New IP regime in Luxembourg – The Challenges and ideas- 1

In Uncategorized by Michael Probst

In this Blog article called “The Challenges – Part I”, I will publish my views on the transition between the old and the new IP tax regime, and the IP which will no longer qualify under the new regime as well as some planning opportunities with regard to such IP.

Indeed, the so-called “grandfathered” IP will continue to benefit from the old IP tax regime in Luxembourg until 30 June 2021.

As expected under the Nexus Approach, IP like trademarks, domain names and similar rights will no longer qualify as “eligible assets”. The new definition is by far more restrictive than the old definition and refers to “inventions” and “software” if protected under the corresponding national or international rules.

What to do?

  1. Surely not over-react! The “grandfathering” continues up to 30 June 2021.
  2. As the new IP regime starts 1.1.2018, it is possible to acquire (or develop) additional IP in an existing company. It is advisable, not to add IP benefitting from the new rules with “grandfathered” IP. Indeed, the old and the new rules do exclude each other, so that either the old rules can be applied, or the new rules (please keep in mind, some old IP may not benefit from the new rules!).

Please refer to our newsflash for more technical information, keeping in mind, that only a first draft of the new law is currently available.

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New IP regime in Luxembourg

In Uncategorized by Michael Probst

Finally, Luxembourg has managed to issue new tax rules on IP held through Luxembourg companies. A draft bill waited for desperately.

Even though the tax benefit is 80% of net income (a known percentage), there have been some amendments, to ensure the new regime is in line with the OECD’s Nexus Approach.

Indeed, the new regime will be more restrictive with regard to the scope of IP benefitting from the tax advantage. Thus, trademarks, domain names and other marketing related rights will no longer benefit from the specific tax advantage.

Also, the basis for the exemption will be different, as a very specific basis for the 80% exemption is defined, not only referring to the “net income”, but also to a coefficient of directly IP-related expenses to total expenses.

This implies, that R&D related expenses need to be rather significant. Also, R&D expenses will not be allowed if in favor of a related party. Consequently, the R&D provider needs to be unrelated.

Considering the geographic size of Luxembourg, qualifying R&D can be performed outside of Luxembourg (but: final service to be provided by unrelated party).

The new IP regime (still a draft, but ….) will require significant planning work with regard to the new expense-related tax regime, but also with regard to the transition of grandfathered IP which benefits from the old rules up to 30 June 2021.

For more technical details please also read the corresponding Newsflash on our homepage.

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Transfer pricing – the head-cracker of Luxembourg tax advisers in the future?

In Uncategorized by Michael Probst

Unfortunately, I believe that the reply to the question I asked myself is: “Yes”. While the focus in Luxembourg currently is the transfer pricing circular for intra-group financing in its new version dated 27 December 2016, I think that the large wording of Article 56bis of Luxembourg Income Tax Law – which is by no way restricted to group financing, but is applicable generally and on all transactions between related companies – is not sufficiently considered.

One could say, that for Luxembourg, it is only (or at least mainly) group financing which is of interest, but what about management services, royalties, marketing and other functions, taken by group entities and invoiced to Luxembourg or from a Luxembourg entity to a related company somewhere in the world.

Also, the new rules referred to, require the documentation of the transfer pricing policy applied. Nothing new for TP-specialists, who have already established such documents for other (i.e. non-financial) clients in other countries.

The question appears: Will Luxembourg request such a documentation and when will it request such documentation?

My answer: It may not, at least not immediately, but it can now. Considering that Luxembourg has learned to apply its tax laws more and more strictly in the last years, it may only be a matter of time until a first request will land on the desk of a surprised tax adviser….

 

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Why advice and compliance are so dependent on each other

In Uncategorized by Michael Probst

I am sure there exist unbelievable creative advisers, which have the best ever ideas on tax planning, despite of BEPS and all current measures to reduce international abuses, and which have themselves never prepared (or reviewed) the tax return of the first year in which their client acted as advised.

Can you (as a professional or a client) imagine such a situation? I can.

Now there are clients which will sue the adviser for wrong advice. The bigger the advisory firm, the longer the so-called disclaimer, resulting in a comfortable situation for the adviser and a loss of the claim for the client. Other clients hesitate to sue their adviser, as a legal proceeding may attract the press to reveal names. Especially private clients (so-called “High Net Wealth Individuals”), will most probably prefer the loss of money, compared to the reputational risk in the event the transaction or its outcome will become known to the public.

A client asking his tax accountant to provide for successful tax planning ideas, may not receive any input. Again, the client will not be happy (at least there is no reputational risk).

The ideal adviser needs to have the knowledge of the clients’ accountant as to his situation and he oversees the feasibility of a transaction, while at the same time, he has the ideas of the brilliant guy. Or, the other way round, the brilliant top adviser needs to know how the basic homework is done, before he offers magnificent solutions.

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Luxembourg Property Companies investing in Germany – Challenges from an accounting and tax point-of-view (part 2 – SAF-T/FAIA)

In Uncategorized by Michael Probst

With accounting performed by three parties in two countries (see part 1 of this blog), there is one legal and tax issue that needs to be considered: the Standard Audit File for Tax (SAF-T – or French: FAIA) and the connected issues. Indeed, even though a problem has so far been avoided in the market (or at least there is no information or rumors), the law is clear and the risk to be requested a data delivery increases on a daily basis.

The legal basis: Luxembourg has implemented this obligation which transposes OECD-guidelines during 2008 in Luxembourg law. An update has been enacted in 2013.

As a result of the law, a FAIA file needs to be presented to the Luxembourg VAT authorities upon request and has to be in the format described in the Luxembourg law.

Luckily, certain companies will be exempted by the FAIA obligation.

Major exemptions in the real estate sector will be:

  • Companies which are only registered under the simplified VAT-assessment regime (i.e. turnover not subject to VAT, but reverse charge obligations)
  • Companies with a limited volume of transactions (i.e. +/- 500 transactions)

The first exemption should help holding and finance companies which have no input-VAT deduction right, but are VAT-registered under the simplified VAT-assessment regime, and have to file a simplified annual return only.

The second exemption may cover a relatively large number of real estate companies. Indeed, 500 transactions does not imply 500 accounting entries, but rather 500 invoices. Related accounting entries will be seen as one transaction (different elements of an invoice, the creditor/debtor account, VAT and the settlement/payment).

All companies not covered by one of the exemptions will be obliged to deliver (upon request) a FAIA file corresponding to the legal prescriptions.

A standard Luxembourg accounting software should be in a position to produce this file. Looking at accounting performed abroad (in booking centers around the world like India, Lithuania, Estonia or other) the production of an appropriate FAIA file may create an issue.

The same problem arises in respect of a real estate company, where the underlying accounting is performed abroad and Luxembourg does not even have the control over the number of transactions.

Simple solutions to this could be:

  • Split large properties into several companies to reduce the number of transactions (residential real estate is VAT-exempt and does therefore not trigger a FAIA file to be delivered (careful with mixed activities)
  • Use local entities (e.g. partnerships) in Germany

If these alternatives cannot be implemented/do not make any sense, it will need to be assured that the accounting systems of services providers (or the promoter) allow the preparation of FAIA files as prescribed for Luxembourg. Given the OECD recommendation, multinational accounting systems (at least those pretending to be multinational) should be able to extract such files for different jurisdictions.

Always bear in mind: An OECD recommendation will offer alternative interpretations. Consequently, there may be a large variety of country specifics – just as for Luxembourg.

IT and tax will continue to be good business cases….

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Luxembourg Property Companies investing in Germany – Challenges from an accounting and tax point-of-view (part 1)

In Uncategorized by Michael Probst

Based on our group’s large experience with Luxembourg corporations (LuxCo’s) investing (directly) in Real Estate located in Germany, we consider that there are accounting issues that require reflection and action.

Promoters (for regulated funds or coordinators of private deals) tend to consider GAAP accounting and tax filings as unpleasant obligations and focus on the budget and specific control reportings.

Indeed, in a process relating to relatively small real estate companies (or funds) which do not have a separate international accounting team and a global software solution offering the full scope of file extractions, the accounting of rental income and directly connected charges of the underlying property will normally be performed by a Property Manager. In a second step, the German tax adviser re-performs the accounting entries to have the entries in his accounting system, mainly to accomplish German tax compliance obligations. The third time the accounting will be (re-)performed in Luxembourg, considering the different filing obligations of a Luxembourg corporation (F/S and tax).

This triple accounting charge is normally reduced to a minimum for accounting services (which is far more complex in reality). Indeed, most clients consider the extra work required to be of no added value and avoid cost.

To reduce the cost of the LuxCo, the model process is, in practice and in a first step, reduced to an accounting of the rental income and direct charges performed by the Property Manager. In a second step, these accounting entries are then transferred into the accounting system of the German tax adviser via a specific interface. Normally, steps one and two are performed by using German GAAP. In a third step the Luxembourg accountant will have to use the data available from Germany (via special interface or based on the trial balance) and converts at the same time German GAAP into Lux-GAAP (mapping).

This has become a rather ideal and cost effective solution in the market. However, the art of having reliable financial statements lies in the communication between the German and the Luxembourg service provider- which may already be a language issue. A second issue lies in the compatibility of accounting systems between Germany and Luxembourg and the quality of the interface (where the biggest issues recognized lie in the automated VAT accounting of most German accounting systems).

Depending on the approach used, we have found that a series of financial statements look good, but are wrong. Also, there may be at least two different sets of financial statements, leading to different opening balances. The issue lies in the corrections performed in order to present financial statements for tax purposes in two jurisdictions. If the two accountants do not work in a permanent cooperation, there will be differences. Such differences continue over years and remain unexplained.

The promoter may not consider this issue relevant, as all that counts for him are the figures from his budget reports and the legal compliance (somehow) performed.

However, one day accountants in two countries may need to find the reason why 5 years ago the appropriate communication between Luxembourg and Germany did not work in the way wanted.

The effect of FAIA obligations will be reviewed in part 2 of this blog article.

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The Brexit and tax issues

In Uncategorized by Michael Probst

The Brexit has been decided on by the British population (at least a majority of those who went to the ballots). There has been a lot of consequences on economics and politics which have been discussed in the media and which will require a lot of political decisions and negotiation in the coming years.

Here is my opinion on the Brexit tax issues raised and maybe not yet thought about.

Application of EU-Directives

In direct taxes, the most important one will be the application of the EU Parent-Subsidiary Directive (PSD). Dividends paid by German or French companies to their UK parents may become subject to withholding tax in Germany or France. Currently, it is the PSD which prevents such payments from withholding taxes. No longer covered by the PSD, dividends will be subject to tax at rates of 5% (treaty rate for important shareholdings). The UK as a holding hub for multinational groups risks to lose some attractiveness.

VAT and Custom duties

Today services rendered and good delivered to and from the UK are intra-community deliveries/services for VAT purposes. After the Brexit, the same should qualify as third country transactions. As a consequence, the underlying exemption rules change together with the required documentation. Goods delivered to the UK will further on require the same documentation as deliveries to Switzerland.

Custom duty exemptions existing for goods delivered between different EU member states may no longer apply (depending on the Brexit conditions negotiated with the EU).

Considering the high level of compliance required especially for VAT, many procedures in international trade will need to be adapted (re-adapted to times before 1993). Does this mean that the step into the future, which the Brexit was supposed to be for the UK, implies a step back in time of more than 20 years?

 

UK Treasury (supported by Inland Revenue) and the European politicians may discuss and negotiate an outcome of tax rules and special status of the UK which replace the old system with equivalent rules. Depending on the outcome of such negotiations, the above consequences may not occur. Who knows?

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Home-Office – a great thing to do (unless you are a Luxembourg employer)

In Uncategorized by Michael Probst

At the end of May 2016, one of the bigger German newspapers considered home-office to make employees happier and more productive. (http://www.welt.de/gesundheit/psychologie/article155325775/Zu-Hause-arbeiten-macht-gluecklich-und-produktiv.html)

A Luxembourg employer allowing his employees to work from home, has to bear in mind that there is a relatively high chance that the one or the other of these employees will be working in one of the neighboring countries. Given the specific situation of Luxembourg, a cross-border tax situation is triggered consequently. If such issues are generated, the employer risks to become unhappy and to lose productivity, with extra work for his administrative staff and his payroll service providers and tax advisers will become happy due to a significant increase of fees for them.

Why? Read More

The “wind of change” in Luxembourg – 2. Challenges for Tax advisers

In Uncategorized by Michael Probst

The second blog on the “wind of change” relates to the challenge in the profession for tax advisers in Luxembourg.

One of the big challenges of a Luxembourg tax adviser is the knowledge of national and international tax laws. The underlying demand is growing permanently. Also, the Luxembourg tax advice environment has changed over the last years.Read More