“…the new tax measures only consist of slight amendments to the current Luxembourg tax law and do not constitute the structural tax measures that Luxembourg needs to maintain and reinforce its position as key investment location.”
Photo: PwC Luxembourg
In 2016 the Luxembourg parliament voted in a whole raft of reforms to tax law that would have a significant impact on individuals and companies, as well as VAT.
Many of the requirements of the new law (no. 7020) came into force in January 2017. In a Q&A with Delano, Valéry Civilio, tax partner and tax consulting leader at PwC Luxembourg, discusses the impact of law no. 7020 so far on Luxembourg businesses.
Delano: What were the key changes to corporation tax in 2017, following the application of the law no. 7020?
Valéry Civilio: The changes to Luxembourg corporate taxation implemented by the 2017 tax reform include the reduction of the corporate income tax rate from 21% to 19% (for the fiscal year 2017) and to 18% as from the fiscal year 2018. The municipal business tax rate is set at 26.01% for Luxembourg City as from the fiscal year 2018.
In addition, the tax losses generated as from the fiscal year 2017 are only carried forward for a maximum period of 17 years. Tax losses that arose before the fiscal year 2017 are not affected by this time limit.
The minimum net wealth tax has been increased from €3,210 to €4,815 (including the solidarity surtax) for Luxembourg holding and financing companies.
In your view, have these changes gone far enough?
We believe that this 2017 tax reform is a first step in the right direction. Indeed, the reduction of the corporate income tax rate shows the Luxembourg government’s will to improve our country’s attractiveness and competitive position.
However, in the context of a highly competitive tax environment, this might not be sufficient as some of our European competitors are in a more advanced position when looking at the corporate income tax rate. The United Kingdom, for example, intends to cut its corporate tax rate to 18% by 2020, while Ireland still has the most competitive rate of 12.5%. If no further cut of the overall tax rate is enacted, Luxembourg’s competitiveness could be penalised with an overall tax rate of 26.01%--including the “solidarity surtax” and municipal business tax rate for Luxembourg City that remain unchanged--as from the fiscal year 2018.
Moreover, the 2017 tax reform, which was foreseen as a key structural reform to the Luxembourg corporate taxation system, did not go as far as expected. At PwC we believe the new tax measures only consist of slight amendments to the current Luxembourg tax law and do not constitute structural tax measures that Luxembourg needs to maintain and reinforce its position as a key investment location.
A final message?
We would like to reiterate our position that Luxembourg needs to reform its tax system in ways that will improve its attractiveness and competitive position. For a couple of years now, PwC Luxembourg has been considering potential new tax measures that would allow our country to keep its position of key location for investing and doing business, and that would also positively impact the overall Luxembourg economy.
Our initial propositions for a tax reform were reflected in our Future of Tax initiative that we undertook in 2016 together with TNS-Ilres.
We think a deeper cut in the corporate tax rate is needed, as well as other structural tax measures (e.g., abolition of the current net wealth tax regime, such regime being considered as “business unfriendly” by other countries), the introduction of an allowance for corporate equity and the broadening of the scope of exemptions from dividend withholding tax. In order to compensate for the cost of these measures, especially the reduction of the tax rate, to the state tax revenues, we would recommend broadening the tax base.