Luxembourg limits deductions for interest and royalties owed to ‘non-cooperative’ tax jurisdictions

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February 2021

Overview

The Luxembourg Parliament unanimously voted on January 28 to amend the income tax law provision governing the tax deductibility of expenses that corporate taxpayers incur.  The draft legislation (Bill n°7547) had been submitted to Parliament on March 30, 2020.

The new provision disallows deductions for interest or royalties owed to associated corporate entities established in jurisdictions that the EU Council considers non-cooperative in tax matters.  It will apply to expenses accruing on or after March 1, 2021.

The new legislation aligns with the EU Council guidelines agreed on December 5, 2019.  Luxembourg companies should examine their interest and royalty payments to all relevant jurisdictions to determine whether they will be subject to the new limitation.

The takeaway

Luxembourg companies that make interest or royalty payments to entities in jurisdictions deemed to be non-cooperative for tax purposes and listed in Annex I (published in the Official Journal of the EU) should recognize that such expenses will cease to be tax deductible to the extent that they accrue after February 28, 2021 and plan accordingly.  Since the list is dynamic, Annex I’s composition should be monitored regularly.

The new provision implements the EU Council’s December 2019 recommendations.  Other EU Member States are expected to consider implementing similar measures in the coming years.

Contact us

Bernard Moens

US International Tax Inbound Leader, PwC US

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