On 9 June 2023, the Luxembourg tax authorities ("LTA") issued an administrative circular ("Circular") providing some guidance on the determination of the total net income and tax due by the reverse hybrid entity ("RHE") under Article 168 quater of the Luxembourg Income Tax Lax ("LITL")1.
The key takeaways of the Circular can be summarised as follows:
- According to the Circular, a RHE is not a resident collective
undertaking (organismes à caractère
collectif) within the meaning of Article 159 LITL.
Accordingly, the following tax provisions are (inter alia)
not applicable to it:
- Article 164 ter LITL: Controlled Foreign Companies ("CFC") provisions;
- Article 166 LITL: participation exemption on dividends received;
- Article 168 bis LITL: Interest Limitation Rules;
- Article 168 ter LITL?: Anti-hybrid rules.
- At the level of the RHE, the income that would be subject to tax is limited to net income from investment within the meaning of Article 97 LITL, net rental income within the meaning of Article 98 LITL, and other net income listed in Article 99 LITL. Accordingly, their determination is to be made in accordance with Article 103 LITL, i.e. the revenue within the meaning of Article 104 LITL will be decreased by the costs incurred to earn income defined in Article 105 LITL.
- The total net income to be taken into consideration corresponds to the total net income realized during the calendar year, regardless of the RHE's accounting year. Thus, for RHE having an accounting year diverging from the calendar year, the relevant income and charges related to the period from 1 January to 31 December will need to be identified.
- When income and charges are denominated in a foreign currency, the conversion into euros should be made at the exchange rate of the day the income and charges are accounted. However, for the sake of simplification, the conversion of said amounts may be done either at the year-end exchange rate or at the average exchange rate of the tax year.
- No step-up in value must be made when an entity becomes a RHE. Conversely, no tax consequences will arise when the entity ceases to be a RHE,
- Distributions made by the RHE are not subject to withholding tax.
The above clarifications by the LTA are welcomed especially for purposes of filing the new form 205 recently issued by the Luxembourg tax authorities.
Footnote
1. Circulaire du directeur des contributions L.I.R n° 168quater/1 du 9 juin 2023.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.