Tax reform: how to respond to the quest for substance in a post-BEPS world?

in Tax, 11.03.2016

In the current environment where fair and acceptable tax competitiveness have become essential, Luxembourg’s government announced, at the end of February 2016, its proposed measures for the tax reform to be implemented in 2017. The country is certainly in need of tools to tackle the challenging job of implementing the BEPS recommendations while maintaining a competitive tax framework.

Indeed, the combined actions of the OECD and the European Union will lead to a broadening of the taxable basis of corporations once these actions are transposed into the domestic law of each state. As a counterbalance measure, more and more countries are considering decreasing their corporate tax rates significantly. The Luxembourg government recently took its first step in this direction by announcing a decrease in the aggregate corporate tax rate to approximately 27% as from 2017 and 26% as from 2018. This is a good sign, but those in the industry are keen to see it followed by a further, more substantial decrease, in order to match the competitive rates in the UK and Ireland of 20% (down to 18% in 2020) and 12.5%, respectively.

Moreover, given the current international trends which favour an increased level of substance, we believe that specific tax measures are needed in order to sustainably maintain Luxembourg’s attractiveness in a post-BEPS world. Indeed, the lowering of the corporate tax rate may not, in and of itself, be sufficient to make Luxembourg more enticing for corporations and highly qualified workers. In order to further strengthen the economic and operational substance of companies, several paths should be considered, such as:

  • encouraging the capitalisation of companies via a reduction of the tax bias existing between debt and equity financing; this should also be matched with a decrease in / abolition of the net wealth tax;
  • establishing a new IP regime compliant with international standards and additional measures (such as tax credits) to develop R&D activities; and
  • improving the tax framework for highly qualified workers who contribute to innovation and the local creation of added value.

The country is now in need of a stronger tax reform, one that is guided by the desire to favour a higher substance level and to reinforce high-value activities locally. This may be a challenge, but it also represents opportunities for Luxembourg going forward.


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