In a recent blog, our Cyprus office sketched out the fairly extensive implications in Cyprus of the BVI having been added to the EU’s blacklist of non-cooperative jurisdictions as of 14 February 2023. In Luxembourg, the consequences of being blacklisted are more limited, as follows:

• Certain payments of interest and royalties may be no longer deductible for tax purposes.
• Any form of deductible payment may be the subject of reporting under the rules known as DAC6 (the Sixth Directive on Administrative Cooperation) as implemented in Luxembourg.

As we shall see, there is not a complete equivalence in the requirements for these two situations to be triggered.

As regards the non-deductibility point, this will be the case if three conditions are fulfilled:

• The recipient of the payment is a corporate entity which is the beneficial owner of that payment. Thus, payments made to transparent entities are not caught under this requirement, save to the extent they are held by corporate entities. Payments made or treated as made to individuals are not caught.
• The corporate entity benefitting from the payment needs to be associated with the entity making the payment – in broad terms this will be the case if one entity is subject to the control of the other (including, although not exclusively, through equity ownership of more than 50 per cent).
• The recipient of the payment is on the blacklist as of 1 January in the year in which the payment is received. It will be clear from this that, in effect, the non-deductibility only applies from 1 January of the year following the inclusion of the recipient on the blacklist. Furthermore, once an entity is removed from the list, the non-deductibility rules immediately cease to apply. Where the list is updated in February of a particular year, this clearly leaves some scope for a material delay in the rules applying or for their not applying at all.

Even if the three conditions are met, the payment could still be deductible if the Luxembourg entity making the payment can show that the arrangement giving rise to the payment has been put in place for genuine economic reasons that reflect commercial reality.

As regards DAC6, a payment will be subject to mandatory reporting to the local EU tax authority if:

• The payment is a deductible payment made across a border. Seemingly, if at the time of the payment the above non-deductibility rules apply, then this requirement will not be fulfilled.
• The payment is made to an associated enterprise, which includes individuals and where there is an ownership link of more than 25 per cent. The test for whether an enterprise is associated is therefore generally less narrow than for the non-deductibility rules.
• That enterprise is on the blacklist at the time of the payment. Thus there is no delay in the application of the reporting requirement. But, as for non-deductibility rules, the rules cease to apply immediately upon the recipient ceasing to be on the blacklist.

It remains to be seen how long the BVI remains on the blacklist but for the moment, at least, the impact of the blacklisting is relatively limited in Luxembourg.

Our blog post on the Cyprus implications, can be found here.