Luxembourg to deny the deduction of interest and royalty payments to blacklisted countries 

On 30 March 2020, the Luxembourg Government published a draft bill of law which seeks to introduce measures to deny the tax deduction of interest and royalty payments made to affiliated parties established in blacklisted jurisdictions. This is in response to guidance issued by the European Council towards the latter end of 2019 which require EU Member States to introduce legislative measures which will impose penalties for countries that are on the EU blacklist. These measures are to be effective from 1 January 2021.

The draft bill provides that interest and royalty payments will become non-deductible expenses where the following conditions are met:

  • The payments are made to or due to a collective undertaking within the meaning of Article 159 of the Luxembourg Income Tax Law (“LITL”) (i.e. payments to opaque entities);
  • The collective undertaking is an associated enterprise within the meaning of Article 56 of the LITL; and
  • The collective undertaking is established in a country or territory included on the EU blacklist.

However, where the above conditions are present but the payer of the interest or royalty can prove that these expenses have been incurred in respect of transactions that have been carried out for valid commercial reasons and reflect economic reality, the expenses will continue to be deductible. In order for transactions to be accepted as valid, economic reasons must, having regard to all relevant facts and circumstances, be capable of being judged to be real and presenting a sufficient economic advantage, beyond any tax benefit obtained.

The draft law notes that the definition of interest and royalties should be determined in accordance with Article 2 of the Directive 2003 / 49 / CE. Article 2 of this Directive states that

  • The term “interest” means income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor’s profits and in particular, income from securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures; penalty charges for late payment shall not be regarded as interest;
  • The term “royalties” means payment of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work, including cinematograph films and software, any patent, trade mark, design or model, plan, secret formula or process or for information concerning industrial, commercial or scientific experiences; payments for the use of, or the right to use industrial, commercial or scientific equipment shall be regarded as royalties.

Next Steps

The EU Blacklist was last updated on 18 February 2020. From 2020, the EU Blacklist should be updated only twice a year and is expected to be amended in October 2020.

Currently, the EU blacklisted jurisdictions include:

• American Samoa;
• Cayman Islands;
• Fiji;
• Oman;
• Palau;
• Panama;
• Samoa;
• Trinidad and Tobago;
• US Virgin Islands;
• Vanuatu; and
• Seychelles.

The blacklist should therefore be closely monitored for any updates in order to understand which countries will actually be in the scope of the law once it enters into force.

Concerning the Cayman Islands, its government is already working with EU officials to begin the process of being removed from the EU black list as the legislative changes relating to investment funds have already taken effect. It is anticipated that the Cayman Islands should be removed from the EU black list upon its expected next update in October 2020, but this should be closely monitored.

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