Securitization: tax avoidance practices

The EU Commission has requested Luxembourg to amend its legislation implementing the Directive against tax avoidance practices

As a reminder, the law of 21 December 2018 (the “Law“) transposed the Council Directive (EU) 2016/1164 of 12 July 2016 against tax avoidance practices (“ATAD I”). The Law introduced in Luxembourg the rule of limitation of the deductibility of interest. This limitation of interest deductibility has been implemented into the article 168bis of the Luxembourg Income Tax Law (“LITL”).

While under ATAD I, certain types of financial undertakings remain out of the scope the interest limitation rule, the Law added to the list of types of financial undertakings in ATAD I the securitization vehicles governed by article 2(2) of the Commission Regulation (EU) 2017/2402 on simple, transparent and standardized securitization. It should be noted that all other securitizations vehicles (not covered by the Commission Regulation (EU) 2017/2402) are captured by the current article 168bis of the LITL and shall be applied the rule governing the limitation of interest deductibility.

In its overview of infringement proceedings dated 14 May 2020, the European Commission indicates that it has decided to send a formal notice to Luxembourg requesting Luxembourg to correctly transpose the interest limitation rule from ATAD I (article 4 of ATAD I).

The EU Commission alleged that Luxembourg went beyond the allowed exemptions in ATAD I by providing unlimited deductibility of interest for corporate tax purposes to securitization vehicles. In its communication of 14 May 2020, the EU Commission states that securitization entities do not qualify as “financial undertakings” within the meaning of ATAD I.

Further to the EU Commission’s formal notice, Luxembourg will have to answer and perform legislative adjustments in order to ensure that securitization vehicles are subject to the interest deduction limitation rule. These adjustments will have to be performed within the next four months, failing which Luxembourg may be sanctioned through an infringement procedure.

For the time being, no action has been taken by Luxembourg in response to this formal notice but we will monitor the developments and keep you informed. Should you have any questions, do not hesitate to contact us.

 

Fabian PironKrasimir KehayovAdèle Rousseau