If European financial advisers thought that the Directive on Administrative Cooperation (Dac 6) was going to be the only taxation measure they needed to deal with in 2020, they might want to keep an eye on Luxembourg.
The country has recently passed the so-called ‘exit rules’ which legislate on the transfer of assets and people’s tax residence.
This brings the EU’s Anti-Tax Avoidance Directive (Atad 1) into domestic law. Although it mainly targets corporations, there are implications for individual taxpayers as well, starting from 1 January 2020.
Up to the end of 2019, jurisdictions used to implement various exit taxation rules in order to levy capital gains at the time of residency transfer, even if the individual remained the owner of the assets, Ali Ganfoud, senior associate at law firm Denton Luxembourg, explained to International Adviser.
As a result, the Court of Justice of the European Union stated that a member state will be allowed to tax latent gains on existing assets transferred out of a jurisdiction only when they are sold or disposed of, which should happen in the destination country.
What has changed?
According to Deloitte Luxembourg, the way the value of such assets is considered will be different under the updated exit rules.
“Where assets are transferred into Luxembourg, the value of the assets, as determined by the exit state, must be used for Luxembourg tax purposes, unless that value does not reflect the fair market value (going concern value) of the assets,” the auditing firm said.
“The acquisition date of the assets is their historical acquisition date, as opposed to their transfer date. This rule applies to transfers of assets from any jurisdiction into Luxembourg, even from a non-EU member state.”
Additionally, people used to be able to indefinitely defer the payment of their tax liabilities, which won’t be an option any longer.
Spotlight on value
“It is important to note that these measures are EU wide and transposition is mandatory into national laws,” Ganfoud pointed out.
“Thus, a person relocating from an EU country to Luxembourg should assess whether the fair market value of his/her movable property is higher that its acquisition price, as the state of departure should be allowed to tax existing capital gains.
“He/she should keep documentation related to capital gains paid in the departure state. In case of disposal after relocation, this valuation should replace the initial acquisition price.
“In other words, only the increase in value of the asset after relocation should be considered for a taxation in Luxembourg.”
While the exit tax rules have aligned Luxembourg laws with the EU directive, they do not affect the capital gains tax regime applicable to private individuals, he added.
Ways to pay
But payment methods have been amended, Deloitte said.
Tax on capital gains accrued on the transfer of assets abroad will need to be paid one way or another, as deferring is no longer on the table.
“Deferrals now are allowed only for transfers to EU member states and certain EEA countries with which Luxembourg or the EU has concluded a mutual assistance agreement for the recovery of tax claims,” the firm added.
But the taxman can terminate any deferral agreements if they fail to meet one of five criteria:
- If such assets are “disposed of other than through certain tax-neutral transactions”;
- If they are relocated to a jurisdiction outside the EU;
- If the individual becomes bankrupt;
- If people fail to make their payments; or,
- If they fail to submit annual documents to tax authorities certifying the residence of the assets.
If taxpayers don’t qualify for a deferral, there is a provision allowing them to pay tax on their liabilities in instalments over a five-year period, depending on whether this can be arranged.
These payments will be interest-free and will not require a guarantee, in the case of Luxembourg; however, other member states may decide to do things differently.
Still attractive
But is this extra set of rules going to put people off relocating to Luxembourg?
Not according to Dentons’ Ganfoud.
“It should not discourage expats moving to Luxembourg as the country has implemented unilateral measures to take into consideration the potential exit tax levied by the state of departure upon relocation to Luxembourg.
“This will limit potential double taxation.
“Since 2015, a private individual holding shares representing more than 10% of a company, who becomes a Luxembourg taxpayer and has never been a Luxembourg tax resident, is allowed to consider that the acquisition price of these shares is their fair market value at the time of relocation.
“Thus, potential capital gains accrued prior to relocation are not taxable in Luxembourg,” he added.
