The “LuxLeaks” and its impact going forward

As a result of the "LuxLeaks", a publication by the so-called "International Consortium of Investigative Journalists" of 548 advance tax rulings issued by the Luxembourg Tax authorities to some 340 multinational companies between 2002 and 2010, we, at Allen & Overy in Luxembourg, would like to place this matter in context for our clients.

The significance of the rulings and the ruling practice

An "advance tax ruling" is a decision of the tax administration to sign-off in advance on certain tax events on the basis of precise facts represented to them. The tax administration confirms the application of the national and international rules relevant to the given situation. It may however not grant a concession which departs from these rules.

The assessment that the tax administration will make after those tax events have occurred will not change assuming the actual facts are as disclosed upfront to the tax administration, and the underlying legal provisions have not changed. By doing so, Luxembourg applies a similar approach as other European and non-European jurisdictions.

Tax planning mechanisms are per se legal tools used by all corporates throughout the world. Hence, it has as its purpose the predictability and the budgeting of likely tax cost and, to the extent achievable, the lowering of the general tax burden and the specific tax cost of transactions.

In fact, it is the duty of these corporates' management and board of directors to pursue a policy of legally containing the tax burden for the benefit of all their various stakeholders. In a global and dynamic world of change, cross-border tax planning has naturally a greater importance than in a static national context. These tools are therefore applied both domestically and internationally.

Put simply, the "advance tax ruling" practice gives certainty to a corporate tax payer in respect of how factual situations are seen and applied by the tax administration in light of the tax legislation in a certain country.

Advance tax rulings are not a Luxembourg invention or a Luxembourg speciality. In fact, they are applied in a vast majority of countries across the world, including the OECD member states. An abundant ruling practice is known and applied in the most sophisticated countries worldwide, on the basis of either consistent administrative practice or black letter legislation. For instance, the European Football Association (UEFA) has been granted a special tax treatment by the host country in relation to the 2016 European football championship.

The EU Commission has on several occasions in the past confirmed the validity of tax rulings as a tool to provide fiscal safety to taxpayers when it comes to the interpretation of tax legislation.

In Luxembourg, rulings have been available for the last 25 years. While there is currently no legislation on rulings, they are based on the principle of good faith governing the relationship between the tax administration and the tax payers. In practice, the ruling request has to be based on a complete factual description and the applicant has to provide its own technical analysis, which the tax administration then upholds or not. The ruling is only valid if issued by that tax inspector who actually is in charge of assessing the tax payer who made the application. The rulings’ validity is subject to possible change of law, and the tax administration may revoke for the future a ruling in a number of circumstances such as a change of doctrine.

A ruling may have different purposes:

  • Where on a specific taxation issue there are no administrative guidelines or other conclusive authority (like case law), rulings provide legal certainty by confirming to a taxpayer the administrative position with respect to a certain factual situation.
  • Luxembourg tax law follows an economic approach. A factual situation has to be characterised from an economic rather than a purely legal perspective. This principle is a concept of German origin (from which current Luxembourg income tax law derives). Rulings may ascertain the economic analysis applicable to certain factual situations.
  • Finally, rulings may provide that in certain situations the tax administration will not challenge the structure put in place by taxpayers. For instance, companies have to comply with a certain debt to equity ratio and rulings may confirm that, in a given fact pattern, the level of indebtedness used by the taxpayer is appropriate.

On-going activities in Luxembourg to adapt to change

The Luxembourg government and the Luxembourg parliament recognise the importance of better defining the ruling practice and giving it a clear legal framework. A couple of weeks before the "LuxLeaks", the Luxembourg legislator released a bill of law to regulate rulings. An upcoming Grand-Ducal decree will create a framework within which the tax authorities may give certainty and predictability on how a transaction will be handled for tax purposes.

This bill must be viewed in the broader context of an enhancement of transparency. Over the past years, Luxembourg has de facto abolished banking secrecy and ceased to use bearer shares, and exchanges information with most of the countries with which it has entered double tax treaties, including information on bank accounts and shareholdings in Luxembourg companies. As of 1 January 2015, Luxembourg will automatically exchange information under the EU Savings Directive regarding interest paid by Luxembourg paying agents to EU resident individuals. In addition, Luxembourg will be an early adopter of the OECD common reporting standard, which provides for automatic exchange of information pertaining to all financial accounts held with financial institutions.

Luxembourg is updating as well its transfer pricing rules. In 2011, it has created a specific framework for intra-group financing. Companies which borrow money to on-lend it to a related party may obtain a ruling confirming that their remuneration on this financing activity is in line with the remuneration an independent party would have charged, given the currency, the amounts, the industry sector, the rating of the group and the maturity of the loans. In the 2015 finance bill, Luxembourg introduces new rules to extend the OECD transfer pricing principles to other operations between related parties and to ensure that the taxpayers properly document these transactions.

Over the years, significant efforts have been made to enhance the presence of international groups in Luxembourg, thereby ensuring that they have a sound organisation commensurate with their activity. The tax authorities regularly link the delivery of tax rulings to the condition that the tax payer evidences good-standing and an appropriate level of substance in Luxembourg.

The future

Corporate tax planning will more than ever be framed by international treaties and international practice, at EU level and beyond. For instance, at EU level, a tax ruling may not confer an advantage to a taxpayer which another taxpayer in the same situation could not obtain. Such an advantage would be considered selective and thus prohibited State aid, and the EU Commission could request the beneficiary to reimburse the aid.

The OECD BEPS initiative (Base Erosion and Profit Shifting) condemns transactions where the tax base of other countries is eroded. Luxembourg adheres to this initiative, and the government has confirmed that everybody has to pay its fair share of tax, under the condition that a level playing field is maintained between all OECD member states.

Historically, Luxembourg has been the host of a significant number of holding, finance and other companies of different kinds. The country's success has been attributable to a variety of factors such as its stability, its safety, its low public indebtedness (which, combined with other drivers, explains Luxembourg’s sovereign triple A rating, a rating it now shares with only a handful of other countries), its openness, its general business friendliness, its multi-cultural environment, its sound regulatory framework in combination with a flexible corporate and other non-tax legislation, to name a few. As important as tax may be as a driver for the structuring of international business and finance streams, the tax driver is only one amongst many drivers.

Luxembourg’s ruling practice will continue to be considered a useful tool and a cornerstone of the Luxembourg financial centre to offer tax planning predictability and budgeting. Luxembourg will remain a jurisdiction of choice for quite a number of reasons including its tax friendly environment and its tax planning mechanisms, while abiding by the EU and OECD bans of fiscal State aid and base erosion and profit shifting.

Should you have any further questions or require additional clarifications on this topic, please do not hesitate to contact us.

Marc Feider    
Senior Partner, Luxembourg 
+352 44 44 5 5415, marc.feider@allenovery.com  
 
Henri Wagner  
Managing Partner, Luxembourg 
+352 44 44 5 5312, henri.wagner@allenovery.com  
 
Jean Schaffner  
Tax Partner, Luxembourg 
+352 44 44 5 5613, jean.schaffner@allenovery.com  
 
Patrick Mischo    
Tax Partner, Luxembourg  
+352 44 44 5 5233, patrick.mischo@allenovery.com



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If you have any queries, please contact Alina Golovkova on +352 444455 234 or via email.

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