On 30 March 2020, the Luxembourg government filed Bill of law No 7547 implementing certain guidelines approved by the EU Council on 5 December 2019 related to the non-tax deductibility of interest and royalty payments made to entities located in jurisdictions appearing on the EU list of non-cooperative jurisdictions (the “EU List”). The final vote is expected to take place in the coming months.

The new measure would apply to accruals and payments made to related parties as of 1 January 2021, based on a list of jurisdictions to be proposed by the Luxembourg government during the second half of 2020 taking into consideration the EU List at the date of the proposal.

Under the proposed measure, interest or royalty accruals or payments should be non-tax deductible, at the level of the Luxembourg paying entity, if all of the following conditions are met:

1. The recipient of the interest or royalties is a corporate entity.
2. The recipient is a related party within the meaning of Article 56 LITL (dealing with Luxembourg transfer pricing rules).
3. The recipient is established in a country or territory appearing on a list of non-cooperative countries for tax purposes.

The current EU list, revised in February 2020, includes the following jurisdictions: American Samoa, Cayman Islands (expected to be delisted later this year), Fiji, Guam, Oman, Palau, Panama, Samoa, Seychelles, Trinidad and Tobago, the US Virgin Islands and Vanuatu.

Where a taxpayer provides evidence that a transaction was made for valid business reasons that reflect economic reality, such accruals or payments will theoretically remain tax deductible. Payments outside the scope of this rule may nevertheless become non-tax deductible by application of other domestic rules, such as interest limitation or anti-hybrid rules.

Finally, the tax circular of 7 May 2018 stating the measures to be taken by the tax authorities where a Luxembourg company has transactions with listed non-cooperative jurisdictions continues to apply.

Taxpayers performing transactions with related entities located in jurisdictions included on the EU list of non-cooperative jurisdictions will need to assess the impact of this new measure on their operations