On 4 March 2020, the Luxembourg Tax Authority has issued Circular n°164ter/1 on the controlled foreign corporation (CFC) rules. Luxembourg enacted CFC rules as part of the implementation of the EU Anti-Tax Avoidance Directive (ATAD) on 21 December 2018.
The circular contains clarification and guidance on the application of the CFC rules on how to determine whether there is a CFC and on abuse of law considerations. Article 164ter of the Luxembourg Tax Law defines that a CFC is an entity or a permanent establishment of which the profits are either not subject to tax or exempt from tax in Luxembourg provided that the following conditions are met:
- the Luxembourg taxpayer must hold, directly or indirectly, more than 50% of the voting rights or profits of the entity, or capital of the entity; and
- the actual corporate tax paid by the entity or permanent establishment (PE) is lower than the difference between the corporate tax that would have been charged in Luxembourg and the actual corporate tax paid on its profits by the entity or PE
The exemptions applicable for CFC rules are:
- a profit according to the commercial balance sheet which does not exceed 750,000 euros (exemption linked to a low level of profit);
- a profit according to the commercial balance sheet which does not exceed 10 percent of the costs of operating during the operating year (exemption linked to a small margin beneficiary).
The Circular also covers the following clarifications on the CFC rule:
- The Circular clarifies that the control test and the associated enterprise test are applicable at any time during the tax year of the Luxembourg taxpayer;
- The Circular also clarifies how to compare the effective taxation of the CFC ;
- States that the determination of the amount to be included as CFC income in the commercial profit of the Luxembourg taxpayer has to be determined based on the transfer pricing rules of articles 56 and 56bis LITL;
- Clarifies about the determination of the inclusion amount;
- Clarifies about amounts distributed by the CFC.
In Luxembourg, the CFC rule is applicable from fiscal years starting on or after 1 January 2019.
