Luxembourg ATAD I implementation creates uncertainty in capital market transactions

Voted into Luxembourg law on 18 December 2018, the Anti-Tax Avoidance Directive I (ATAD I) now applies, with its provisions applicable as from fiscal years starting on or after 1 January 2019, except for the exit tax provisions that will apply as from 2020.

The directive triggers a number of tax impacts including inter alia Interest Limitation rules (new article 168bis LITL) which will apply to “exceeding” borrowing costs and will be deductible in a tax period only up to the higher of i) 30% of the taxpayer’s net revenues before interest, tax, depreciation and amortization (“EBITDA”) or ii) 3 million Euros. Certain exemptions apply, i.e. grandfathering, stand/alone exemption, EU securitisation compliance, etc.

While ATAD I provides a non-exhaustive explanation of borrowing cost, it doesn’t define interest income at all. There are some arguments for a symmetric definition of borrowing cost and interest income, but Luxembourg tax authorities may apply an asymmetric definition. Consequently, there is an uncertainty to which extent ATAD I may impact the tax neutrality of Luxembourg securitisation companies. However, we understand that Luxembourg tax authorities are working on a circular to reduce the recent uncertainty. Dependent on the content if such circular, the worst case could be that neither the transaction details nor the ATAD I exemptions support the tax neutrality and the exceeding borrowing cost would be subject to taxation at the usual corporate income tax rate.

Clarifying uncertainties

As it stands, many securitisation companies with interest bearing assets and liabilities should not face a significant tax impact through the ATAD I interest limitation rules. However, we see a level of uncertainty for some securitisation companies investing into funds or shares, certain non-performing loans or certain repackage transactions with synthetic exposure on equities or indices. It cannot be excluded that these transactions could be seriously impacted by interest limitation rules when borrowing cost and interest income follow an asymmetric definition.

Recommendations

For the time being there is no general rule on the potential impact on securitisation companies and an analysis should be carried out based on the setup of a transaction, the securitised asset class and availability of exemptions. Therefore, we recommend initiating discussion with the tax or legal advisor in order to assess the potential impact and solution on a case by case basis.

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