Luxembourg releases draft law implementing ATAD 2 rules on hybrid mismatch arrangements

Luxembourg releases draft law implementing ATAD 2 rules on hybrid mismatch arrangements

 

Luxembourg Tax Alert

On 8 August 2019, Luxembourg published the draft law that would implement hybrid mismatch measures of the 2017/952 EU Anti-Tax Avoidance Directive (ATAD 2) into Luxembourg domestic law. ATAD 2 is largely inspired by Action 2 – Neutralizing the Effects of Hybrid Mismatch Arrangements – of the OECD’s base erosion and profit shifting project (OECD BEPS Action 2).

ATAD 2 extends the anti-hybrid provisions of the 2016/1164 EU Anti-Tax Avoidance Directive (ATAD 1) to hybrid mismatches with countries outside of the European Union and covers additional types of hybrid mismatches. The draft law would cover hybrid mismatches not yet covered by the current anti-hybrid provisions, such as (i) imported mismatches, (ii) hybrid transfers, (iii) tax residency mismatches, as well as (iv) reverse hybrid mismatches.

The draft law largely follows the wording of ATAD 2 while addressing the main points of concern of the marketplace and providing some useful additional clarifications and examples in the commentary to the draft law.

The draft law would modify the Luxembourg Income Tax Law (LITL) by replacing the current provisions of Article 168ter LITL and introducing a new Article 168quater LITL. It would also adapt some related provisions of LITL, such as the limitation of the deduction of foreign tax credits in the context of hybrid mismatches, as well as some provisions of other Luxembourg laws.

The Luxembourg parliament will now debate, possibly amend and ultimately vote on the proposed measures. Most of the provisions included in the proposal would apply as from fiscal years starting on or after 1 January 2020, with the exception of the provision specifically targeting reverse hybrid mismatches (new Article 168quater LITL), which would apply as from fiscal years closing in 2022.

 

 

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