On 9 June 2023, the Luxembourg Tax Authority published Circular L.I.R. n° 168quater providing guidance on reverse hybrid mismatch regulations. The Circular aims to provide further clarity on various aspects, including the tax classification of hybrid entities in Luxembourg, the computation of taxable income, and the associated tax compliance responsibilities. The key measures of the circular include:
- In Luxembourg, hybrid entities are liable for corporate income tax on their taxable income. This taxable income encompasses various sources, including income derived from movable property, rental income, and miscellaneous income. The determination of taxable income follows the cash accounting method.
- If specific criteria are met, reverse hybrid entities may be benefited from a 50% exemption on qualifying dividends they receive.
- Distributions of dividends by a reverse hybrid entity are not subject to withholding tax.
- In the determination of the taxable result of a reverse hybrid entity in Luxembourg, foreign tax credits associated with income subject to taxation may be deducted.
- Reverse Hybrid Entities are obligated to report their income subject to corporate income tax (CIT) by using a newly introduced form “Form 205”.
