Luxembourg has long been an attractive destination for expats looking to establish residency in a tax-friendly environment. However, when leaving the country, these same individuals may find themselves facing an unexpected hurdle in the form of an exit tax.
The exit tax is a form of capital gains tax that applies to individuals who are leaving Luxembourg and taking their assets with them. While this tax can be an unexpected issue for some, it is important to understand the ins and outs of the exit tax and how it may impact your financial planning when considering to move out of Luxembourg.
In this article, we will take an overview of Luxembourg's exit tax and provide insight into how it works in various situations. However, exit tax is a complex and constantly evolving field that requires a deep understanding of international tax laws and regulations.
Individuals and companies must seek professional advice from qualified tax experts before making decisions to cross-border transfers of assets. The advice can help ensure compliance with the latest laws and regulations, mitigate potential tax liabilities, and avoid costly legal disputes.
What is an exit tax and who pays it
An exit tax is a tax that is imposed on individuals or businesses when they leave a country and transfer their assets. The purpose of the tax is to prevent tax evasion by individuals or businesses who might seek to move their assets to a lower-tax jurisdiction.
More specifically, the exit tax in Luxembourg is a tax designed to prevent taxpayers from avoiding tax by transferring their residence, activities, or assets out of a country without paying the appropriate taxes on deemed unrealized capital gains.
This tax is typically imposed on assets such as intellectual property or patents, that are often transferred to a low-tax or no-tax jurisdiction outside the EU to avoid paying taxes on the profits generated from the sale of those assets.
The exit tax requires the member state to determine the amount of unrealized capital gains on the assets transferred and impose the tax upon the transfer. The tax amount is equal to the going concern value of the transferred assets at the date of the transfer less their tax value.
The tax is collected over a period of 5 years in the case of a transfer to a country member of the European Union with which Luxembourg or the EU has concluded a mutual agreement for the recovery of tax claims. For transfers to any other jurisdiction, deferrals are no longer permitted.
What laws regulate this type of tax
The laws regulating the exit tax in Luxembourg began to appear in 2018, marked by the adoption of a series of projects and directives.
One of these is the Anti-Tax Avoidance Directive of 12 July 2016 (ATAD 1), which was transposed into national law through the law of December 21, 2018. The ATAD was developed in response to the OECD's BEPS actions of 2015, aimed at combating corporate tax evasion. The directive includes measures to fight against aggressive tax planning, improve tax transparency, and promote fair tax competition among all companies in the EU.
The ATAD comprises five anti-tax evasion measures that became effective starting on January 1, 2019. One of these measures is the exit tax, which aims to prevent companies from relocating their assets to avoid paying taxes. The ATAD provides a coherent, coordinated, and flexible implementation framework for these measures, allowing each member state to adopt stricter measures in their national legislation.
In 2019, new measures were taken in fighting tax fraud, tax evasion, and aggressive tax planning. The Law of December 20, 2019, transposed into national law the EU Anti-Tax Avoidance Directive of 29 May 2017 (ATAD 2) which amended the ATAD 1 with regard to hybrid mismatches with third countries. The Law is effective from financial years starting on or after 1 January 2020.
The purpose of ATAD 2 is to supplement the provisions of ATAD 1 and contains measures aimed at neutralizing hybrid mismatches involving third countries. The text of ATAD 1 is limited to rules aimed at neutralizing certain hybrid mismatches (hybrid entities and hybrid financial instruments) exploiting differences between the tax provisions of two member states.
The text of ATAD 2 addresses hybrid mismatches between member states and third countries and extends the scope of ATAD to other hybrid mismatches (hybrid permanent establishments, imported mismatches, hybrid transfers, dual resident entities). These measures are part of the European Union's wider efforts to combat tax avoidance and evasion and create a more level playing field for all taxpayers.
How assets are transferred to Luxembourg
When transferring assets to Luxembourg, there are important considerations to keep in mind.
If a taxpayer transfers their tax residence, activities carried out through a foreign permanent establishment (PE), assets of a foreign PE, or an enterprise into Luxembourg, the value of net invested assets must be equal to the value determined in the exit state at the beginning of the first financial year in Luxembourg. This value may be challenged by Luxembourg if it is greater than the going concern value of the assets.
It's also important to note that the acquisition date of the transferred assets is their historical acquisition date, not the transfer date.
How assets are withdrawn from Luxembourg
When a taxpayer decides to move their assets or business out of Luxembourg, several tax implications need to be considered. There are specific rules for the transfer of assets out of the country to ensure that the state receives its fair share of taxes.
Luxembourg’s exit tax provisions cover assets forming part of an undertaking or a PE (permanent establishment) as well as individual assets and apply to transfers to both EU and non-EU jurisdictions.
As for transactions that are considered taxable for exit tax purposes, the following are included:
Transferring assets from an undertaking in Luxembourg to a PE in another jurisdiction, where Luxembourg no longer has the right to tax the assets.
Transferring the assets of a Luxembourg PE to an undertaking, registered office, or PE in another jurisdiction where Luxembourg no longer has the right to tax the assets.
Transferring tax residence, habitual abode, or registered seat and head office to another jurisdiction, except for assets that remain effectively connected to a local PE and whose book values are maintained in Luxembourg.
Transferring the activities of a local PE to another jurisdiction where Luxembourg no longer has the right to tax the assets.
The exit tax owed is calculated by subtracting the tax value of the going concern value of the transferred assets at the date of the transfer.
What are the exemptions and deductions for exit tax in Luxembourg
Luxembourg's exit tax provisions offer some exemptions and deductions to reduce the burden of the tax according to the circumstances of the individual or company. These exemptions and discounts may vary following the specific provisions of the tax treaty between Luxembourg and the country to which the individual or company is moving to.
Some of the possible exemptions and rebates from exit tax in Luxembourg are the following:
Moving within the European Union
Individuals or companies moving within the European Union can defer the payment of exit tax for up to 5 years.
Exemption from participation
There is an exemption for the transfer of assets or activities between a parent company and its subsidiary, provided the parent company retains a minimum 10% shareholding in the subsidiary for 12 months after the transfer.
Tax treaty provisions
Luxembourg has signed several tax treaties with other countries, which may provide for reduced rates or exemption from exit tax. These tax treaties usually apply to certain types of income or assets and vary according to each treaty, so it is important to check the specific treaty provisions of the country in question.
Double Taxation Exemption
If the moving individual or entity has paid tax on the same income or assets in another country, they may qualify for double taxation relief under the relevant tax treaty or domestic tax law. This can help reduce or eliminate the Luxembourg departure tax liability.
Payment delay of exit tax
The exit tax provisions in Luxembourg have been amended to comply with ATAD. The taxpayer may request the payment of the exit tax debt in equal installments over a maximum period of five years only for transfers to EU member states and certain EEA countries that have a mutual assistance agreement for tax claims with Luxembourg or the EU.
However, the deferral will be terminated, and the tax will become due immediately in certain cases:
If the assets or the business are disposed of through transactions that are not tax-neutral
If the assets, the business, or the tax residence are transferred to a non-EU member state without fulfilling certain conditions.
If the taxpayer becomes bankrupt.
If the taxpayer fails to pay installments as they become due.
If the taxpayer fails to provide annual documentation certifying that the assets, business, or tax residence have not been transferred in violation of the tax deferral provisions.
It’s important to keep in mind that the availability and scope of exemptions and deductions to the Luxembourg exit tax may depend also on the circumstances of the individual or company, as well as on the relevant provisions of the tax treaty and the domestic tax law.