ATAD Luxembourg Implementation: General anti abuse rule

In a nutshell: what is a general anti-abuse rule?

A general anti-abuse rule ("GAAR") is generally a broad and general principle enacted in the tax laws of a State with the aim to counteract tax avoidance arrangements and targeting principally abusive and artificial schemes.

Is the GAAR a new concept for Luxembourg?

No. Luxembourg has currently already a GAAR codified in the Luxembourg adaptation law (Steueranpassungsgesetz - "StAnpG"), which has given, in particular in the last years, rather significant Luxembourg case law.

What has changed if the concept is not new?

Our existing Luxembourg GAAR will be amended (not replaced) to come closer to the wording of the GAAR included in the ATAD. As a consequence, the abuse of law situations where the GAAR may be applied could be considered as being extended as opposed to the current GAAR. However, this is not yet clear, as most of the amendments of §6 StAnpG do reflect components derived from the recent Luxembourg case law already applicable nowadays to the concept of abuse of law.

What is the scope of the new GAAR?

The scope of the §6 StAnpG, as amended by the ATAD Draft Law, will not change and as such target individual and corporate taxpayers regarding domestic or cross-border situations, opposed to the GAAR of the ATAD which only covers corporate taxpayers.

What are the most significant changes to the GAAR as implemented under the ATAD Draft Law?

§6 StAnpG, as amended by the ATAD Draft Law, will henceforth be triggered if three conditions are met:

• use of forms and institutions of the law;
• the purpose, or one of the purposes, of this use is to avoid or reduce the tax charge in a way that goes against the object or purpose of the tax law; and
• the non-genuine aspect of legal arrangement used.

As such, three differences can rather easily be spotted as opposed to the current wording of the GAAR.

First, the use of forms and institutions of the law will no longer be limited to those of private law. Indeed, under the new wording, the use of private as well as public forms and institutions of the law may fall within the GAAR.

Second, the GAAR now explicitly clarifies that it is sufficient that one of the purposes of the taxpayer is to avoid or reduce the tax charge in a way that goes against the aim or the finality of the tax law. As such, the new GAAR will apply to transactions where one of the main purposes is to obtain a tax advantage, as opposed to the exclusive purpose of the current rules. However, in our view, this change is of less relevance considering the most recent case law regarding abuse of law situations in Luxembourg.

Third, the purpose (or one of the purposes) must be to avoid or reduce the tax charge in a way that goes against the aim or the finality of the tax law, and not be the mere avoidance or reduction of the tax liability. The reference to "tax law" is larger and may include abuses as regards tax reimbursements or tax credits.

What is in your opinion key under the new GAAR?

The key concept is in our view the question as to whether a given legal arrangement is genuine or not. A non-genuine arrangement will be the one put in place for no valid commercial reasons and which does not reflect economic reality. As such, the economic rationale of a given structure or transaction will be key.

The State Council commentaries highlighted that the principle of the “choice of the least taxed way” (choix de la voie la moins imposée) may still be applied by the taxpayers, except where (i) the purpose, or one of the purposes, of this use is to avoid or reduce the tax charge in a way that goes against the object or purpose of the tax law, and (ii) the choice is not genuine considering all relevant facts and circumstances, i.e., where arrangements have been put in place for no valid commercial reasons which do not reflect economic reality.

Further, the State Council stressed that these commercial reasons need to have valid underlying economic purposes (i.e., presence of economic reasons). As such, the mere presence of commercial reasons is not sufficient; they must in addition be real and present an adequate economic advantage beyond the tax advantage gained. In this context, the Council of State referred to the recent Luxembourg case law as regards abuse of law.

What is the consequence if the GAAR is applied?

Transactions considered as abusive in accordance with the GAAR will be ignored by the Luxembourg tax authorities, and taxes will be computed based on the "genuine route" with regard to all relevant facts and circumstances.

How will the burden of proof be applied under the new GAAR?

The burden of proof will remain unchanged. As such, the existence of an abuse and its constituting elements needs to be proven by the Luxembourg tax authorities. However, the latter is not required to prove the absence of sufficient valid commercial reasons that could justify the transaction, but must merely demonstrate the likelihood of such absence. Once this likelihood is demonstrated, the taxpayer must prove the presence of such sufficient valid commercial reasons justifying the transaction.

The State Council emphasised in its commentaries that as regards the burden of proof, the case law already existing in that matter would remain valid and as such provide a welcoming level of legal certainty in this area.

How will the GAAR interact with other anti-abuse provisions?

The State Council commentaries emphasized that the GAAR will not be applied in case a specific anti-abuse rule is triggered based on the concept of specialia generalibus derogant. However, whilst these specific anti-abuse rules prevail over the GAAR, the latter may come into play if these specific anti-abuse rules would not be applied (e.g., if their conditions would not be complied with).

When will this rule be applicable?

The GAAR will be applicable as of 1 January 2019 as far as an income will be realised by the taxpayer.

What will be the impacts of the new GAAR in Luxembourg?

Whilst it needs to be monitored whether these changes will have an effect on the application of the current GAAR as established by relevant case law, we currently do not anticipate a major impact as a result of this alignment. Further, it will also have to be monitored whether the new wording of our GAAR will be challenged as it slightly differs from the GAAR wording of ATAD. In our opinion, this shouldn't be the case as the new GAAR reflects the key elements of the GAAR wording of ATAD and is in line with its expectations and goals. 

Authored by Gérard Neiens,  Jean-Philippe Monmousseau, and Pierre-Luc Wolff

Hogan Lovells (Luxembourg) LLP is registered with the Luxembourg bar.