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What Do Luxembourg’s New Taxation Laws Mean For Expats?

Luxembourg has for some time now held the reputation of being a tax haven. With a high standard of living, but a comparatively low tax rate compared to many of its other European counterparts, it was vastly appealing to expatriates and investors alike. However, in December 2018 Luxembourg drafted its plans to implement the proposed ‘Anti-Tax Avoidance Directive’ (ATAD), which came into play from the 1st of January 2019.So what does this mean? What exactly is the anti-tax avoidance directive, and what effect will this news have on expatriates? In this article we take a look at Luxembourg’s new taxation law and the knock-on effect that it could potentially have on the expat community.

What is the Anti-Tax Avoidance Directive?

The Anti-Tax Avoidance Directive is a Europe-wide initiative that has been rolled out across all EU member states. For those countries whose tax years run parallel to the calendar year, the law comes into effect on the 1st of January. Otherwise, it will begin on the first day of the taxation period. The directive ensures a consistent set of rules within Europe that will prevent people from abusing any anomalies or differences in the tax system that until now has varied greatly from country to country, minimising the opportunity of profiting from avoiding tax payments. It will also discourage companies from creating artificial debt arrangements designed to minimise taxes, and counteract those who have been guilty of aggressive tax planning in order to cheat the system.

These all sound like positive changes, particularly in the wake of revelations that large mega-corporations have been using such methods and making use of European loopholes to avoid paying taxes in the UK. That being said, the question is: will the Anti-Tax Avoidance Directive have an effect on the expat community?

What effect will the Anti-Tax Avoidance Directive have on expats?

Where do expatriates stand when it comes to ATAD in Luxembourg? The pressure may be on for expatriate business owners, especially if operating across Europe, where once the difference in tax laws would have been an advantageous cushion. Things will also likely change for those with passive income and dividends for example, as well as limitations on interest deductions, and rules to prevent the double non-taxation of certain incomes. There have been numerous concerns over the exit taxes outlined in the bill that was passed, although these won’t be applicable until 2020.

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The core aspects of the ATAD bill are interest limitation, exit taxation, a general anti-abuse rule (GAAR), controlled foreign companies (CFC) and intra-EU hybrid mismatches.

Whilst Luxembourg has mainly steered in the direction of protecting businesses as much as possible under the new tax reform, some of the rules could have a significant impact on alternative investments (such as private equity and real estate, etc.) structured via Luxembourg, as well as on multinationals and expatriates with investment platforms in Luxembourg particularly in these sectors.

When it comes to personal income taxes for the average person in Luxembourg, the new process should be much more simple than it has been in the past. The minimum welfare wage will be increased and more tax incentives will be introduced, as well as revisiting the deductible lump-sum travel expenses due to the plans for free public transport in 2020. As such there doesn’t appear to be any significant impact that squarely falls upon the expatriate community as a whole.

All in all it looks to be a smooth transition thus far and the tax reform can bring many positives with it. However, some may question what will happen to the large gap that will open up in the market, and where companies and shrewd businesspeople may set their sights next to protect their assets and gain as much as they can from tactical accounting when it comes to taxation.

Of course the tax landscape of Luxembourg will continue to change under the current political coalition agreement. This all coincides with the new double tax treaty or “DTT” between Luxembourg and France (although the ratification has not been fully completed yet), which puts more of a focus on the taxation of cross-border payments such as interest and royalties.

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