Application of the EU Participation Exemption Regime to Gibraltar companies

On 1 December 2020, the Luxembourg tax authorities ("LTA”) issued the Circular L.I.R. n° 147/2, 166/2 et Eval. n°63 (“Circular”) providing for the non-applicability of the Parent-Subsidiary Directive 2011/96/EU (“PSD”) to companies based in Gibraltar.

This publication of the LTA follows the decision of the Court of Justice of the European Union (“CJEU”) in the case GVC Services (Bulgaria) EOOD v. Direktor na Direktsia ‘Obzhalvane i danachno-osiguritelna praktika’ Sofia (C-458/18) according to which companies incorporated in Gibraltar are not covered by the PSD as they are not included in the expressions “companies incorporated under the law of the United Kingdom” and the tax levied in Gibraltar cannot be considered as “corporation tax in the United Kingdom” for the purposes of the application of the PSD.

Further to the Circular and as of 1 January 2021:

• Luxembourg companies having subsidiaries in Gibraltar and relying on the Luxembourg participation exemption (“LPEX”) for dividends, capital gains and net wealth tax will have to re-assess whether they can still benefit from LPEX. Indeed, those companies will only be able to benefit from LPEX in future if their Gibraltar subsidiary meets the “comparable tax test” condition, requiring the foreign subsidiary to be a fully taxable resident company subject to an income tax comparable to the Luxembourg corporate income tax (for 2021, a rate of 8.5% on a comparable tax basis should satisfy this requirement).
• Luxembourg companies distributing dividends to Gibraltar companies will no longer be able to rely on the LPEX for the withholding tax exemption. Indeed, Luxembourg withholding tax exemption applies to non-EU recipients, fully taxable companies, resident in countries with which Luxembourg has concluded a double tax treaty. However, Luxembourg has not concluded a double tax treaty with Gibraltar and therefore the Luxembourg withholding tax exemption cannot apply in this case.

The Circular is more than welcomed as it usefully clarifies (i) the impact of the CJEU decision on the C-458/18 case for Luxembourg taxpayers as well (ii) the date from which the new interpretation shall apply.