On 14 May 2020, European Commission (the EU Commission) sent two notifications to Luxembourg requesting amendments to its rules on the taxation of securitisation vehicles. 

The EU Commission requests Luxembourg to amend its legislation transposing the EU Anti-Tax Avoidance Directive (ATAD)

As part of its implementation of ATAD, Luxembourg made use of the possibility to exempt financial undertakings from the interest limitation rules in ATAD by providing that certain securitisation vehicles, namely regulated vehicles and being those that issue securities to the public, be treated as financial undertakings. Thus, such vehicles are currently allowed an unlimited deduction of net interest payments. According to the EU Commission, this goes beyond the permitted exemptions as securitisation entities should not be treated as “financial undertakings” under ATAD. Accordingly, the EU Commission asks Luxembourg to correctly transpose the interest limitation rule of ATAD by excluding regulated securitisation entities from the interest limitation rules exemption. 

While this may be unfortunate for regulated securitisation vehicles, it leaves the very many unregulated vehicles unaffected and therefore still subject to ATAD. However, what that means is that unregulated securitisation structures vehicles continue to be significantly exposed to the interest limitations where their return on their underlying investments is not in the form of interest or similar income, for example capital gains or dividend. Any hope that there might be some relaxation of the interest limitation rules in that context would appear to be severely dented by the approach being taken by the EU Commission on regulated entities.

The EU Commission requests Luxembourg to amend​ its discriminatory tax rules concerning securitisation enterprises

According to the EU Commission, Luxembourg also taxes securitisation enterprises with taxable operations in Luxembourg but whose statutory seat is in another EU or EEA Member State more heavily than pure domestic securitisation entities. On the basis that these rules are not compatible with the EU freedom of establishment, the EU Commission asks Luxembourg to amend its rules accordingly.

Even if Luxembourg amends its domestic rules to take account of the notifications, the impact is likely to be limited as there are relatively few regulated securitisation vehicles and it would seem that few of them actually need to rely on the exemption. The impact of extending the securitisation tax regime to foreign securitisations vehicles with operations in Luxembourg should also be limited.

If Luxembourg does not act within the next four months, the Commission may take the next step in the infringement process by sending a reasoned opinion to the Luxembourg tax authorities.