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    Italy and Reshoring of Economic Activities

    Italy and Reshoring of Economic Activities – Introduction

    On 16 October 2023, the Council of Ministers preliminarily approved a legislative decree proposing significant reforms to international taxation in Italy.

    This decree is currently undergoing review by relevant parliamentary committees before it officially becomes law.

    An interesting proposal is a relief for the so-called ‘reshoring’ of economic activities.

    Let’s look at this in some more detail.

    Implementation and Timeline

    Expected to come into force after final approval of the legislative decree (anticipated by December 31, 2023), the ‘reshoring’ provisions aim to rejuvenate Italy’s economic landscape.

    However, their actual enactment hinges on authorization from the European Commission.

    Reshoring of Economic Activities

    Article 6 of the draft legislative decree outlines a specialized tax incentive designed to incentivize the transfer of ‘economic activities’ to Italy.

    Unlike similar measures in other nations, Italy’s decree extends beyond specific sectors, aiming to encompass ‘economic activities’ regardless of industry.

    Under the proposed measure, income derived from business activities transferred from non-EU or non-EEA countries to Italy will enjoy a 50% exemption from income tax and IRAP (Regional Production Tax) for a designated period:

    The relief spans the tax period during the transfer and the following five tax periods. However, ‘economic activities’ already conducted in Italy within the preceding 24 months are excluded from eligibility. Interpretive Challenges and Scope The decree poses several questions for stakeholders, primarily concerning its application scope.

    What are economic activities?

    The term ‘economic activities’ casts a wide net, referencing income from business activities conducted in non-EU/EEA countries and relocated to Italy.

    This suggests potential application scenarios, including the relocation of non-EU/EEA companies’ registered offices to Italy.

    Consequential matters?

    Though the draft decree doesn’t explicitly mention the combined application of ‘reshoring’ relief and tax basis adjustment provisions, such as Article 166-bis of the Consolidated Income Tax Law (TUIR), experts opine that these could complement each other.

    This combination might lead to higher depreciation or lower capital gains, further reducing the taxable base.

    Complexities and Considerations

    Determining the application of ‘reshoring’ relief, along with compliance with other provisions like ‘Pillar 2’ and ‘Qualifying Domestic Minimum Top-Up Taxes,’ poses intricate challenges.

    The definition of ‘economic activity’ under European Union law highlights the complexity of identifying eligible activities.

    Moreover, entities already established in Italy undergoing functional changes might potentially qualify for ‘reshoring’ benefits.

    This includes transformations within the value chain, such as a distributor evolving into a manufacturing entity.

    Compliance Requirements and Forfeiture Conditions

    To benefit from the incentive, taxpayers must maintain meticulous accounting records to verify income determination and eligible production values.

    The legislation stipulates forfeiture conditions, triggering the recovery of unpaid taxes in case of activity transfer out of Italy within specific periods following ‘reshoring.’


    Italy’s proposed tax incentive for ‘reshoring’ economic activities presents opportunities and complexities for businesses.

    The legislation’s interpretation and application nuances warrant thorough understanding, and compliance measures are crucial to harness the benefits while navigating the regulatory landscape effectively.


    If you have any queries around Italy and reshoring of economic activities, or Italian tax matters in general then please get in touch. 


    The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article.

    BVI Removed from EU’s ‘Blacklist’

    BVI removed from blacklist – Introduction


    In a significant development for the British Virgin Islands (BVI), the European Union (EU) has officially removed the BVI from its list of non-cooperative jurisdictions for tax purposes. 


    This is important news for the BVI, a prominent offshore financial centre, and reflects its commitment to adhere to international standards, particularly those set by the OECD Global Forum regarding the exchange of information on request.


    The EU’s announcement


    The EU press release regarding this development stated that the British Virgin Islands had been removed from the list due to amendments made in its framework concerning the exchange of information on request, specifically criterion 1.2. 


    The EU further noted that the BVI would be reassessed in line with the OECD standard. While this reassessment is pending, the jurisdiction has been placed in Annex II.


    What is the EU’s Non-Cooperative Jurisdictions List?


    The EU’s list of non-cooperative jurisdictions for tax purposes was established in December 2017 as part of the EU’s external taxation strategy. 


    Its primary goal is to support worldwide efforts in promoting good tax governance. 


    The EU Council has established a set of criteria by which jurisdictions are evaluated. 


    These criteria encompass areas like tax transparency, fair taxation, and the implementation of international standards aimed at preventing tax base erosion and profit shifting. 


    The code of conduct group’s chair engages in political and procedural dialogues with relevant international organizations and jurisdictions as needed.


    Understanding the BVI Listing


    The BVI’s journey towards removal from the EU’s list of non-cooperative jurisdictions began when, on 9 November 2022, the OECD Global Forum published its second-round Peer Review Report on the BVI. 


    This report revealed that the BVI’s rating had been downgraded from ‘largely compliant’ to ‘partially compliant.’ Importantly, a rating below ‘largely compliant’ automatically led to a jurisdiction being placed on the European Union’s list of non-cooperative jurisdictions for tax purposes.


    The ‘partially compliant’ rating assigned to the BVI encompassed the period from 1 March 2016, to 30 June 2020, considering exchange of information requests received during this timeframe. 


    It also factored in a ‘block period’ from 17 September 2017, to 31 December 2018, which was due to the disruptive impact of Hurricane Irma. Furthermore, the report assessed the legal and regulatory framework in place as of 9 September 2022.


    Crucially, this rating did not account for the legislative changes introduced in 2022, which included the BVI Business Companies Amendment Act 2022 and the BVI Business Amendment Regulations 2022, both of which came into effect on 1 January 2023.


    BVI removed from blacklist – Conclusion


    The removal of the British Virgin Islands from the EU’s list of non-cooperative jurisdictions for tax purposes is a significant milestone for the BVI and its reputation as a financial center. 


    It reflects the dedication of the BVI government and stakeholders in aligning with international standards and demonstrating a commitment to transparency and cooperation. 


    This development not only bolsters the BVI’s status but also highlights the importance of maintaining adherence to global tax governance standards in an increasingly interconnected world.


    If you have any queries about BVI removed from blacklist, BVI matters in general, or any tax matters, then please get in touch.

    EU tax rules for digital platforms – unpacking DAC7 and its potential impact

    EU tax rules for digital platforms – Introduction

    In the ever-evolving landscape of global taxation, the European Union (EU) has taken a significant stride in enforcing tax transparency on digital platforms.

    The recent extension of EU tax transparency rules to digital platforms has introduced new obligations on platform operators, shaking up the way information is collected, verified, and reported for sellers engaging in what are termed as “Relevant Activities.”

    While initially an EU initiative, these rules have far-reaching implications for platform operators beyond the EU, especially those established in non-EU countries like the United States.

    In this article, we delve into the intricacies of these rules, their impact, and what platform operators need to know.

    EU’s Regulatory Leap: DAC7 in Action

    On January 1, 2023, the EU’s regulations implementing the OECD’s Model Reporting Rules for Digital Platforms, known as DAC7, officially came into effect.

    With a deadline of December 31, 2022, EU Member States were mandated to incorporate DAC7 into their national legislation.

    The overarching aim of these regulations is to ensure tax compliance among participants in the digital economy and level the playing field between online and traditional businesses.

    While the UK’s regulations implementing these rules are still in draft form, they are slated to take effect from January 1, 2024, with the first reports expected in 2025.

    The UK’s implementation of these rules will be closely aligned with EU regulations to streamline reporting obligations and reduce duplication.

    Unpacking DAC7: What Platform Operators Must Know

    Scope of the Requirements

    The crux of DAC7 lies in its broad-ranging requirements for platform operators. In essence, platform operators falling under the scope of these rules must:

    1. Collect information as part of their due diligence obligations to identify EU-based sellers engaging in Relevant Activities on their platform.
    2. Verify the accuracy of collected information by consulting their records and public databases.
    3. Report identification and transaction information related to Relevant Activities carried out by these sellers to the relevant Member State.

    Who Needs to Comply?

    DAC7’s focus centers on platform operators.

    The term “platform operator” encompasses entities that provide software connecting sellers with users to perform Relevant Activities.

    Compliance requirements kick in for platform operators that are either residents of a Member State for tax purposes or fulfill specific conditions like being incorporated under Member State laws, having their management based in a Member State, or having a permanent establishment in a Member State without a jurisdictional information exchange agreement.

    Defining Relevant Activities

    Central to DAC7 are the “Relevant Activities,” encompassing activities like renting immovable property, personal services facilitated through the platform, sale of tangible goods, and rental of transport modes.

    The Data Collection Process

    Platform operators in scope of DAC7 are required to conduct due diligence to collect seller information.

    However, exceptions are provided for sellers falling under certain thresholds. Notably, sellers with fewer than 30 sales or a consideration of less than 2,000 euros, governmental entities, listed entities, and certain lessors of immovable property fall outside the due diligence scope.

    The collected information includes a range of details such as names, addresses, tax IDs, VAT registration numbers, and more. Verification of this data’s accuracy is paramount, and operators are encouraged to utilize electronic interfaces provided by Member States or the EU for authentication purposes.

    Reporting Requirements under EU tax rules for digital platforms

    For sellers identified through due diligence, platform operators must collect and report a host of transaction-related information. This includes financial account numbers, consideration amounts, activity volumes, fees, commissions, and taxes withheld.

    Navigating Non-Cooperative Sellers

    DAC7 outlines measures platform operators must take against non-cooperative sellers. If sellers fail to provide requested information after two reminders, operators can close their accounts or withhold payments until compliance is achieved.

    Timing and Penalties

    Compliance timelines are well-defined: due diligence and verification by December 31 of the reporting year and information reporting by January 31 of the subsequent year.

    Fines for non-compliance should be “effective, proportionate, and dissuasive,” although exact penalties vary by Member State.

    The Global Impact of EU tax rules for digital platforms

    The extension of EU tax transparency rules transcends geographical boundaries, impacting non-EU platform operators with ties to the EU.

    For instance, US-based operators accommodating EU-based sellers or property rentals in the EU now need to adapt their operations to comply with DAC7.

    EU tax rules for digital platforms – conclusion

    In a digitally connected world, tax transparency is evolving rapidly. As platform operators, it’s crucial to remain informed about regulations like DAC7 that impact your business operations.

    From information collection and verification to reporting and compliance, understanding the nuances is essential for a smooth transition.

    As the tax landscape continues to reshape, being proactive in embracing change and adapting to new norms will set the stage for sustainable growth and compliance in an ever-evolving global marketplace.






    If you have any queries about this article on the EU tax rules for digital platforms or any other international tax matters, then please do get in touch.

    The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article..

    Quad Island Forum convenes to address economic crime and international tax offences

    In a notable step towards combating overseas economic crime and tax offences, representatives from the Financial Intelligence Units of Gibraltar, Guernsey, Isle of Man, and Jersey met at London’s Gibraltar House.

    The meeting marked the continued commitment of the Quad Island Form to strengthen its framework and enhance collaboration with other authorities responsible for tackling financial crime.

    During the three-day event, participants engaged in productive discussions involving the Economic Crime and Confiscation Unit from Jersey and the Isle of Man Proactive International Money Laundering Investigation Team. The primary focus was on sharing best practices in preparation for upcoming Moneyval assessments.

    An important outcome of the meeting was the establishment of a dedicated subgroup that integrates tax authorities from all four jurisdictions. This initiative aims to foster greater cooperation between tax authorities and FIUs, enabling them to combat serious tax-related crimes and sophisticated fraud schemes that result in substantial illicit gains.

    The participants discussed other matters, including:

    The formation of this sub-group represents an encouraging step, showcasing the commitment of each jurisdiction to equip themselves with comprehensive financial intelligence and mechanisms to target criminals and illicit proceeds.

    It also serves as a collaborative platform for sharing knowledge and experiences, allowing the four jurisdictions to work collectively towards their objectives.

    Recognising the significance of international cooperation in combating money laundering, financial terrorism, and proliferation, the Forum emphasises the importance of collaboration, providing a vital avenue for identifying and addressing criminal activities effectively. The Forum members share common values, face similar challenges, and closely collaborate on issues of mutual importance.

    Lynette Chaudhary, Director of Sovereign Tax Services, welcomes the Forum’s continued commitment to strengthening its framework and expanding collaboration. Emphasising the collaborative approach would facilitate closer working and knowledge sharing within the quad, and aid in the fight against financial crime.

    Hedge your bets: Spain’s new Ruling on Non-resident hedge funds

    Spain non-resident hedge funds – Introduction

    A recent court judgment has held that non resident hedge funds should be treated like residents in Spain if they meet certain requirements.

    Under the Non-resident Income Tax Law, hedge funds resident in Spain are taxed at a lower rate of 1%, while those resident in other countries are taxed at a higher rate of 19%, unless there is a relevant double tax treaty.

    The Supreme Court ruled that this different treatment is discriminatory and goes against the free movement of capital regulated in article 63 of the Treaty on the Functioning of the European Union.

    More detail on the Supreme Court’s decision

    The court held that non-resident hedge funds should be treated like residents if they can prove that they are open-ended entities, that they have relevant authorization, and that they are managed by an authorized management company pursuant to the terms of Directive 2011/61/EU.

    The nonresident hedge fund has the burden to prove these requirements, but a certain flexibility should be allowed due to the lack of specific regulations in Spain in this regard. If the Spanish authorities have reservations about the documentation provided by the fund, they must initiate an exchange of information procedure with its State of residence.

    The Court also concluded that the restriction on the free movement of capital could only be considered neutralized by the provisions of a double tax treaty if the treaty permits the hedge fund (not its members) to deduct the total amount of Spanish tax withheld in excess. However, given the way hedge funds operate and are taxed, that neutralization is impossible in practice.

    What is the significance of the decision?

    This judgment is significant as it removes discrimination against nonresident hedge funds and brings Spain in line with the free movement of capital provisions of the Treaty on the Functioning of the European Union.

    The decision clarifies the requirements that nonresident hedge funds must meet to be treated like residents and offers some flexibility in terms of providing documentation. It also highlights the difficulty in neutralizing restrictions on the free movement of capital through double tax treaties in practice.

    Spain non-resident hedge funds – Conclusion

    In conclusion, the recent Supreme Court judgment in Spain has removed discrimination against nonresident hedge funds and clarified the requirements for them to be treated like residents.

    This decision is in line with the free movement of capital provisions of the Treaty on the Functioning of the European Union and offers some flexibility in terms of providing documentation.

    However, the decision also highlights the difficulty in neutralizing restrictions on the free movement of capital through double tax treaties in practice.

    If you have any queries about issues around Spain non-resident hedge funds, or Spanish tax matters in general, then please do get in touch.

    The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article.

    ATAD 3 – “She sells corporate shells…” (Part II)

    ATAD 3 – Introduction

    Over a year ago, we wrote an article called “She sells corporate shells” about the EU Commission’s proposal for a directive imposing new rules to prevent the misuse of shell entities for tax purposes.

    In January 2023, the European Parliament approved the European Commission’s draft directive known as ATAD 3 to prevent the misuse of shell entities for tax purposes.

    The directive includes several indicators of minimum substance to assess if an entity has no or minimal economic activity, which could result in the denial of certain tax benefits based on treaties or EU directives.

    Unlike Pillar 2, ATAD 3 is not limited to international or domestic groups with global revenues exceeding EUR 750 million, meaning it will impact many small and medium-sized enterprises with an EU presence, increasing the administrative burden.

    ATAD 3 – What’s the current plan?

    The European Council is not bound by the amended text and may still amend or decide not to issue the directive.

    The Council will have the final vote, and ATAD 3 will be on the agenda of the European Council Ecofin meeting of 16 May 2023.

    Member States are meant to transpose ATAD 3 into domestic law by 30 June 2023, and the directive would apply as of 1 January 2024, although the European Commission may relax the timeframe in light of the short timeframe for final adoption and implementation.

    What will ATAD 3 target?

    ATAD 3 targets passive undertakings that are tax resident in an EU Member State and deemed not to have minimum substance.

    The directive aims to bring more entities into scope by lowering some gateway thresholds but clarifies that the intra-group outsourcing of the administration of day-to-day operations and decision-making on significant functions is not considered a gateway.

    Certain entities, including UCITS, AIFs, AIFMs, and certain domestic holding companies, will benefit from a carve-out and be exempt from reporting obligations. However, entities owned by regulated financial undertakings that have as their object the holding of assets or the investment of funds did not retain the proposed amendment to introduce a carve-out.

    If an entity passes all three gateways, it will have to report certain information regarding indicators of minimum substance through its annual tax return.

    Failing to report

    Failure to comply with the reporting obligation triggers a penalty of at least 2% of the entity’s revenue, and for false declarations, an additional penalty of at least 4% of the entity’s revenue would be due.

    If an entity lacks substance in one of the indicators or fails to provide adequate supporting documentation, that entity is presumed to be a shell entity. However, an entity has the right to rebut this presumption.

    If the entity cannot rebut the presumption, it will not receive a certificate of tax residence from its EU Member State of residence, resulting in the disallowance of any tax advantage gained through bilateral tax treaties of the entity’s resident jurisdiction or through EU Directives.

    Regardless of whether the entity is classified as a shell, the reported information will be exchanged automatically.

    Anything else?

    Additionally, the European Commission is working on a new taxation package, including the Securing the Activity Framework of Enablers initiative and the FASTER proposal, aiming to introduce a new EU-wide system for withholding tax to prevent tax abuse in the field of withholding taxes.

    ATAD 3 – Conclusion

    The implementation of ATAD 3 and other initiatives to restrain the use of shell entities and aggressive tax planning may have an important impact on existing structures, and entities should be carefully checked on a case-by-case basis before the relevant date of entry into force.

    If you have any queries about this article, or the matters discussed more generally, then please do not hesitate to get in touch.

    The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article.

    Airbnb WHT case- CoJ decides online withholding tax is OK

    Airbnb WHT – Introduction

    In a recent court case, the Court of Justice in the European Union (EU) has ruled that it is legally acceptable for Italy to impose a withholding tax (WHT) and data-gathering obligations on non-resident online platforms that facilitate short-term property rentals like holiday lets.

    However, the obligation to appoint an Italian tax representative liable to pay the WHT was prohibited by the EU law fundamental freedom to provide services.

    Wider implications?

    The ruling has implications for other EU member states with similar rental markets, as they might also be tempted to bring in their own WHT regimes that could impact non-resident platforms.

    The case began when Italy introduced three obligations on non-resident platforms in the short-term letting sector in 2017:

    (1) collecting income-related data on Italian rentals,

    (2) withholding tax on rental income, and

    (3) appointing a local tax representative with responsibility for withholding the tax.

    Airbnb WHT challenge

    Airbnb challenged these rules, arguing that they were incompatible with the freedom to provide services.

    The ruling is part of the EU’s ongoing attempts to regulate the economic models of online platforms in areas such as tax and data-protection.

    The judgment concerns tax and data-collection and sharing obligations imposed on online platforms and the extent to which tax authorities can use platforms as a de facto compliance arm for the ‘gig’ economy.

    The court held that the obligations to collect data and withhold tax at source did not constitute a restriction on the freedom to provide services. However, the obligation to appoint a tax representative in Italy was deemed a breach of the freedom to provide services.

    The ruling confirms that direct taxation is not an EU-competence yet, and in principle, each member state could introduce its own WHT regime applicable to online platforms.

    DAC 7 implications?

    One key part of the case is DAC 7, a council directive that requires most online platforms to conduct due diligence on their service-providing users and report the information to one or more EU tax authorities.

    DAC 7 does not require platforms to act as tax collectors; only as information providers.


    In the short-term, the case allows Italy to impose WHT obligations on non-resident platforms.

    The long-term implication is that other EU member states might be tempted to introduce their WHT regimes, which could impact non-resident platforms in the medium term.

    If you have any queries relating to the Airbnb WHT case or Italian tax matters more generally, then please do not hesitate to get in touch.

    The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article.

    EU Blacklist: Back to black

    EU blacklist – Introduction

    On February 14, 2023, the Council of the European Union made changes to the list of countries that do not cooperate with the EU on tax matters.

    This is called the “EU blacklist”.

    New additions to EU Blacklist

    Four new countries were added to the list:

    With these additions, the EU blacklist list now has 16 countries on it. The other countries are as follows:

    The Council gave reasons for adding these countries.

    Marshall Islands

    For example, the Marshall Islands was added because they have a tax system that encourages businesses to move profits offshore without any real economic activity.

    Costa Rica

    Costa Rica was added because they do not provide enough information about tax matters, and they have tax policies that are considered harmful. Russia was added for the same reason.


    The Bahamas was previously removed from the EU blacklist in 2018 but was added back in 2022 and remains on the list.


    The new list will be officially published in the Official Journal of the EU, and the next revision will take place in October 2023.

    If you have any queries relating to the EU Blacklist or tax matters more generally, then please do not hesitate to get in touch.

    The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article.

    French Tax Office Gets an AI Tool to Inspect Your Swimming Pools

    Software trained to spot undeclared swimming pools has resulted in an additional €10 million of tax revenue for the French authorities.

    Okay, let’s dive in!

    AI Tool

    A machine-learning tool deployed across nine French regions during a trial in October 2021 helped authorities uncover 20,356 undeclared private pools and levy additional taxes on applicable households.

    Under French law, pools must be declared part of a property’s taxable value.

    As such, pools can increase the value of a property – and hike the individual tax homeowners pay.

    According to Le Parisien newspaper, which first reported the news, a 30-square-metre pool is taxed at €200 (£170) a year.

    Google and French consulting firm Capgemini have developed an application that uses machine learning to scan publicly available aerial images of properties for indications that a swimming pool is present.

    The most obvious indication is a blue rectangle in the back garden!

    After identifying the pool’s location, its address is confirmed and cross-checked against national tax and property registries.

    In April 2022, The Guardian reported that the software had a 30% error rate. It would often mistake solar panels for pools or miss existing pools if they were heavily shadowed or partially covered by trees.

    Plans To Expand Surveillance

    The French Treasury said it would expand a tool across the country that it expects will bring in around €40m (£34m) in new taxes on private pools in 2023, exceeding the £24m cost of developing and deploying the software.

    The tool could eventually detect undeclared home extensions and patios that are also considered when calculating French property taxes.

    “We are particularly targeting house extensions like verandas, but we have to be sure that the software can find buildings with a large footprint and not the dog kennel or the children’s playhouse,” said the deputy director general of public finances, Antoine Magnant to Le Parisien.

    He added, “This is our second research stage and will also allow us to verify if a property is empty and should no longer be taxed.”

    According to the Federation of Professional Builders (FPP), France has the largest market in Europe for private swimming pools, with an estimated three million in existence.

    This is partly due to a boom in construction during the Covid-19 lockdowns and recent heat waves.

    However, the issue has been contentious this year because of the drought in France, which has led to rivers drying up and restrictions on water usage. One MP for the French Green party has called for a ban on new private pools.

    Next Steps

    If you have any general queries about this article, please do not hesitate to get in touch.

    The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article.

    Luxembourg’s Reverse Hybrid Rule Amendments


    In 2020, the EU’s Anti-Tax Avoidance Directive II (“ATAD II“) came into force.

    This led to EU Member States being required to implement into domestic law a suite of so-called “anti-hybrid” laws.

    What are anti-hybrid rules?

    The aim of the anti-hybrid rules is, unsurprisingly, to eliminate the potential to exploit ‘hybrid features’ in a structure.

    For example, the rules might address a hybrid instrument that is treated as debt in one jurisdiction but equity in another jurisdiction. Alternatively, they might target a hybrid entity which is treated as tax transparent in one jurisdiction and tax opaque in another jurisdiction.

    Reverse, reverse

    One such anti-hybrid rule is the “reverse hybrid” rule.

    This was introduced in a number of countries including Luxembourg.

    The purpose of the “reverse hybrid” rule is to counteract “double non-taxation outcomes”.

    Such an outcome might arise where an entity, e.g. a Luxembourg fund partnership, is treated as tax transparent in Luxembourg but tax opaque in the jurisdiction of one of its investors.

    Why might this lead to ‘double non-taxation?’

    Running with the example above, the Luxembourg fund partnership is not taxed in Luxembourg because it transparent for tax purposes. In other words, the entity does not pay tax, only the partners in the partnership.

    However, that same income is also untaxed in that investor’s jurisdiction as a result of that jurisdiction deeming the income to have been paid by an opaque entity.  

    Triggering the Luxembourg reverse hybrid rule

    The rule may be triggered if:

    This is subject to certain aggregation or “acting together” rules.

    Effect of the reverse hybrid rule

    Where it is engaged, our fund partnership would be treated as a corporate for tax purposes in Luxembourg. As such, it becomes subject to Luxembourg corporate income tax.

    Recent amendments

    Luxembourg amended its “reverse hybrid” on 23 December 2022.

    This was to clarify certain conditions that must be satisfied in order for it to be engaged.

    The conditions can be summarised as follows:

    1. there is an entity established in Luxembourg that is treated as tax transparent under Luxembourg domestic law;
    2. one or more investors in the relevant entity are located in a jurisdiction that treats the Entity as opaque for tax purposes;
    3. income allocable to such investor or investors is not subject to tax as a result;
    4. the hybrid Investors hold at least 50% of the relevant entity’s voting rights, capital, or profits; and
    5. the income of the relevant entity is not otherwise taxed under the laws of Luxembourg (or any other jurisdiction).

    The reason for the amendment was that they overreached and counteracted certain mismatches that were not caused by hybridity – but rather as a result of an investor’s tax exempt status.

    The amendment has retrospective effect from 1 January 2022.

    If you have any queries relating to Luxembourg’s Reverse Hybrid Rule Amendments or tax matters in the Luxembourg more generally, then please do not hesitate to get in touch.

    The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article.