Upcoming measure denying the tax deduction of interest and royalties to entities in blacklisted jurisdictions

The Luxembourg Government adopted on 25 March 2020 a draft law amending the Luxembourg income tax law so as to deny, in Luxembourg, the deduction of interest and royalty expenses directed to entities or persons located in non-cooperative jurisdictions. This measure follows the recommendations made by the EU Council and happens a few weeks after the Cayman Islands were added to the EU blacklist. Since the draft law has not yet been published, the details of the measure and its date of application remain to be confirmed.

Background:

On 18 February 2020, the EU Council updated the EU list of non-cooperative tax jurisdictions by adding Cayman Islands, Palau, Panama and Seychelles. The EU Council regularly reviews and updates the list, taking into consideration the evolving deadlines for jurisdictions to deliver on their commitments and the evolution of the listing criteria that the EU uses to establish the list.

In parallel, the EU Council produced a guidance on further coordination of national defensive measures in the tax area towards non-cooperative jurisdictions in December 2019 and invited EU Member States to apply one of the following legislative defensive measures in taxation vis-à-vis the listed jurisdictions as of 1 January 2021, with the aim of encouraging those jurisdictions’ compliance with the Code of Conduct screening criteria on fair taxation and transparency:

• non-deductibility of costs;
• CFC rules;
• withholding tax measures;
• limitation of the participation exemption on profit distributions.

The Luxembourg Government decided to introduce the first of these measures, i.e. the non- deductibility of costs.