In the framework of the June 18th 2018 draft law implementing the first Anti-Tax Avoidance Directive (hereafter “ATAD”) into Luxembourg law, the Luxembourg government decided to propose additional changes to the Luxembourg tax law that were not required by the ATAD but nonetheless fall, in the eyes of the government, within the broader Basis Erosion and Profit Shifting (BEPS) context. These changes aim at modifying two specific provisions, which could lead to mismatch situations resulting in a deduction without a corresponding inclusion and which were used in structures that are currently reviewed by the European Commission in its on-going State Aid investigations.
The first change aims at restricting, as of January 1st 2019, the Luxembourg rollover relief regime for exchange of assets, by excluding debt-to-equity conversions from its scope. As a result, such conversions would follow the general tax treatment applicable to exchanges, i.e. be treated as a deemed sale of the debt at fair market value followed by a subsequent acquisition of the shares.
The second change aims at amending the domestic definition of permanent establishment (hereafter “PE”), in order to confirm that, in cases involving a country with which Luxembourg has concluded a double tax treaty, the treaty definition of the PE should replace the domestic definition of a PE. Additionally, the draft law foresees that the taxpayer has to provide, if relevant, the Luxembourg tax authorities, upon request, with a certificate issued by the other contracting state, confirming that the foreign tax authorities recognize the existence of the PE in their country.