In a blog post published last week, we examined the impact of Covid-19 on personal taxation, including taxation for cross-border commuters.
The virus’s impact, however, also extends to companies, who now face extraordinary operational and financial hardship. Prime Minister Xavier Bettel has announced a few measures on March 17th 2020.
KPMG Luxembourg has compiled these measures with other important tax topics. Below is a list of taxation-related actions your company can take to minimize the impact of this pandemic on your business.
1) Deferral of cash payments
Corporate tax payers can apply for a 4 months extension of deadline for the payment of (corporate) income, municipal business and net wealth taxes due after 29 February 2020, without any penalty for late payment.
Also, corporate taxpayers can apply for a cancellation of their quarterly corporate income tax and municipal advance payments for the first and second quarter of 2020.
These requests should be automatically accepted.
In general, Luxembourgish entities suffering considerable hardship, can apply to the authorities for a deferral of cash payment, in order to improve cash flow and cash tax in accordance with the General Tax Law (AO, par 127,1).
2) Reduction of estimated taxes (Avances d’impôts)
For the third and fourth quarter of 2020, the payment of quarterly installments (so-called estimated taxes or Avances d’impôts in French) has been calculated using last year’s taxable basis divided by four.
In addition to the cancellation of Q1 and Q2 advance payments, and given that Covid-19 will negatively impact companies’ overall results and taxable basis, corporations may also ask for a reduction in estimated tax payments for Q3 and Q4. It is recommended to prepare interim accounts (for example, end of June) to support such a request.
2) Delay in filing tax returns
The legal deadline to file corporate tax and personal income tax returns is extended until 30 June 2020.
In practice, there is a tolerance to file corporate tax returns within 12 months (and sometime more if justified by specific situations).
As a general rule, beyond the extension that has been exceptionally granted, when it comes to filing corporate tax returns or withholding tax returns, it could be argued that the deadline was not met due to force majeure. The taxpayer could then apply for an exclusion from the late filing penalty. Of course, for such an argument to hold, inability to file on time must be proven, and decisions will need to be made on a case-by-case basis.
4) Substance requirements: board meeting attendance
There are no specific substance requirements for Luxembourg-based companies stated in the tax law and company domicile substance analysis is conducted on a case-by-case basis. Place of central administration is a leading factor in determining domicile. Therefore, it’s important to consider where the board of director, manager and shareholder meetings are held since their location helps determine place of central administration.
This can create tension in situations when a non-resident member of the board or a foreign shareholder is not able to travel to Luxembourg for a meeting and must attend remotely (e.g. via webex, call or video conference).
Luxembourg’s articles of association do not always specifically refer to the possibility of holding meetings by phone.
By special Grand Ducal decree (dated March 20th 2020), the Luxembourg authorities have formally decided that shareholders meetings and board meetings can be held by video conference or through other means (circular resolutions for board meetings, votes in writing or special proxies for shareholders meeting).
In such cases, KPMG Luxembourg recommends that companies specify in the meeting minutes that this particular meeting is being held via electronic means due to exceptional circumstances arising from the Covid-19 outbreak, including the travel limitations it poses.
Ideally, this call should be initiated from Luxembourg, generally by the local director.
5) Impairment deductions
Operating subsidiaries may face significant decreases in revenue. Assuming that this decrease results in a lasting reduction of the entity’s value, it may be necessary to book and claim a tax-deductible impairment at the level of the corporate shareholder, i.e. the holding.
This impairment deduction can result in a net loss for the corporate shareholder, which can be carried forward for the next 17 years, and can be used to offset any type of taxable income.
6) Repatriation of cash to the parent company
Repatriation of cash to the parent company could take the form of an upstream loan. If agreed to in the short- or medium- term, the interest rate on this loan can be very low. The transfer of cash and future repayments can take place without any specific administrative work required, meaning that only basic legal documentation and daily manager authorization would need to be done.
If the repatriation takes the form of a reduction in share capital or premium (a measure that only shareholders can approve), then there shouldn’t be any withholding tax on this transfer, except if the Luxembourg entity has distributable reserves and the parent company does not qualify for participation exemption (cumulative conditions).
Dividends are also possible if the company has sufficient distributable reserves – here, a withholding tax review will also be required.
The movement of cash should not affect the net worth tax reserve (i.e. the deferral system to mitigate net worth tax), as long as the special reserve is maintained in the books.
7) Economic measures
Recently, the Grand Duchy’s Ministry of Economic Affairs announced that Luxembourg-based companies facing difficulties due to the coronavirus outbreak can apply for subsidies to help keep employees on the payroll and to invest in hygiene enhancements (“chomage partiel”). The subsidy reimburses up to 80 percent of regular salaries. The reimbursement is capped at 250 percent of the social minimum wage for unskilled workers with a maximum time of 1,022 work hours per employee.
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