Luxembourg tax - New tax measures for 2013 - Ogier

Luxembourg tax -New tax measures for 2013International Tax April 2013IntroductionOn 7 November 2012 the Bill of Law n° 6497 (hereafter the Bill of Law)introducing new tax measures for corporations and individual taxpayers wassubmitted to the Luxembourg Parliament.On 13 December 2012 the Bill of Law was approved by the LuxembourgParliament.The new tax provisions will be applicable as from 1 January 2013. Please findbelow a summary of the main changes impacting the taxpayers.New tax measures affecting corporationsChanges on the minimum flat taxThe current minimum flat tax for corporations amounting to EUR 1,575(including the contribution to the Employment Fund also referred to as SolidaritySurtax) has been introduced since 1 January 2011. The corporations coveredby this measure are those that are not subject to a regulatory authority (forinstance the CSSF) and where more than 90% of asset items consist offinancial assets, transferable securities and cash at bank.The Bill of Law foresees an increase of the minimum flat tax amount to EUR3,210 (including the Solidarity Surtax) and extends its scope to regulatedentities.Therefore, SICARs and regulated securitization companies will also be subjectto the EUR 3,210 minimum flat tax if their total balance sheet falls above theaforementioned minimum 90% threshold. As regards to the 90% threshold, it isworth noting that interests held in tax transparent partnerships (eg SociétéCivile Immobilière) will also be considered for 90% threshold computationpurposes.In addition, a new minimum flat tax has been introduced to affect allcorporations not falling in the scope of the above minimum flat tax EUR 3,210. Itwill impact corporate taxpayers whose portfolios do not meet these criteria andhave their statutory seat or central administration in Luxembourg. This newminimum flat tax applicable to such companies whose portfolios do not meetthe eligibility criteria above, is progressive and its amount varies depending onthe balance-sheet total amount as follows:Information on the Ogier Group and details of its regulators can be accessed via our website

Total Balance-sheet*Minimum Flat TaxUp to EUR 350,000 EUR 500 (EUR 535**)From EUR 350,001 to EUR 2,000,000 EUR 1,500 (EUR 1,605**)From EUR 2,000,001 to EUR 10,000,000 EUR 5,000 (EUR 5,350**)From 10,000,001 to EUR 15,000,000 EUR 10,000 (EUR 10,700**)From EUR 15,000,001 to EUR 20,000,000 EUR 15,000 (EUR 16,050**)Above EUR 20,000,000 EUR 20,000 (EUR 21,400**)(*) : Total Balance-sheet as at the closing of the tax year(**) : Including the 7% Solidarity SurtaxThe main characteristics of the minimum flat tax are the following:• the flat tax is meant to be an alternative minimum tax due in cases wherethe corporate taxpayers are in loss position or whose tax liabilities are lowerthan the above-mentioned amounts. Being treated as an advance on theCorporate Income Tax (CIT) due for the future, in those cases the minimumflat tax will be creditable against future CIT. Minimum flat tax is notrefundable;• In case of fiscal consolidation, all companies of the tax consolidated groupwill be subject to the minimum flat tax. The parent company of the taxconsolidated group will pay the aggregate amount of minimum flat tax.However, the total amount due by the consolidated group will be limited toEUR 21,400 (including Solidarity Surtax);• available tax credits (eg for hiring unemployed people or for investments)will not reduce the minimum flat tax.Some discussion has occurred in relation to the minimum flat tax and itscompatibility with European Directives and Double Tax Treaties (DTTs)concluded by Luxembourg. This discussion arises as a result of the fact, themajority of corporations likely to be subject to the EUR 3,210 minimum flat taxare those which derive mainly income from financial instrument ie dividends orcapital gains on disposal of shares. Via the minimum flat tax, Luxembourgwould apply taxation of income that would, in principle, be tax exempt underthe conditions provided for by the EU Parent-Subsidiary Directive.Similarly, under the new rules, a Luxembourg corporation holding real estate ina Treaty Country may be subject to a tax charge up to EUR 21,400 whereas theconcerned DTT provides for an exemption from Luxembourg taxes of the rentalincome as well as the capital gains arising from the disposal of the real estateproperty. The legality of these new flat taxation measures is therefore likely tobe challenged by taxpayers. In this context, and in order to take into accountthe concerns of the investments in real estate sector, the Luxembourg taxauthorities have issued official guidelines on 21 December 2012. According tothese guidelines, Luxembourg companies directly holding real estate assets in aBTLG1-53096-3

Treaty Country will have the right to exclude the net book value of such realestate for Total Balance Sheet computation purposes.Net Worth Tax (NWT) reductionCurrently, Luxembourg corporations are entitled to reduce their NWT liability byconstituting and maintaining a reserve (corresponding to 5 times the NWTamount) during 5 years. However, the NWT liability reduced is capped to theCorporate Income Tax amount due for the related tax year (including SolidaritySurtax and before deduction of tax credits).The Bill of Law proposes to restrict the NWT deduction. The NWT amountreduced is capped to the Corporate Income Tax amount (including SolidaritySurtax and still before deduction of tax credits). However, the minimum flat taxwill be disregarded for the calculation of the maximum NWT reduction amount.Only Corporate Income Tax due in excess of the minimum flat tax will be takeninto account.Solidarity Surtax increaseThe Bill of Law provides for an increase of the Solidarity Surtax from 5% to 7%.As a result, the effective Corporate Income Tax rate will amount at 29.22% forcorporations based in Luxembourg-City (instead of 28.80% currently).New tax measures affecting individualsThe main measures are:• introduction of a new bracket into the Income Tax schedule for taxableincome exceeding EUR 100,000 (for tax classes 1 and 1a ie singletaxpayers mainly) and EUR 200,000 (for tax class 2 ie jointly taxedindividuals). The marginal tax rate amounts to 40%• increase of 3% of the Solidarity Surtax, ie:- from 4% to 7% for individual taxpayers with taxable income notexceeding EUR 150,000 (for tax class 1 or 1a) and not exceeding EUR300,000 (for tax class 2);- from 6% to 9% for individual taxpayers with taxable exceeding EUR150,000 (for tax class 1 or 1a) and exceeding EUR 300,000 (for taxclass 2);• therefore, the 2013 maximum marginal income tax rates applicable toindividuals should range between 42.80% and 43.60%;• the existing rules dealing with taxation of Stock-options plans will beamended. A Circular was issued by the Luxembourg tax authorities on 20December 2012. The new regime is applicable as from 1 January 2013;• reduction of the lump sum deduction for employees' travel expenses: Themaximum annual lump sum deduction for employees' travel expenses islimited to EUR 2,574;• cut of special expenses for debit interest by 50%: The maximum annualdeduction for debit interest on consumer loans is to be limited to EUR 336per member of the taxpayer’s household per year (vs. EUR 672 currently).BTLG1-53096-3

About OgierThe Ogier Group provides international professional services. We employ over850 people and provide legal advice on BVI, Cayman, Guernsey, Jersey andLuxembourg law through our network of offices that cover all time zones. andkey financial markets.Our highly qualified professionals deliver outstanding client service in eachlocation. The Group's approach is a successful combination and we regularlywin awards for the quality of our client service, our work and our people.This briefing provides a general summary only of this area based on current lawand practice in Luxembourg at March 2013 and is subject to changes therein. Itdoes not purport to be comprehensive and is intended for information only. Itdoes not constitute specific advice issued on a reliance basis. Such specificlegal advice should be sought on each occasion.Authors:Alex Pham, Senior Associate, LuxembourgT: +352.2712.2013E: alex.pham@ogier.comBTLG1-53096-3

International Tax April 2013Key contacts forLuxembourg TaxLuxembourg LegalFrancois PfisterPartner, LuxembourgT +352 2712 2020E francois.pfister@ogier.comDaniel RichardsPartner, LuxembourgT + 352 2712 2011E daniel.richards@ogier.comAlex PhamSenior Associate, LuxembourgT +352 2712 2013E alex.pham@ogier.comThis client briefing has been prepared forclients and professional associates of thefirm. The information and expressions ofopinion which it contains are not intendedto be a comprehensive study or toprovide legal advice and should not betreated as a substitute for specific adviceconcerning individual situations.Ogier includes separate partnershipswhich advise on BVI, Cayman, Guernsey,Jersey and Luxembourg law. For a full listof partners please visit our website.Please check with the relevant contactlisted above for specific details regardingthe legal services we offer from eachoffice as we do not always practice thelaw of the jurisdiction where our officesare located. Please note that the namedcontact may not be qualified to advise onall the laws practiced from that office.This briefing provides a general summaryonly of this area based on current lawand practice in Luxembourg at the datethereof and is subject to changes therein.It does not purport to be comprehensiveand is intended for information only. Itdoes not constitute specific adviceissued on a reliance basis. Such specificlegal advice should be sought on eachoccasion.BTLG1-53096-3