As we welcome in the new year, we would like to highlight two major developments that may significantly impact promoters and investors with Luxembourg investment structures.
1. ATAD 2: Entry into force of reverse hybrid mismatch rules
January 1, 2022 marks the effectiveness of the reverse hybrid mismatch rules—the final limb of the hybrid mismatch rules introduced by the law of December 20, 2019 implementing Council Directive (EU) 2017/952 of May 29, 2017 amending Directive (EU) 2016/1164 (ATAD) regarding hybrid mismatches with third countries (ATAD 2), as transposed into Article 168 quarter of the Luxembourg Income Tax Law.
In a nutshell, these rules aim to eliminate instances of double non-taxation that can occur when entities or arrangements treated in Luxembourg as tax transparent (e.g. common limited partnerships (SCS) or special limited partnerships (SCSp) are considered as tax opaque in the jurisdiction(s) of their shareholder(s) (i.e. a reverse hybrid entity).
As a consequence, reverse hybrid entities may, under certain conditions, become subject to Luxembourg corporate income tax (CIT).
Reverse hybrid mismatch rules only apply in situations where non-resident associated enterprises hold in aggregate a direct or indirect interest of at least 50 percent of the voting rights, equity interests or rights in entities or arrangements located in jurisdictions that consider such entities or arrangements to be opaque.
