The European Commission requests amendments to certain Luxembourg provisions on securitisation companies.

On 14 May 2020, the European Commission (“Commission”) sent two letters of formal notice to Luxembourg requesting: 

1. (i)    Adjustment of the Luxembourg law implementing the Council Directive (EU) 2016/1164 (“ATAD I”) as regards the exclusion from the interest deduction limitation rule (“IDLR”) of the Securitisation Companies governed by the Regulation (EU) 2017/2402 (“EU Regulation”). The Commission considers that the exclusion of such entities from the IDLR under the category of “financial undertakings” goes beyond the permitted exclusions provided by Article 4 of ATAD I.
2. (ii)    Amendment of its current legislation resulting in heavier taxation of (foreign) securitisation enterprises with taxable operations in Luxembourg whose statutory seat is in another Member State of the European Union or European Economic Area, as compared to the taxation of Luxembourg (domestic) securitisation enterprises. The Commission considers that such legislation is incompatible with the freedom of establishment of the Treaty of the Functioning of the European Union (provided in its Article 49) and the Agreement on the European Economic Area (provided in its Article 31).

Luxembourg has to answer these requests for information within a period of 4 months. If it fails to do so (or if it fails to provide sufficient information), the Commission may then send a “reasoned opinion” (i.e., the 2nd step of the infringement procedure), calling on Luxembourg to comply within a specified period. The reasoned opinion may be further followed, depending on the outcome, by an action of the Commission against Luxembourg before the Court of Justice of the European Union.

Comment:

If Luxembourg amends its legislation as regards the aspects mentioned above (either as a result of a later stage of the infringement procedure, or on a voluntary basis), this will result in (i) the Securitisation companies governed by the EU Regulation being subject to the IDLR and (ii) the expansion of the scope of the securitisation tax regime to foreign securitisation enterprises with taxable operations in Luxembourg. The question remains as to the timing of the effect of such amendments, in particular in view of the taxpayers’ right to the rule of law, or more precisely, the right to legal certainty. 

In any event, any of the above amendments, if enacted, are expected to have a low impact as, (i) the IDLR may only affect securitisation companies falling under the EU Regulation that have exceeded borrowing costs; a situation that does not seem to reflect the reality of these securitisation companies, and (ii) both the use of securitisation companies governed by the EU Regulation and foreign securitisation companies having a taxable presence in Luxembourg would merely seem to have a small (for the former) or even no (for the latter) footprint in the Luxembourg market.