Category: Newsletter

On 14 February 2023, the Council of the European Union published an updated list of non-cooperative jurisdictions for tax purposes  (“EU Black List”). The list was first created and published on 5 December 2017 by the Code of Conduct Group (Business Taxation) commissioned by the Council, and each year revisions are implemented by adding new (non-compliant) and withdrawing old (compliant) jurisdictions that appear on it.

EU Black List

The following 4 countries have now been added to the EU Black List: British Virgin Islands, Costa Rica, Marshall Islands and Russia.

The Black List now contains 16 jurisdictions considered to have harmful tax practices and unsafe: America Samoa; Anguilla; Bahamas; British Virgin Island; Costa Rica; Fiji; Guam; Marshall Island; Palau; Panama; Russia; Samoa; Trinidad and Tobago;  Turks and Tobago Island; US Virgin Island; and Vanuatu.

Russia included in the EU Black List

It is ironic, but the Russian so called “de-offshorisation” measures (basically, measures against capital flight from Russia) resulted in the country itself being included in the EU Black List.

On August 3, 2018, special administrative regions (SARs) were created in Russia. The purpose of the SARs was to establish favourable conditions for direct foreign investments, making it possible to establish international funds and inviting the capital to return to the country. The state revenues from the economic activity in the SARs were to be used for infrastructure development of the 2 Russia’s geographically most remote regions where the SARs were established (Kaliningrad, Russia’s European exclave, and Russkiy Island in Primorsky Krai (Vladivistok) in the Far East of the country).

Before 2018 no re-domiciliation to Russia of companies established outside of the country had been possible. From 2018, the change of nationality for companies from FATF countries became an option, if they wanted to transfer their domicile to Russia.

The SARs regime inter alia provides for exemption of taxation of dividends and capital gains under certain conditions, if such dividends and capital gains are received from countries with comparable corporate income tax rate (i.e. not from tax havens). It offers reduced withholding tax on dividends paid out to foreign parent companies under certain conditions (companies from countries with comparable corporate income tax rate (i.e. not from tax havens). So, arguably tax reductions and exemptions offered by the SARs are comparable to existing world practices, including Luxembourg.

Until 2022, Russia and the EU had been in discussions and exchanged information on the SARs regime, certain recommendations has been implemented, but the dialogue between the EU and Russia came to a standstill after the events in Ukraine. The Code of Conduct Group made its final assessment of this regime and considered it a harmful tax practice.

The inclusion of the country in the EU Black List certainly has implications on the Luxembourg business, which had, and may still have, ties with Russia, but also on the Russian business in and with Luxembourg, but also on any capital stemming from Russia or having any Russian nexus. Luxembourg authorities and businesses obviously have to adapt correspondingly.

EU defensive measures

In the fight against tax fraud, evasion and abuse, the European Council’s intention is to encourage the non-cooperative countries to improve their legal framework, to be cooperative in tax matters and to align their tax practices with those of the EU countries.

The countries reached common ground – they shall apply at least one of the administrative measures:

• reinforced monitoring of transactions;
• increased risk audits for taxpayers who benefit from listed regimes;
• increased risk audits for taxpayers who use tax schemes involving listed regimes.

As of 1 January 2021, EU member states also committed to apply at least one of the following legislative measures in respect of the blacklisted countries:

• non-deductibility of costs incurred in a listed jurisdiction;
• controlled foreign company (CFC) rules, to limit artificial deferral of tax to offshore, low-taxed entities;
• withholding tax measures (WHT), to tackle improper exemptions or refunds;
• limitation of the participation exemption on shareholder dividends.

The inclusion in the EU Black List is also relevant to whether a cross-border tax arrangements is reportable under DAC 6 as falling under category C Hallmark.

From 2024, it will also be relevant to EU country-by-country reporting as separate reporting for each jurisdiction on the black list will be required.

Measures introduced in Luxembourg

In 2018, the Grand Duchy obliged corporate taxpayers to declare in their corporate tax returns whether they have entered into transactions with related parties located in blacklisted jurisdictions.

In 2021, Luxembourg passed the law introducing defensive measures in respect of countries listed in the EU Black List. Under certain conditions, the deductibility for corporate income tax purposes of interest and royalties paid out by Luxembourg companies to associated companies from the EU blacklisted countries is denied. The provision applies to interest and royalties accrued, irrespective of whether they were paid or are outstanding.

However, the law offers Luxembourg taxpayers a possibility to demonstrate that the transaction giving rise to royalties and interest is made for valid economic reasons which reflect economic reality, i.e. the GAAR main purpose test shall apply. This suggests that the tax advantage should not be the main purpose of the transaction, and the taxpayer should have real economic reasons for the transaction to be allowed a deduction.

In May 2022, a Circular was issued by the Luxembourg Direct Tax Administration in clarifying aspects of the application of the above measures, in particular:

• The rules apply to interest and royalties owed to collective undertakings within the meaning of article 159 Luxembourg income tax law. In principle, the rules shall not apply to distributions to partnerships, trusts and individuals;
• The rules apply to interest and royalties accrued after 1 March 2021;
• The valid economic reasons must be genuine and economically relevant. The taxpayer may request a tax ruling in this respect in order to get certainty of treatment of the transaction by the Luxembourg tax authorities.
• If the interest deduction is denied under the Law introducing defensive rules, the interest limitation rule shall not apply.

There are other measures introduced in Luxembourg and on the EU level with an aim of fighting tax avoidance and evasion. For example, controlled foreign company rules exist in Luxembourg since 1 January 2019, in furtherance of the European Union (EU) Anti-Tax Avoidance Directive (ATAD). These rules target to tax income of CFCs arising from non-genuine arrangements that have been put in place for the essential purpose of obtaining a tax advantage. CFCs are typically companies existing in the low tax jurisdictions with effective tax rate lower than 50% percent of the corporate income tax payable in Luxembourg, and most (if not all) of the countries on the Black List are normally referred to as tax havens with low or no taxation.

For European companies, transactions with counterparties from the EU Black List and generally those registered and existing in the countries considered as tax havens require care and proper analysis. Feel free to contact us for more information, legal and advice.

In response to the decision of the Court of Justice of the European Union (Grand Chamber) of November 22, 2022, in joined cases C 37/20 and C 601/20, invalidating the provision of Directives 2018/843 of the European Parliament and of the Council of 30 May 2018 on the prevention of the use of the financial system for the purpose of money laundering or terrorist financing and public access to the Register of Beneficiaries (the “RBE“), via the LBR’s website, has been suspended as of 22 November 2022 by the Luxembourg Business Registers (the “LBR”).

As a consequence, the professionals within the meaning of Article 2 (Scope) (the “Professionals”) of the amended act of 12 November 2004 on the fight against money laundering and terrorist financing (the “2004 Law”) have no longer access to the RBE at the moment.

In order to remedy this situation and to reopen access to these professionals on the LBR’s website, the LBR set up a new procedure in order to access to the RBE for the Professionals.

To access the RBE, the professionals will have to (i) meet the following prerequisites and (ii) complete the below documents:

I. Prerequisites

• Be a professional within the meaning of Article 2 (Scope) of the 2004 Law;
• Hold a product issued by Luxtrust SA (i.e. smart card, token, signing stick, Luxembourgish eID, LuxTrust scan or LuxTrust mobile); and
• Execute the agreement (Convention relative à l’accès a la consultation au registre des bénéficiaires effectifs) (the “Agreement“). The Agreement will lead to the creation of an account with LBR, allowing the professional to be identified as such by LBR, when connecting to the website and to designate internal users, via an application dedicated to user management
• Execute the Agreement’s annex (Annexe technique à la convention relative à l’accès à la consultation au Registre des bénéficiaires effectifs) (the “Annex“) with the LBR.

II. Documents

List of documents:

• The Agreement available here; and
• The Annex available here.

In order to ensure that your application is processed in a timely manner, it is strongly recommended that you complete and sign the application form and attachment electronically.

It is important to note that the LBR will not process with incomplete applications and will return them in their entirety to the applicant.

III. Procedure

1. Fill out the prerequisites;
2. Log on to the LBR’s website and download the Agreement and its Annex;
3. Execute electronically or by hand the Agreement and its Annex;
4. Email the executed Agreement and its Annex to LBR at Access_rbe@lbr.lu

New Luxembourg Law on administrative dissolution without liquidation of companies

A new Law of 28 October 2022 on administrative dissolution without liquidation (“Law”) has been recently passed by the Luxembourg legislator and will enter into force on 1 February 2023. The Law introduces a new procedure allowing the dissolution of inactive companies which meet certain criteria by an administrative decision only, i.e. outside of the judicial dissolution and liquidation.

Companies concerned

A company may be dissolved within the administrative procedure, if it meets the following criteria:

– it pursues activities in breach of criminal law or it seriously infringes provisions of the Commercial Code or the laws governing commercial companies, including laws governing authorisations to do business (e.g., it has no registered office, it has failed to file annual accounts, its management has resigned with no replacement);
– it has no employees;
– it has no assets.

Dissolution procedure

The procedure will be opened by the administrator of the Luxembourg Trade and Companies Register (“RCS”) at the request of the Public Prosecutor. The decision will be notified to the company at the address registered at the RCS and be published in two Luxembourg newspapers and at RESA (the Luxembourg electronic platform for publication in respect of companies and associations).

The administrator will have to verify whether the concerned company has any assets and employees. For this purpose, and in order to assess the financial and administrative situation of the company, the administrator will send requests to the following entities, institutions and authorities:

– financial institutions, where the company may have bank accounts;
– non-life insurance companies;
– mortgage offices;
– the administration of the cadaster and topography;
– the national automobile traffic company (SNCA);
– the joint social security center (CCSS).

The deadline for response by the above-mentioned entities, institutions and authorities is set at one month. The administrator will inform the Public Prosecutor of the results of the verification.

If all conditions for the administrative dissolution are met, the Public Prosecutor will request the administrator to proceed with the administrative dissolution of the company. Within six months of the publication of the opening of the dissolution procedure, the decision to close the dissolution must be published at RESA, and the company will be automatically dissolved without liquidation.

If one of the conditions is not met, the Public Prosecutor will request the administrator to stop the dissolution. Such decision will also be subject to the publication at RESA.