Specific tax aspects for Professionals of the Financial Sector (PSF)
- Transfer pricing
- Qualified Intermediary regime
- Automatic exchange of information
- Taxation of savings income
- Exchange of information upon request
- EU Directive relating to administrative cooperation in tax matters
- System of exemption for intellectual property rights
Since a few years now, the ultra-globalised environment is heading to a direction where transfer pricing (and the related arm’s length principle) is on the top of the agenda for companies involved in intra-group transactions, supply of goods or services and payment thereof. The increasing volume of intra-group transactions (representing about two thirds of the total number) and the evolution of local regulations make transfer pricing planning and documentation a key risk management stone on the path of every company operating on a cross-border and intra-group basis.
Under the ‘arm’s length principle’, intra-group transactions are treated by reference to the profit that would have arisen if the transactions had been carried out under comparable circumstances by independent parties. Based on this principle, the tax authorities are, in many jurisdictions, allowed to adjust the taxable basis of a company which would have unjustifiably deviated from market conditions. These adjustments can either result in an increase of the taxable income or in a reduction of the tax loss.
Luxembourg inserted two new legal provisions in its tax law stating that as from 1 January 2015, any taxpayers (among which PSF) carrying out intra-group transactions must be able to deliver, upon request, the appropriate transfer pricing documentation demonstrating that the remuneration applied with the related party is arm’s length. Aside of this documentation obligation, a second provision is granting the possibility to the tax administration to adjust upwards or downwards the taxable basis of a taxpayer if the conditions prevailing within the transaction would deviate from market conditions.
In March 2010, the United States adopted new tax regulations within the framework of the Hiring Incentives to Restore Employment (HIRE Act), thus creating a new chapter in the American internal revenue code, the Foreign Account Tax Compliance Act (FATCA). FATCA aims for global transparency of U.S. account holders.
The United States wants all Foreign Financial Institutions (FFI) to report annually to the IRS on U.S. persons and their assets, as well as on certain types of entities (so-called Passive NFFE) and their controlling US persons.
Through FATCA, the U.S. impose a punitive withholding tax of 30% for all financial intermediaries who do not comply with the FATCA obligations (which comes in addition to the current US internal withholding tax / Qualified Intermediary regime). This tax applies not only to direct U.S.-source (Fixed, Determinable, Annual or Periodic income or FDAP) income but also to proceeds from sales of assets that generate direct (and, possibly in the future, indirect) U.S. source income.
Qualified Intermediary regime
In January 2001, following lengthy negotiations with the global financial services industry, the U.S. tax authorities introduced the QI regime. These regulations enable financial intermediaries to streamline administrative withholding tax procedures relating to the collection of U.S. source revenues.
More particularly, the QI reduces tax refund applications by applying reduced withholding rates, thus lightening the administrative workload while preserving the banking secrecy for non-U.S. investors. Although the QI is required to reveal the identity of U.S. beneficial owners, the identity of non-US clients receiving U.S. income is not revealed. In return, the intermediary is subject to a complex set of rules and procedures regarding documentation of the beneficial owners, withholding tax and reporting to the U.S. tax authorities. Until recently, compliance with the provisions of the contract was regularly checked by an independent Internal Revenue Service (IRS)-approved auditor, and this audit was conducted on the basis of agreed-upon procedures (Revenue Procedure 2002-55).
In Luxembourg, many banks and equally certain PSF have adopted this status.
Automatic exchange of information - Savings Directive and CRS based reporting
According to European Council Directive 2003/48/ EC on the taxation of income from savings (the ‘EU Savings Directive’), Member States must provide to the tax authorities of another Member State details of any cross-border interest paid by a ‘paying agent’ to a beneficial owner whose permanent address is in a different Member State, or to certain types of entities (‘residual entities’).
European ‘paying agents’ must send a statement of all cross-border interest payments and identification information on the beneficial owners of these payments to their respective tax authorities. These tax authorities will then automatically exchange this information with their peers in other jurisdictions.
Initially three European Union Member Countries were allowed to apply withholding on savings income instead of exchange of information during a transitional period: Belgium, Luxembourg and Austria.
Meanwhile, Belgium decided unilaterally to abandon the savings withholding tax as from 1 January 2010. Luxembourg unilaterally abandoned savings withholding tax as from 1 January 2015, and consequently automatically exchanges information under the EU Savings Directive as from this date.
Taxation of savings income
The law of 23 December 2005 which took effect on 1 January 2006 was based on the law of 21 June 2005 which transposed European Union Council Directive 2003/48/ EC of 3 June 2003 into Luxembourg law regarding the taxation of savings income received in the form of interest payments (hereinafter the ‘law of 21 June 2005’). This law introduced a final withholding tax regime for certain types of interest income from fixed-income investments.
The main types of income concerned are:
- Interest from savings account
- Interest from current accounts and term accounts
- Interest on bonds
The law provides a rate of 10% on interest paid by a paying agent within the meaning of the law, based in Luxembourg to beneficiaries resident in Luxembourg.
Exchange of information upon request
The exchange of information on demand is one of the three main methods of exchanging information along with the automatic and spontaneous exchange.
An exchange of information on demand occurs when a jurisdiction requests another jurisdiction to provide information on a case-by-case basis. To answer such demand, the responding jurisdiction may ask the holder of the information (bank, taxpayer, etc.) to provide information for it to send back to the requesting jurisdiction.
The procedures and the conditions of exchanging information were clarified in the new agreements/ protocols signed by Luxembourg, by the law of 31 March 2010, as amended by the law of 25 November 2014 (entered into force on 1 December 2014) that significantly modified the procedure that has to be followed upon the reception of a request.
EU Directive relating to administrative cooperation in tax matters
The Member States of the European Union agreed a new wording for Directive 2011/16/EU at the Council meeting of 15 February 2011 relating to administrative cooperation in taxation matters, which supersedes Directive 77/799/EEC.
The new Directive generalises information exchange on request and automatic exchange of information amongst EU Member States but also contains provisions regarding spontaneous exchange of information, and regarding automatic exchange of information amongst tax authorities on, amongst others, salaries, director’s fees, real estate and insurance.
System of exemption for intellectual property rights
To develop its appeal, Luxembourg has introduced an attractive tax regime for income derived from intellectual property rights.
In this respect, 80% of income resulting from the exploitation of intellectual property rights acquired or registered after 31 December 2007 and 80% of the capital gains arising from such assets are exempt. This regime was abrogated since 1st July 2016 and cannot apply for new rights. However this regime still applies for a transitional period until 30 June 2021 under certain conditions. A mechanism exchanging the information on the beneficiaries was introduced as well.
For further details: Art.50 bis LIR Grand-ducal regulation of 21 December 2007 Circular no. 50bis/1 LIR of 5 March 2009
BEPS (Base Erosion and Profit Shifting)
At the demand of the G8 and the G20, the OECD launched in July 2013 extensive action programs to fight against international tax evasion and harmful tax competition.
These actions, which are 15 in number, are neither more nor less recommendations whose normative force varies, were approved by the OECD and the G20 in October and November 2015. These are articulated around three central concerns: more coherence, more substance and more transparency in international tax.