Luxembourg’s financial sector has faced a wave of tax avoidance legislation in recent years. But the impact of the earlier measures is likely to pale in comparison to the EU’s latest – the third Anti-Tax Avoidance Directive, known as the “Unshell directive”. Luxembourg tax specialists are anxious about its potential impact on the widespread use of shell companies, often known as ‘special purpose vehicles’, in Luxembourg company structures.
The industry was on edge last week, waiting for a possible Friday decision to fast-track the implementation into national law. That didn’t happen, so national implementation will have to await the next EU presidency, meaning it will be expected to be integrated into EU countries› national law by 1 January 2025.
While the proposed legislation remains for the moment just a proposal, the thinking last week was very concerned, “If you read this very strictly, if the implementation in Luxembourg is done very quickly, I think that can be quite difficult for the industry,” said Florent Trouiller, a partner at law firm Norton Rose Fulbright, in a Tuesday interview.
Not finalised
But the problem for companies considering the potential impact of ATAD-3 is that much is still not finalised. “The uncertainty around the compromise that we may end up with is something that is clearly a key point on the market,” said Raphaële Kamoun, counsel at the same firm. “We are all waiting for clarity on that and as to the timing.”
“Clients just want to be prepared for their future obligations and would like to just be in time in terms of any reorganisation they need to do,” said Kamoun.
Local tax experts see a proposed measure to permit a two-year backward look at a company’s behaviour as worrisome.
Judged on past history
“This is the difficult part of ATAD 3, said Trouiller. “You will be judged on something that has already occurred – there is a lack of predictability.” He said this probably breaches fundamental EU rules.
Taxpayers can normally adjust to or take appropriate measures to deal with new legislation. But, said Trouiller, the retroactive issue is “more difficult when speaking with clients.”
The increased scrutiny of tax affairs in the financial world follows global headlines fuelled by leaked document caches giving journalists a behind-the-scenes look at common corporate practices.
Fundamental freedoms
“The real difficulty is that we have all this discussion concerning aggressive tax planning and so on, and at the same time, you have these fundamental freedoms, which are the freedom of establishment, freedom of movement of capital,” said Trouiller. “You have to balance the need to put a framework in place and catch this potential aggressive tax planning and also manage these fundamental freedoms.”
“I think there is a real political pressure concerning the directive,” he added. He accepted the new scrutiny of corporate tax affairs. “This is a fair point, I mean this is the new environment.”
He sees this pressure stemming as “a discussion” between countries based on the relative size of their financial sector. “Countries with a financial sector that want to preserve their own industry and other countries that are really pushing hard in order to ensure that things are implemented in a way more favourable for them.”
Change business model
Companies that fall foul of the new regulations “will just stop what they are doing,” said Trouiller. “if you’re not able to have something that is sustainable, you have to change your business model.”
Any firm caught under the provisions of ATAD-3’s substance requirements could lose the right to benefit from EU directives or double-tax treaties. The legislation imposes reporting requirements that will give the authorities what they need to apply such sanctions.
There’s no certainty about much of this, explained Kamoun. “We have no clue about what and whether a double tax treaty would be made a sanction under ATAD-3.”
Exemption last hope
The degree of concern among financial centre participants about ATAD-3 has left them hoping for a last-minute reprieve, no matter how unpopular it turned out to be. “The industry is awaiting a clear exemption of all SPFs underneath a regulated or alternative investment fund structures to out of the scope of the directive.”
“I think it’s an important part of the compromise that we are expecting from the Commission because there are a lot of investments and structures using SPVs underneath,” said Kamoun. She pointed to the substance requirements as well as the reporting requirements. “For large investments and structures it can be really cumbersome to handle such reporting requirements,” she explained.