Luxembourg: The EU Parent Subsidiary Directive And Gibraltar

On 1 December, 2020, the Luxembourg tax authorities issued circular L.I.R 147/2, 166/2 and eval. n°63 on the application of EU Directive 2011/96 on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States (the “EU Parent Subsidiary Directive”) to Gibraltar companies (the “Circular”).

The EU Parent Subsidiary Directive was designed to eliminate double taxation of parent companies on the profits of their subsidiaries.

The Circular, applicable from 1 January, 2021, It clarifies that companies incorporated in Gibraltar (being either a parent or subsidiary of a Luxembourg company) will no longer benefit from the EU Parent Subsidiary Directive under Luxembourg law. Subject to certain exceptions which are clearly set out in the Circular, dividends received in Luxembourg from a Gibraltar companies will no longer benefit from the Luxembourg participation exemption. Similarly, the withholding tax exemption on outbound dividend distributions by a Luxembourg company to its parent Gibraltar company, currently permissible under the EU Parent Subsidiary Directive, would no longer be applicable under certain conditions.

The Circular follows a recent CJEU decision which held that companies incorporated in Gibraltar subject to local Gibraltar corporation tax should not be covered by the EU Parent Subsidiary Directive and therefore should not benefit from the various tax exemptions for profit distributions from subsidiaries to their parent companies provided therein. 

It should be noted that as of the date of this alert, there is no bilateral tax treaty between Luxembourg and Gibraltar. As a result, no exemption from withholding tax paid by a Luxembourg company to a Gibraltar corporate entity/resident tax payer (and vice versa) is available under the provisions of the EU Parent Subsidiary Directive or domestic Luxembourg legislation, except in limited circumstances.