EU Blacklist update

Non-cooperative jurisdictions for tax purposes

Following on the Higher Administrative Court (“Cour Administrative”) case N°39193C originated on 23 November 2017, the Lower Administrative Court (“Tribunal Administratif”) confirmed the position in the case N°42432 on 27 January 2023 concerning the Luxembourg tax treatment of the redemption of alphabet shares (i.e. classes of shares not tracking specific investments).

Background

EU Blacklist (“Blacklist”) was established by EU Council in December 2017 as part of the strategy to promote good taxation governance worldwide. The blacklist identifies countries considered non-cooperative for tax purposes, i.e., countries that fail to meet EU’s criteria for good tax governance principles (mainly involving tax avoidance and harmful practices). The three main criteria to be assessed are tax transparency, fair taxation, and implementation of OECD – BEPS measures (tax Base Erosion and Profit Shifting).

Blacklisted jurisdictions may confront EU Member States tax measures, stricter reporting rules and non-eligibility for some EU funding (European Fund for Sustainable Development).

On 14 February 2023, the EU Council published a new official update of the Blacklist in the Official Journal of the EU, now to include British Virgin Islands, Costa Rica, Marshall Islands and Russia. A new update is expected in October 2023.

Updated EU Blacklist

As a result of these new 4 additions, the Blacklist is now composed by 16 jurisdictions:

Impact of Blacklist update on Luxembourg investment structures

EU Member states are encouraged to impose administrative measures for tax purposes when transactions involve blacklisted jurisdictions.

Luxembourg tax law foresees measures that could mainly concern:

1. Non-deductibility of costs incurred in a listed jurisdiction, meaning mainly interest and royalties;
2. Under EU DAC6 – Mandatory Disclosure Rules, it may impact in specific and stricter reporting rules for cross-border arrangements with associated enterprises. Luxembourg taxpayers may then need to:

i.Disclose its intra-group transactions with blacklisted countries to the Luxembourg Tax Authorities; and

ii.Report tax-deductible payments made to associated enterprises in jurisdictions that do not impose Corporate tax (or 0%) or blacklisted jurisdictions, under Hallmark C1b) (i) and             (ii) and regardless of the Main Benefit Test (MBT).

Other measures that EU Member States may impose to blacklisted jurisdiction are:

1. Higher or additional Withholding tax on payments received to tackle improper exemptions or refunds;
2. Controlled Foreign Company (CFC) rules to limit artificial deferral of tax to offshore, low-taxed entities; and
3. Limitation of Participation Exemption or profit distribution (dividend distribution);

Takeaway

Luxembourg taxpayers engaging in transactions with blacklisted jurisdictions (mainly multinational companies and investment funds) should assess the potential tax implications of the updated Blacklist on their transactions and structures, and monitor coming further updates of the forenamed list.