Non-deductibility of interest and royalties due to “blacklisted countries”

Since 1 March 2021, interest and royalties due to associated enterprises established in a country or territory listed on the EU list of non-cooperative tax jurisdictions will no longer be tax deductible (under certain conditions) in accordance with the new Luxembourg Law of 10 February 2021 (“Law”).

Please refer to our previous Newsletter dated 1 April 2020 for further background.

Compared to the Bill of Law, the following main changes were made during the legislative process:

• the new defensive tax measures are applicable since 1 March 2021 instead of 1 January 2021 as initially contemplated by the Bill of Law;
• only interest and royalties accrued from 1 March will be subject to the new measures. The Bill of Law originally envisaged covering interest and royalties payments (along with accruals). This would have led to a retroactive effect of the Law for payments made after the entry into force of the Law but stemming from accruals made before that time.

Blacklisted countries covered by the measures on 1 March 2021) are those listed in the most recent EU blacklist published by the EU Council, which was updated recently on 22 February 2021 and is composed of the following countries: American Samoa, Anguilla, Dominica, Fiji, Guam, Palau, Panama, Samoa, Trinidad and Tobago, US Virgin Islands, Vanuatu, Seychelles.

Any country or territory added to the EU blacklist during a year will only be taken into account as of 1 January of the following year for the application of the new defensive tax measures.

Conversely, if a country or territory is removed from the EU blacklist during a year, the defensive tax measures would cease to apply as from the date of publication of the EU blacklist confirming that the country or territory concerned has been removed.