The Anti-Tax Avoidance Directive (ATAD 2) was transposed into Luxembourg law on 19 December 2019. Some of its provisions have been applicable since 1 January 2020 while some provisions, notably relating to reverse hybrids, will be applicable from 1 January 2022. Have you considered the potential impact on your entities?
ATAD 2 comes after the first ATAD Law, which is the result of the OECD Base Erosion and Profit-Shifting (BEPS) initiative. It applies to all Luxembourg corporate income taxpayers, which includes entities that have a permanent establishment in Luxembourg.
It aims at eliminating hybrid mismatches – situations in which jurisdictions consider instruments (or payments) differently, notably either as equity or debt – which trigger double deductions or deduction without inclusion in taxable income. In the latter case, the deduction would for instance be denied for the Luxembourg payer. Similarly, from the 2022 tax year, Luxembourg entities that qualify as tax-transparent entities (e.g. SCSp entities) will become liable to corporate income tax to the extent their income was not otherwise taxed in Luxembourg or in any other jurisdiction under certain conditions. Exemptions and detailed rules apply.
ATAD 2 also elaborates on some of the structures that can give rise to an hybrid mismatch, which includes associated enterprises (thresholds apply). ATAD 2 takes the fight against tax loopholes arising from hybrid financial instruments to countries outside of the European Union.
Does your company still use hybrid financial instruments – especially instruments convertible to equity or debt with equity features? Could your partnerships potentially fall within scope of the rules? JW Partner can help you identify impacts and find solutions, feel free to reach out!
A hybrid instrument is defined by the OECD as an instrument that results in a deduction without inclusion (i.e. in taxable income) or by a double deduction due to differences in the way instruments or payments are classified. For instance, a hybrid instrument could be an instrument that is considered a debt instrument in a given jurisdiction and as an equity instrument in another country (e.g. convertible bonds, convertible preferred equity certificates, PEC, mandatorily redeemable preference shares…), which leads to a situation whereby none of the two countries would tax the applicable flows.