020, the Luxembourg government has presented a Draft Law N°7547 to the Parliament introducing a non-deductibility of interest or royalties paid to associate enterprises established in countries that are “blacklisted” as being “non-cooperative” for tax purposes.
The Draft Law introduces a new paragraph in article 168 of the Luxembourg Income Tax Law (ITL) which stipulates the expenses that are not tax-deductible for corporate income tax and municipal business tax purposes. According to the Draft Law, interest and royalties paid or accrued by a Luxembourg company are no longer deductible subject to the following cumulative conditions:
- the beneficial owner of interest or royalties is a collective undertaking within the meaning of article 159 of the ITL;
- the beneficiary company is a related entity under article 56 of the ITL; and
- the beneficiary company is established in a jurisdiction mentioned in the EU list of non-cooperative jurisdictions and territories for tax purposes.
Furthermore, the non-deductibility of interest/royalties provided for by article 168 of the ITL should not apply where the Luxembourg Company demonstrates that the transaction pursuant to which interest or royalties are paid is implemented for valid business reasons that reflect economic reality.
The Draft Law also specifies that this “blacklist” will be the same as the most-recent list then published by the EU Council of countries and territories that the EU regards as “non-cooperative” for tax purposes. As of 27 February 2020, there are 12 jurisdictions on the EU blacklist: American Samoa, Cayman Islands, Fiji, Guam, Oman, Palau, Panama, Samoa, Seychelles, Trinidad and Tobago, US Virgin Islands, and Vanuatu.
This new measure shall be applicable to interest or royalties paid or due as of 1 January 2021.
