On 5 March 2019, the Luxembourg parliament (Chambre des Députés) released a draft bill on the 2019 budget providing two new important corporate tax measures: the decrease of the corporate income tax rate from 18% to 17% and the possibility for tax consolidated groups to compute the limitation of interest deduction at a group level. The first measure related to the decrease of the corporate income tax rate from 18% to 17% was announced in the government coalition agreement published on 3 December 2018 (please read our Tax Alert of 4 December 2018 in this respect). The second measure related to the implementation of the anti-tax avoidance directive ("ATAD") through the law of 21 December 2018 (please read our Tax Alert of 24 December 2018 in this respect) was announced in the motion published on 18 December 2018. The corporate income tax rate decrease and the clarifications for tax groups in the context of the interest limitation rule will be applicable respectively as of the 2019 tax year and 1 January 2019.
Decrease of the corporate income tax rate
The bill not only introduces a decrease in the corporate income tax (CIT) rate from 18% to 17%, but also substantially increases the threshold of taxable income subject to the lowest CIT rate of 15% (i.e., up to EUR 175,000). In other words, up to EUR 175,000, the applicable CIT rate will be 15%.
As from 1 January 2019, the new CIT brackets could be depicted as follows:
The global income tax rate for companies established in the city of Luxembourg that realize profits above the EUR 175,000 referred to above is 24.94%.
Interest limitation rule applicable within a tax consolidated group
The law of 21 December 2018 implementing the ATAD ("ATAD Law") introduced provisions on interest deduction limitation enshrined in article 168bis of the Luxembourg income tax law ("LITL"). When transposing this new rule, Luxembourg opted for the safe harbor clause left available by the ATAD, which provides that the exceeding borrowing costs of a taxpayer remain deductible in any tax period only up to the higher of: i) 30% of the taxpayer's net revenues before interest, tax, depreciation and amortisation ("EBITDA"); or ii) EUR 3 million. As a consequence, taxpayers exceeding borrowing costs below EUR 3 million are allowed to deduct their costs incurred without limitation.
However, the other option allowing Member States to treat as a taxpayer "an entity which is permitted or required to apply the rules on behalf of a group, as defined according to national tax law" has initially not been retained because the effects of such provisions would not have been in line with the computation method used to determine the total net income of an integrated group under Luxembourg law (bill of law n°7318).
As a result, the legislator decided to wholly redraft article 164bis LITL on tax consolidation in order to provide details on the mechanics of the interest limitation rule within a tax consolidated group.
This new measure will be applicable as of 1 January 2019.
These two measures are in line with the government's announcements and positions. While confirming its intention to comply with international standards, the Luxembourg government again shows its willingness to increase the competitiveness of Luxembourg and to encourage business opportunities, especially for small and medium-sized enterprises.
Our Baker McKenzie Luxembourg tax experts would be happy to assist you should you require any further information.