October 26, 2022

Luxembourg Draft Budget Law 2023: The Most Awaited Reverse Hybrid Clarification

On 12 October 2022, the finance minister presented the Luxembourg budget bill for fiscal year 2023.

For corporate tax payers, and particularly for funds, there is a most welcomed clarification on the scope of the reverse hybrid rule. The bill proposes to amend the Luxembourg income tax law to clarify that the reverse hybrid rule only applies to the extent that the non-taxation of the net income, that the investor realizes through the fiscally transparent entity, results from a mismatch on the qualification of the latter.

In other words, investors that due to their tax status benefit from a subjective exemption in their jurisdiction should not trigger the application of the reverse hybrid rule, given that in this case the non-taxation of the said net income is not attributable to the difference in qualification of the entity under Luxembourg law and the laws of the jurisdiction of the investor. This interpretation is in line with OECD BEPS Report (Action 2 Report, p. 57) and aligns Luxembourg position to other EU jurisdictions such as Ireland.

The budget bill also foresees a formal extension (which has previously been an administrative tolerance) of the deadline for filing the tax returns from 31 March to 31 December. The extension is expected to be effective as from financial year 2022, save for net wealth tax returns.

The budget bill contemplates several other measures, in particular for individuals such as reduction of the income threshold for the impatriate regime.