On 9 June 2023, the Luxembourg tax authorities released a circular on the reverse hybrid rule, as introduced as from tax year 2022 by Article 168quater of the Luxembourg Income Tax Law as well as an FAQ on the related tax return (Form 205) to be filed by Luxembourg reverse hybrid entities.
A Luxembourg reverse hybrid is an entity that is treated as tax transparent under the laws of Luxembourg but as a separate entity (i.e. opaque) under the laws of the jurisdiction(s) of the investor(s). As a result of the implementation of ATAD2 in Luxembourg, a Luxembourg reverse hybrid may become a “taxpayer within the meaning of article 168quater of the LITL”.
We will provide an overview of the clarifications provided by the LTA in the Circular, which deal with the tax status of the reverse hybrid entity and the determination of its taxable basis, as well as the computation of the Luxembourg tax due. While these clarifications are welcome given that the law did not address these practical issues, more guidelines will be needed to address all issues related to the reverse hybrid rule.