Taxation of the banking sector: what priorities?

Banks and other businesses are massively investing in their digital transformation while significant investments are required to meet climate targets. In the meantime, Luxembourg corporate investment tax credits remain essentially defined on the basis of economic patterns of the 20th century. It is highly time to modernize this regime to make sure that our tax system constitutes an effective lever to support future-proof investments. 

Based on the tripartite agreement signed on 28 September 2022, the ABBL has teamed up with the Luxembourg Employers’ Association (UEL) and other stakeholders to define a comprehensive set of new tax credits to support digital transformation projects and green investments. In close cooperation with members, proposed incentives have been defined broadly to reflect the complexity and diversity of the investments at hand. These proposals have been submitted to the Ministry of Finance. We expect draft legislation to be released and adopted before the end of the current legislature.

Talent acquisition and retention has been identified as a key priority by our members. Amidst fierce competition with other financial centres, our financial centre is facing a shortage of critical competence. The introduction of additional tax incentives would certainly help addressing this situation. The ABBL intends to bring forward two targeted measures to enhance the attractiveness of Luxembourg for talents and performers. 

First, we believe that the impatriate tax regime should be reviewed and extended to match equivalent measures applicable in neighbouring countries. A higher relief should be introduced in relation to impatriation bonuses and a stronger focus should be set on the exemption of foreign-sourced income, while the benefits of the regime altogether should be conditioned to less burdensome requirements and monitoring. 

Second, we believe that the profit participating scheme currently in place is too restrictive and current limitation thresholds should be increased so as allow for higher tax benefits. 

We appreciate the improvements secured by the Government in the context of the pandemic regarding the taxation and social security treatment of cross-border homeworkers. We believe, however, that the current framework should be thoroughly reviewed in the long term to achieve greater neutrality from a tax and social security point of view. Current thresholds do not enable employers to rely in full on cross-border workers. Various solutions may be considered, including further extensions of existing thresholds, the creation of a teleworker status or a more extensive review of the taxing rights between Luxembourg and neighboring countries. The budgetary consequences attached to these proposals will need to be carefully weighted though.

Pending further developments, the ABBL remains committed to securing targeted improvements to streamline the implementation of applicable tax thresholds. A dedicated guidance document has been released by the ABBL to help members navigating through applicable requirements and open questions are discussed on a regular basis with members and the tax authorities. Most recurrent topics relate to the consequences attached to homeworking performed during a marginal part of a working day, practical questions around changes of employer or country of residency during a calendar year and the impact of cross-border homeworking on the recognition of permanent establishments.

The banking sector is committed to tax transparency and the fight against tax fraud. As gatekeepers of the financial system, banks play a pivotal role in tax procedures applicable to financial accounts and payments on securities. 

In this context it is important that the EU exchange of tax information remains clearly framed, proportionate and coordinated. After no less than seven extensions to the directive on administrative cooperation (DAC) in less than ten years, including the latest proposal covering crypto-asset transactions, it is perhaps time to stand back and to take stock of the use of data exchanged by tax authorities. There is arguably a need to reconcile the objectives of an ever-expanding DAC with the protection of personal data under the EU privacy framework. 

Another point of attention relates to current complexities in withholding tax relief and refund procedures with respect to cross-border investment income. These are a major obstacle to cross-border investment and the completion of the Capital Markets Union. A harmonized framework yielding genuine simplifications is long overdue and should leverage on OECD work on treaty relief and compliance enhancements (TRACE). With the aforementioned objectives of administrative simplification and market efficiency in mind, we are eagerly awaiting the legislative proposal announced by the European Commission.

To remain competitive European banks shall be relieved from the “hidden VAT cost” resulting from the limited deductibility of input VAT for financial intermediaries and insurance companies. The VAT treatment of financial services has already been identified in the early 2000s as a factor of distortion and many suggestions have been brought forward, including by the EBF and the ABBL. The fact that a legislative proposal will not be released under the current EU legislature, notwithstanding prior announcements, is a source of disappointment. We are hoping and will be further advocating for more conclusive developments in the course of the next EU legislature.

In the meantime, banks are facing an unprecedented surge of sectoral levies, be it on bank profits or financial transactions or activities. The detrimental impact of these levies on financial stability, market efficiency and the resilience of the banking sector has been stressed by many. At a time where the European economy needs more than ever a sound banking sector and efficient financial markets to finance its recovery and the digital and green transition, the introduction of such levies, especially at EU level, must be avoided.