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Luxembourg Plans Legislation to Stop Aggressive Tax Planning

Posted on Mar. 15, 2021

In its national recovery and resilience plan, Luxembourg has pledged to introduce initiatives to curb aggressive tax planning and money laundering, modernize the corporate tax system, and decarbonize transportation.

The Grand Duchy is set to receive €95.53 million over the next three years from the €672.5 billion EU Recovery and Resilience Facility (RRF), a mechanism of grants and loans intended to aid member states in sustainably rebuilding their economies after the impact of the coronavirus crisis.

Luxembourg's draft RRF plan, published March 10, lays out tax policies that will help it decrease carbon emissions, digitalize the economy, and preserve and create jobs aligned with EU goals. It intends to submit the plan to the European Commission by April 30.

The commission released country-specific recommendations in its 2020 European Semester, which included suggestions for Luxembourg to monitor and implement the anti-money-laundering framework concerning professional providers of company, trust, and investment services. It also urged Luxembourg to strengthen its efforts to address features of the tax system that could facilitate aggressive tax planning, like payments abroad.

To help it achieve EU sustainability goals laid out by the European Green Deal and meet the bloc’s commitment to cutting greenhouse gas emissions by 55 percent by 2030, Luxembourg is planning several initiatives to decarbonize transportation, including the adaptation of its vehicle tax for passenger cars to promote low- or zero-emissions vehicles. The government plans to use the World Harmonized Light Vehicle Test Procedure to better measure vehicle fuel consumption and greenhouse gas emissions and determine taxes on road vehicles.

Under Luxembourg’s plan to promote a transparent and fair economy, it will work to implement and finalize the effort of the 139-member OECD inclusive framework on base erosion and profit shifting to modernize global tax rules for the digital economy. Member countries are engaged in negotiations on pillar 1, a revision of profit allocation and nexus rules, and pillar 2, a global minimum effective tax rate, and hope to reach agreement in summer 2021.

Once the OECD agreement is finalized, Luxembourg plans to transpose the seventh directive on administrative cooperation in tax (DAC7) into national law on January 1, 2023. This will introduce an obligation for companies to declare for tax purposes income from activities undertaken through digital platforms, particularly in the areas of real estate rentals, the provision of personal services, and the sale of goods, says the RRF plan.

Moreover, DAC7 will enable Luxembourgian tax authorities to automatically exchange information on digitally generated income and ensure the strengthening of compliance and income declaration from cross-border activities.

Also, to strengthen the national system for combating money laundering and terrorist financing, Luxembourg will dedicate €2.78 million to developing the “Luxembourg Business Register”; strengthening the anti-money-laundering regime for service providers to companies and trusts; and deepening the identification, assessment, and understanding of risks of money laundering and terrorist financing.

On March 1 Luxembourg introduced nondeductibility of interest or royalty expenses paid to a related business established in a jurisdiction appearing on the EU list of noncooperative jurisdictions for tax purposes. “The objective of the measure is to put an end to aggressive tax planning practices which would still exploit certain provisions of the Luxembourgish tax system in relation to outgoing payments,” the RRF plan says.

Luxembourg landed in hot water in February after the publication of OpenLux, a database compiled by Le Monde using data from Luxembourg’s Register of Beneficial Ownership, showed that 81 percent of over 16,000 regulated investment funds in Luxembourg did not declare any beneficial owners. Members of the European Parliament and the European Commission raised concerns that Luxembourg had not adequately implemented anti-money-laundering practices for financial institutions and beneficial owners.

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