Luxembourg: Application of the parent subsidiary directive to Gibraltar companies – new guidance released by the Luxembourg tax authorities

The Circular makes direct reference to the ECJ case law dated 2 April 2020, GVC Services (read our tax alerts dated 13 November 2019 and 14 April 2020 in this respect).

The Circular mentions that an administrative tolerance will apply until 31 December 2020 to all dividends derived by Luxembourg companies from Gibraltar companies (tax exemption for corporate income tax and municipal business tax purposes) and dividends distributed by Luxembourg companies to their Gibraltarian shareholders (withholding tax exemption).

From 1 January 2021, Gibraltarian share capital companies will no longer be considered covered by Directive 2011/96/EU and will not be eligible for the Luxembourg participation exemption regime covering EU companies, in particular:

• The dividend tax exemption will not be applicable in Luxembourg, based on article 166 (2) 1 LITL.
• The withholding tax exemption will not be applicable in Luxembourg, based on article 147 (2) e LITL.
• The net worth tax exemption also will not apply, based on §60 (2) 1 BewG.

However, the Circular clarifies that the dividend tax exemption and net worth tax exemption may still apply if the Gibraltarian share capital companies meet the Luxembourg subject-to-tax test (i.e., the companies are subject to tax in Gibraltar at a tax rate of at least 8.5% computed on a similar basis to how it would be in Luxembourg). Such provisions are foreseen in article 166 (2) 3 LITL and §60 (2) 3 BewG, respectively.

Our Baker McKenzie Luxembourg tax experts would be happy to assist you should you require any further information.