AGEFI Luxembourg - Avril 2020 - édition gratuite

Continuedonpage 1 Firstly, corporate taxpayers can apply for acancellationoftheirquarterlycorporate income tax and municipal business tax advance payments for the first and sec- ondquarter of 2020. This specificmeas- ure does not apply to net wealth tax advances.Therelevantformsrelatedto theserequestsareshortandcanbecom- pletedonlineonthewebsiteofthetaxad- ministration (2) .Oncefiled,therequestsare expected to be automatically accepted by the Luxembourg tax authorities. In addition to the potential cancellation of advancepaymentsrelatedtoQ1andQ2, companies may also request for a reduction of estimated tax paymentsforQ3andQ4 usingthestandardpro- cedure. When filing such request, it is rec- ommended to pro- vide rationale and evidencethatreduction of advances can be jus- tified (e.g. by providing interimaccounts). c. Extension deadlines for corporate tax returns filing The legal deadline to file corporate income tax re- turnsisextendeduntil30June2020.Inpractice,there is a tolerance to file corporate tax returns within 12 months (and sometime more if justified by specific situations), i.e. generally by 31 December of the fol- lowing year for taxpayers closing their financial statementswith the calendar year.With theCOVID- 19 crisis, this tolerance (i.e. the absence of adminis- trative penalty in case of the filing of the corporate tax return after the legal deadline but before the fol- lowing year-end) is expected to continue. As a gen- eral rule, beyond the extension that has been exceptionally granted, when it comes to filing cor- poratetaxreturnsorwithholdingtaxreturns,itcould be argued that the deadlinewas notmet due to force majeure. The taxpayer could thenapply for anon-ap- plication of late filing penalties. Of course, to sustain this, inability to file on timemust beproven, andde- cisionswill need to bemade on a case-by-case basis. d. Suspension deadlines for appeal on tax assessments According to the Luxembourg tax law, the deadline tomake an appeal to the tax assessments (which set the corporate tax charges of the companies) is 3 months as from the date of the issuance of the rele- vant tax assessment. As an exceptional measure due to COVID-19, these deadlines have been sus- pended until 30 June 2020. This suspensionwill be valid as from the date the law implementing this measure will enter into force. 2) Other tips for corporate taxpayers a. Substance considerations Luxembourg is a major economic hub for the struc- turing of investments in and through Europe. There are no specific substance requirements for Luxem- bourg-based companies stated in the tax law. How- ever, Luxembourg companies involved in cross-borderstructuresoftenneedtocomplywithcer- tain substance requirements, when they rely on ben- efits provided under the domestic tax laws of the investment jurisdictions (in accordance with EU Di- rectives)orunderapplicabletaxtreaties(forexample, reducedorzerowithholdingtaxrates).Thisisbecause ofanti-abuserulesprovidedunderthetaxlawsofthe investment jurisdictions and tax treaties. Over the years, countries around the globe have implemented avarietyof anti-abuse legislation toprotect their own tax base against erosion. Far frombeing uniform, the wayanti-abuselegislationisdesignedvariesfromone statetoanotherandmayberatherrestrictiveorbroad in its scope of application. Furthermore, Luxembourg resident companies are expectedtomaintainalevelofsubstancethatisinline with the activities performed, so that the analysis of Luxembourg tax residency is to be conducted on a case-by-casebasis.Amongmanycriteria,placeofcen- tral administration is a leading factor in determining residency.Therefore,itisimportanttoconsiderwhere the board of directors, managers and share- holders meetings are held since their loca- tion helps in determining place of central administration. This cancreate tension in situationswhereanon-residentmember of the board or a foreign shareholder is not able to travel to Luxembourg for a meeting andmust attend remotely (e.g. through call or video conference). In this context, theLuxembourgauthori- ties have formally decided in the Grand DucalDecreedated20March2020,thatshare- holders meetings and board meetings can be held by video conference or through other means(circularresolutionsforboardmeetings, votes in writing or special proxies for shareholders meeting). Board members participating by such means should be deemed to be present for the purposes of quorum and majority. These exceptional measures should be applicabletoanymeet- ing held until the latest date of (i) 6 months after the end of the financial year or (ii) 30 June 2020. In such cases, it is however highly recommended that companies document in the meeting minutes the reasons why the board members couldnot physicallyattend, and themeet- ing had to be held through other means, i.e. due to exceptional circumstances arising from the COVID- 19outbreak, including the travel limitations it poses. Also, in case of meetings held electronically, the call should ideally be initiated from Luxembourg, gen- erally by the local director. As explained above, the substancemeasures that areapplied inLuxembourg are in the first instancedictatedby the investment ju- risdictions. One should not forget that. The consent of the Luxembourg authorities is thus important, of course, but might not be enough to avoid any tax risk. It is thereforeof paramount importance, even in these troubled times to document properly any de- cision to depart from the normal course of business. Thisbeingsaid,itisworthmentioningthattheOECD recently took a position on the potential impact that COVID-19 shouldhave as regards the location of the directors /managerswith respect to the “Place of ef- fective management” (3) . In this respect, the OECD states that “temporary change in location of the chief executiveofficersandotherseniorexecutivesisanex- traordinary and temporary situation due to the COVID-19 crisis and such change of location should not trigger a change in residency”. This is an addi- tional argument to sustain that the health crisis itself should not jeopardize the place of effective manage- mentandtaxresidencyprovidedthatthechangesare justified, proportionate, documented and temporary. b. Impairment deduction Due to the COVID-19 crisis, operating subsidiaries may unfortunately face significant decreases of in- come.Assumingthatsuchdecreaseresultsinalasting reduction of the entity’s value, itmay be necessary to book and claim a tax-deductible impairment at the level of the Luxembourg corporate shareholder. Where the case may be, this impairment deduction can typically result in a net tax loss for the corporate shareholder,whichcanbecarriedforwardforthenext 17 years and can be used to offset any type of taxable income. Expenses directly related to a participation that qualifies for the Luxembourg participation ex- emption regime are onlydeductible to the extent that they exceedexempt income arising fromthe relevant participationinagivenyear.Decreasesintheacquisi- tioncostofaparticipationthatqualifiesfortheexemp- tion are deductible. The exempt amount of a capital gainrealizedonaqualifyingparticipationis,however, reducedbytheamountofanyexpensesrelatedtothe participation, including decreases in the acquisition cost, that have previously reduced the company’s Luxembourg taxable income. Thepossibilitytocarrybacktaxlossesrealizedin2020 onprevious tax years not yet finally assessed, 2019 or even previous years - something that is not possible under current rules - could also be envisaged by the authorities as an additional measure to be taken in favor of the business. The United States are reported to envisage such a measure. Alternatively, creating a provision charged toprofit in 2019 couldalso be con- sidered.TheGovernmentcould,forinstance,consider allowing taxpayers (in corporate income tax and en- trepreneurs in income tax) to create a provision charged toprofits in2019 if they expect to incur a loss in 2020 as a result of the COVID-19 outbreak. This would enable some taxpayers to apply for a further (provisional) assessment for the year 2019, which could then potentially lead to a tax refund and im- prove their cashposition. c. Repatriation of cash to the shareholders/unitholders Repatriationofcashtotheshareholders/unitholders could take the formof upstreamloans. If agreed to in the short- or medium- term, the interest rate on this loan can potentially be low, though a proper assess- mentbasedonatransferpricingreviewisalwaysad- visable. The transfer of cash and future repayments can take place without any specific administrative work required, meaning that only basic legal docu- mentationanddailymanager/directorauthorization would need to be done. If the repatriation takes the form of a reduction in share capital or premium (a measure that only shareholders/unitholders canap- prove),thenthereshouldnotbeanywithholdingtax on this transfer, except if the Luxembourg entity has distributablereservesandwheretheparentcompany does not qualify for participation exemption (cumu- lativeconditions).Intheabsenceofreserves,itshould bedemonstratedthattherearegenuineeconomicrea- sons originating fromsaid reduction, such as imme- diatecashneedsatthelevelofthegroupwhichisdue toCOVID-19outbreak.Dividenddistributionsisalso an option if the company has distributable reserves. In such a case, a withholding tax review would be recommended. B) Other taxmeasures 1)Measures in favor of individual taxpayers Inaddition to themeasures targeting companies, the Government also announced or took actions which aimat beinguseful to individuals. It is however rele- vant that companies are aware of these measures as employers. a. Taxation of cross-border workers employed by Luxem- bourg employers DoubletaxtreatiesbetweenLuxembourgandforeign countries usually include a limitation of days that cross-border employees can work from home with- out being taxed by their home country. The limits varyaccording to the treaty (19days forGermany, 24 daysforBelgiumand29daysforFrance).Whenthese limits are exceeded, the foreign authorities can step inandtaxtheindividualsconcerned.Giventhecrisis and commuters being required to work from home located in their residence country, it couldbe consid- ered that thesedays are not taken into accountwhen calculating the above-mentioned threshold. This has been confirmed between the competent authorities concerning the workers residing in Belgium, France andGermany but usuallyworking in Luxembourg. As an illustration, on 3April 2020, Luxembourg and Germancompetentauthoritiessignedon3April2020 abilateral agreement in connectionwitharticle 14 (1) ofthedoubletaxtreatyinthisrespect.Thisagreement covers the period from 11 March 2020 until 30April 2020 and will be automatically extended on a monthlybasisuntilitisdenouncedbythecompetent authorities of either country. b. Leave for family reasons The Government has confirmed that parents staying home to look after children with the virus will be granted“leaveforfamilyreasons”.Thissolutiononly applies for parentswhodonot have thepossibility to workfromhomeandwhohavenochildcaresolution. This is an extension of the existing systemwherein parents can take leave without loss of remuneration when they are looking after a child under the age of 18. The number of days of leave provided for under this ruledepends on the child’s age. Employeesmust informtheiremployeronthefirstdayoftheirabsence. c. Deadline extension to file personal income tax returns Theoriginaldeadlineof31March2020tofilethe2019 personal income tax returns has been extended to 30 June2020.Thismeasureisalsorelevantforthenumer- ouscompaniesemployinghighskilledworkersorex- patriates offering them as part of their annual compensationandbenefitpackagethepreparationof their individual tax returns, such returns being pre- paredbythecompanyitselforbyanexternaladvisor. d. Suspension deadlines for appeal on tax assessments According to the Luxembourg tax law, the deadline to make an appeal to the tax assessments (which set thetaxchargesofindividuals)is3monthsasfromthe dateoftheissuanceoftherelevanttaxassessment.As anexceptionalmeasureduetoCOVID-19,thesedead- lines have been suspended until 30 June 2020. This suspensionwill be valid as fromthe date the law im- plementing thismeasurewill enter into force. e. Subsidies for forced partial unemployment Recently, the Grand Duchy’s Ministry of Economic Affairs announced that Luxembourg-based compa- niesfacingdifficultiesduetothecoronavirusoutbreak canapplyforsubsidiestohelpkeepemployeesonthe payroll and to invest in hygiene enhancements (“ chomage partiel ”). The subsidy reimburses up to 80 percent of regular salaries. The reimbursement is cappedat250percentofthesocialminimumwagefor unskilled workers with a maximum time of 1,022 workhours per employee. 2) Reimbursement of LuxembourgVAT receivables Only limited announcements have beenmade in the field of VAT so far. The Luxembourg tax authorities simply mentioned that they are proceeding with re- fundpayments for all companieswhichhavea credit balance for Luxembourg VAT of less than 10,000 euros. The authorities have also announced that they are applying an administrative tolerance for the sub- mission of VAT returns. Until further notice, the late submissionofVATreturns shall not be sanctionedby administrative fines. C) Linkwithmeasures takenby other countries Other countries also announced (or implemented) measures to combat this crisis. Many measures are similartomeasuresundertakenbyLuxembourg(e.g. extension of deadlines regarding payments of tax charges or filing obligations etc.). Somemeasures are morefavorabletothetaxpayerinLuxembourg,asfor instance the possibility to defer payments of tax charges / advances for 4 months in Luxembourg, whereasthesamepossibilityisof2monthsinBelgium or3monthsinFrance.Ontheotherhand,othercoun- triesannouncedortookmeasureswhicharemorefa- vorable than Luxembourg. For example, in the Netherlands, the deferral of payments of tax charges covers a broader range of taxes, such as VAT or indi- vidual income tax. Some countries are also taking othertypesofmeasures,suchassuspensionoftaxau- dits (Italy), or no initiation of new tax audit during lockdown period (France), or the possibility to set off 2020taxlossagainst2019taxprofit(theNetherlands). Conclusion The measures taken or announced by the Luxem- bourg authorities to help businesses to navigate the COVID-19 crisis are obviously more than welcome and should help companies and individuals to face these difficult times froman economic point by opti- mizing cash available to them. As of today, the Gov- ernment has mostly relied on existing flexible measures and simplified the process to benefit from thesemeasures.Thisbeingsaid,theseactions,rapidly undertaken, should significantly improve the situa- tion of the taxpayers.As thesemeasures are part of a broaderactionplanaimingatstabilizingtheeconomy, onecouldexpectthattheGovernmentwilltakeaddi- tional measures on the short and on the long run, re- lying for instanceonactions takenbyother countries, or on the needs of the local market. More than ever, the share of best practices and good ideas to support the economy becomes of paramount importance. * Émilien LEBAS, Partner, International Tax, KPMG Luxembourg Laurent GOUTIER (picture), Manager, International Tax, Commerce & Industry, KPMG Luxembourg 1) General Tax Law (Abgabenordnung), §127. 2) https://impotsdirects.public.lu/fr/formulaires/contribuables/delai- paiement.html https://impotsdirects.public.lu/fr/formulaires/contribuables/annulation- avances-trimestrielles.html 3) OECD Secretariat Analysis of Tax Treaties and the Impact of the COVID-19 Crisis dated 3April 2020, number 15. COVID 19: Tax measures to safeguard the economy and additional tips 25% des recettes publicitaires récoltées dans cette édition sont reversés au Centre Hospitalier de Luxembourg (CHL) pour la lutte contre le coronavirus. Nous remercions tous les annonceurs : Foyer Assura Agence Principale i ATOZ Tax Advisers Luxembourg i Avaloq Luxembourg i CASTEGNARO i CPR AssetManagement i DNCAFinance Luxembourg i Ebury i ERI Bancaire Luxembourg i EuropeanCapital Partners i FIAAssetManagement i Fidelity International i HLDEurope i IQ-EQ i KeytradeBankLuxembourg i FacultédeDroit, d'Économie et deFinance,UniversitéduLuxembourg i LaFinancièrede l’Échiquier - LFDE i Linklaters i SocieteGenerale Securities Services i TrustConsult (Luxembourg) i Unik Capital Solutions i Value Partners i VPBank Luxembourg Avril 2020 3 AGEFI Luxembourg Economie / Fiscalité