On 14 May 2020, the European Commission decided to send two letters of formal notice to Luxembourg. The first one relates to the incorrect transposition of the interest limitation rule of the Anti-Tax Avoidance Council Directive (EU) 2016/1164 (“ATAD”). The second letter addresses discriminatory tax rules towards foreign securitisation enterprises.
With regard to the ATAD legislation, the question revolves around the entities to be included in the “financial undertaking” definition, which are excluded from the interest limitation rules under ATAD. According to the European Commission, the domestic implementation by Luxembourg goes beyond the allowed exemptions as it provides unlimited deductibility of interest payments for corporate income tax purposes to EU regulated securitisation entities governed by EU Regulation 2017/2402. In the Commission’s view, those EU regulated securitisation entities do not qualify as “financial undertakings” under ATAD.
On the second aspect, the Commission considers that Luxembourg is taxing securitisation enterprises with taxable operations in Luxembourg, but whose statutory seat is in another Member State of the EU or European Economic Area (“EEA”) more heavily than domestic ones, which could constitute a violation of the freedom of establishment under EU law. Unfortunately, no additional details are provided at this stage.
The letter of formal notice is the first step of the EU infringement procedure to challenge Member States that do not comply with EU law. If Luxembourg does not act within four months, the Commission may send a reasoned opinion to the Luxembourg authorities detailing the arguments as to why the Luxembourg tax rules would not be in compliance with EU law.