EY Tax Club

1 EY Tax club Year-end tax update John Hames / Sylvie Leick / Yannick Zeippen 2 December 2015. Agenda Tax rulings Transfer Pricing Anti-abuse rules Transparency IP Tax regime Net Wealth Tax Individuals Double taxation treaties VAT. Trends Page 2 2 December 2015 EY Tax club Tax rulings Page 3 2 December 2015 EY Tax club New tax ruling process - effective 2015. Formalization of the previous tax ruling practice into Luxembourg domestic law ( 29a Abgabenordnung and Grand-Ducal Regulation (GDR) dated 23 December 2014): Formal requirements ( , information on taxpayer, detailed description of envisaged transactions, detailed tax analysis, bona fide statement).

2 New Tax Ruling Commission ( commission des d cisions anticip es ) still rulings are addressed to the head of the tax office. Timing of filing of tax rulings: GDR requires that transactions must not have produced their effects . Validity of 5 years (under certain conditions). New administrative service fees applicable for any request submitted as from 1 January 2015. (range between EUR 3,000 10,000) no fees for pending rulings filed before 31 December 2014. No recourse possible against negative decision however a claim can be filed against the tax assessment.

3 Publication of anonymized executive summaries / exchange of information. Increased focus on business purpose and transfer pricing. Page 4 2 December 2015 EY Tax club New tax ruling process In essence, no substantial change compared to the past except for the fact that the former administrative practice is formalized under a legal framework. Focus on providing a robust legal framework and improving the dialogue between the taxpayer and the tax administration. Tax rulings remain an interpretation of the Luxembourg tax law applicable to a specific fact pattern.

4 Increased tax transparency in line with principles of the new Government's fiscal policy. Contribution to a competitive domestic and international tax environment. Stable framework with the aim to achieve enhanced planning security and conformity with OECD / BEPS standards. Page 5 2 December 2015 EY Tax club Transfer Pricing Page 6 2 December 2015 EY Tax club Transfer pricing - effective 2015. Formalization of the framework for Luxembourg transfer pricing (TP) legislation and introduction of transfer pricing documentation requirements: Under prior legislation, power of the Luxembourg tax authorities to reassess the taxable result of a Luxembourg taxpayer in cases where an unjustified transfer of profits had been made due to a special economic relationship of that taxpayer with a non-resident taxpayer.

5 New regulation outlines the arm's length principle in line with the OECD Model Convention and applicable (as from 1 January 2015) to transactions with resident and non-resident related party. TP documentation required for all transactions between related parties for the purpose of verification of transfer prices by the Luxembourg tax authorities. New Luxembourg ruling procedure applies also to Advance Pricing Agreements (APA). Page 7 2 December 2015 EY Tax club Anti-abuse rules Page 8 2 December 2015 EY Tax club Parent Subsidiary Directive (PSD) changes Draft law n 6847 aims at introducing anti-hybrid (avoidance of double non- taxation due to hybrid mismatches in two Members States) and general anti-abuse rule ( GAAR , benefit of PSD denied for structures which main purpose is to gain a tax advantage).

6 Application only within intra-EU context. Implementation deadline is 31 December 2015. Page 9 2 December 2015 EY Tax club Parent Subsidiary Directive (PSD) changes Anti-hybrid provision Tax exemption denied Based on national law, loan instrument qualifies LuxCo as equity Income derived: tax Loan granted from exempt dividend LuxCo to EUCo Based on national law, EUCo loan instrument qualifies as debt Expense on loan: tax deductible interest Page 10 2 December 2015 EY Tax club Parent Subsidiary Directive (PSD) changes GAAR.

7 Member States shall not grant the benefits of this Directive to an arrangement or a series of arrangements that, having been put into place for the main purpose or one of the main purposes of obtaining a tax advantage which defeats the object or purpose of this Directive, are not genuine having regard to all relevant facts and circumstances.. An arrangement or a series of arrangements shall be regarded as not genuine to the extent that they are not put into place for valid commercial reasons which reflect economic reality.

8 Page 11 2 December 2015 EY Tax club US Branches Discussions between the Luxembourg tax authorities and the IRS regarding the tax treatment of US branches of Luxembourg companies resulting in double non-taxation. Protocol or exchange of letters to the US-Luxembourg tax treaty providing for specific requirements that need to be met in order to be able to claim a branch exemption likely to be concluded; possibly specific grand-fathering period for existing US branch structures. Going forward, the Luxembourg tax authorities will, in essence, no longer issue advance tax clearances confirming the Luxembourg tax treatment of US branches.

9 Situations to be analyzed on a case-by-case basis (signed advance tax clearance obtained or pending, US branch implemented, etc.). Page 12 2 December 2015 EY Tax club Mandatorily redeemable preferred shares (MRPS). Tax treatment of MRPS under discussion due to hybrid treatment (debt qualification for tax purposes vs equity treatment for accounting and legal purposes). According to latest discussion with Luxembourg tax authorities, debt qualification should be upheld provided this is also reflected in the statutory annual accounts (substance over form approach under Lux GAAP or IFRS).

10 Applicable at the latest for accounts closing as from 1 January 2016. Page 13 2 December 2015 EY Tax club Financial instruments under critical review Qualification for tax purposes: analysis of all criteria will result in the determination of debt or equity. Critical review of the terms and conditions of various financial instruments (CPECs, IPPECs, etc.), typical equity features: Crossed conversion options (issuer and holder) no longer accepted Stapling (instrument connected with shares) to be avoided Maturity < 30 years Determination of interest (not profit participating).