BEPS Implementation – Act I

ABBL Published 21.12.2018

The translation of the OECD BEPS Action Plan into concrete measures under domestic law has taken a decisive step forward through the adoption, on 18 December 2018, of draft law 7318 by the Chamber of Deputies. Additional developments are expected in 2019 and several of them have a direct impact on the banking sector.

Draft law 7318 aimed at transposing into Luxembourg law the EU Anti-Tax Avoidance Directive (“ATAD”), which sets out a series of measures under EU law derived from the OECD BEPS Action Plan.

Per ATAD, the provisions of the new law contain rules on interest limitation, exit taxation, controlled foreign companies (CFC) and intra-EU hybrid mismatches as well as a general anti-abuse rule (GAAR). The law also includes two additional measures not specifically foreseen in the directive, namely a modification to the rules on tax neutrality applicable to the conversion of debt instruments and a modification to the domestic definition of permanent establishment.

Banks, as financial undertakings, benefit from an exemption under the interest limitation rule, per an option set out in the directive, the application of which was left at the appreciation of Member States. This must be welcomed.

A parliamentary motion was adopted in parallel to the adoption of the draft law requesting the submission of draft legislation during the first half of 2019 so as to allow relevant taxpayers, in the case of a fiscally integrated group, to apply the interest limitation rule at group level, per another option set out in the directive. The motion also calls on the government to further analyse the treatment of securitisation vehicles under ATAD.

The timely transposition of the Anti-Tax Avoidance Directive is one step among several others towards the implementation of the BEPS Action Plan. Further developments should notably relate to the ratification of a Multilateral Instrument (or “MLI”) aimed at modifying the provisions of existing double tax treaties, the transposition of a directive further addressing the use of hybrid financial instruments or hybrid entities (“ATAD 2”) and, perhaps most crucially, the inception of new EU mandatory disclosure rules under the EU Directive on Administrative Cooperation (“DAC 6”).

Several provisions in the aforementioned instruments have a direct impact on the banking sector. Relevant points of attention include:

  • the role of banks as intermediaries under DAC 6 and resulting reporting obligations;
  • the definition of a lower threshold under double tax treaties for the recognition of a permanent establishment (i.e. a taxable presence abroad) by the reliance on dependent agents;
  • the treatment under the interest limitation rule under ATAD of securitisation vehicles and certain issuing entities on the Luxembourg Stock Exchange,
  • the treatment of hybrid regulatory capital under ATAD 2

These issues may have an impact on the cost structure and revenue streams of banks and related entities. These should be put into perspective with tax-related measures set out in the coalition agreement, notably a limited decrease of the corporate income tax rate from 26% to 25% in 2019.

As the second act of the implementation of anti-BEPS measures will be unfolding in 2019, the ABBL is looking forward to further discussing relevant issues with members at the level of competent ABBL working groups with a view to articulate sensible positions and proposals reflecting the interest and legitimate concerns of the banking sector.

By Camille Seillès, Secretary General and Member of the ABBL Management Board

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