Key Provisions of the Directive

Some of the central features include:

• Introduction of a common EU digital tax residence certificate (eTRC), valid across Member States, to simplify and harmonise proof of tax residence.

• Two “fast-track” relief procedures for excess withholding tax:

  • A “relief at source” mechanism allowing the correct reduced WHT rate to be applied at time of payment by certified intermediaries.

  • A “quick refund” procedure, enabling refunds for over-withholding within a defined short period (e.g., within 60 days) in certain cases.

• Introduction of certified financial intermediaries (CFIs) who must register in national registers and comply with standardised due diligence, reporting and anti-abuse obligations.

• Standardised reporting obligations for intermediaries and investors, enhanced due diligence and anti-abuse safeguards.

• A transposition deadline for Member States of 31 December 2028, with the rules becoming applicable as of 1 January 2030.

Implications for Luxembourg Investment Funds

Structuring and operational adjustments

Investment funds domiciled in Luxembourg will need to review their withholding tax procedures, especially where income is paid to non-resident investors (dividends, interest). They must consider which intermediate entity in their custody or payment chain may need to qualify as a CFI or be impacted by the new relief-at-source / quick-refund mechanisms.

Compliance and intermediary obligations

Fund managers and service providers (custodians, paying agents, fund administrators) will need to assess whether they or designated counterparts qualify as CFIs and whether they must register and fulfil due diligence and reporting duties. Failure to comply may lead to removal from registers and exposure to penalties.

Investor communications and documentation

Funds will need to ensure that investors’ tax-residence status is supported by the new digital certificate (eTRC) and that intermediary documentation is aligned with the standardised forms. Legacy arrangements relying on national tax certificates may require amendment.

Impact on cross-border investment flows

By reducing administrative burdens, increasing transparency and streamlining refund/relief processes, the Directive aims to encourage cross-border investment within the EU capital markets. For Luxembourg funds, this means a potential competitive edge – provided the operational adaptations are timely completed.

Key Considerations and Risks

• Early preparation is critical: The transposition period extends to end of 2028, but operational readiness (systems, documentation, registers) should begin well in advance.

• Certified Intermediary classification: Funds and service providers must carefully map the chain of custody/payment to identify whether they act as CFIs or rely on third parties.

• Anti-abuse and due-diligence: The new regime intensifies the obligations to detect ineligible relief claims and to monitor intermediary conduct.

• Transitional uncertainty: As national transposition laws may vary, Luxembourg-based entities should monitor the local implementation law and guidance.

Practical Checklist for Luxembourg Fund Managers

• Map withholding tax flows for all fund structures (UCITS, AIFs, sub-funds) and identify where relief or refunds apply.

• Identify the intermediary entities in the payment chain and determine if any will become CFIs under FASTER.

• Review existing tax residence certificate procedures and adopt the new EU digital certificate format when available.

• Establish enhanced due-diligence procedures to verify investor eligibility, beneficiary status and treaty outcomes.

• Engage with fund administrators, custodians and paying agents to ensure they understand their obligations under FASTER.

• Monitor the Luxembourg transposition law and relevant guidance from the Commission de Surveillance du Secteur Financier (CSSF) and the tax administration.

Conclusion

For the Luxembourg investment fund industry, the FASTER Directive presents both a challenge and an opportunity. On the one hand, it introduces stricter operational and compliance demands; on the other hand, it supports the smoother cross-border movement of capital and may reduce friction in tax relief processes. Proactive adaptation will be essential to maintain competitiveness and regulatory alignment ahead of 2030.

 

Introduction

Over the past decade, international tax reform has reshaped the landscape for cross-border investments. The OECD’s Base Erosion and Profit Shifting (BEPS) initiative and the EU’s Anti-Tax Avoidance Directives (ATAD I and II) have fundamentally transformed the way multinational groups and investment funds structure and manage their operations.

Luxembourg, as a leading European fund domicile, has been at the forefront of implementing these measures. While the Grand Duchy continues to offer a favourable and stable tax environment, the era of “light” tax structuring has clearly evolved toward greater substance, transparency, and alignment with economic reality.

This article explores the main BEPS and ATAD rules implemented in Luxembourg and their practical impact on the investment fund industry.

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1. Overview of BEPS and ATAD Objectives

The OECD BEPS Project, launched in 2013, introduced 15 action points designed to close gaps and mismatches in international tax rules that allowed profits to be artificially shifted to low-tax jurisdictions.

The EU translated several BEPS recommendations into binding legislation through two key directives:

• ATAD I (Directive 2016/1164/EU) – applicable as of 1 January 2019;

• ATAD II (Directive 2017/952/EU) – extending the rules to hybrid mismatches involving third countries, effective 1 January 2020.

Both directives aim to ensure that taxation occurs where value is created and that structures with artificial arrangements no longer achieve tax advantages.

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2. Luxembourg’s Implementation Timeline

Luxembourg transposed ATAD I and II into domestic law through the following key legislative acts:

• Law of 21 December 2018 (transposing ATAD I);

• Law of 20 December 2019 (transposing ATAD II).

These laws introduced new anti-avoidance measures affecting corporations and, indirectly, certain investment fund structures. While most regulated funds (e.g., UCITS, SIFs, RAIFs) remain tax-neutral, their subsidiaries, SPVs, and holding companies are directly impacted.

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3. Key ATAD Measures Affecting Luxembourg Structures

a) Interest Limitation Rule

Interest deduction is limited to 30% of EBITDA or EUR 3 million (whichever is higher).
Although many stand-alone entities (i.e., entities not part of a consolidated group) and certain financial undertakings are exempt, this rule affects SOPARFIs, holding companies, and fund SPVs used in financing chains.

Fund managers should review financing structures to ensure deductibility remains available and to avoid erosion of returns due to interest reclassification.

b) Controlled Foreign Company (CFC) Rule

CFC rules attribute certain undistributed income from low-taxed foreign subsidiaries to the Luxembourg parent company.
For investment funds, this may affect Luxembourg holding entities with participations in jurisdictions offering preferential regimes.
CFC inclusion is triggered where the foreign entity’s effective tax rate is less than 50% of what would have been due under Luxembourg rules and where non-genuine arrangements are identified.

c) General Anti-Abuse Rule (GAAR)

Luxembourg introduced a broad anti-abuse clause, allowing tax authorities to disregard arrangements whose main purpose is to obtain a tax advantage contrary to the object or purpose of the law.
This codifies the principle that fund structures must be commercially driven, with genuine substance and operational rationale beyond tax efficiency.

d) Exit Taxation

ATAD introduced an exit tax when assets, functions, or tax residency are transferred out of Luxembourg to another jurisdiction.
This measure primarily impacts corporate entities or fund SPVs that relocate or restructure. The exit tax equals the difference between the market value and the book value of the transferred assets.

e) Hybrid Mismatch Rules (ATAD II)

Perhaps the most complex element, hybrid mismatch rules prevent double deductions or deduction-without-inclusion outcomes arising from differences in legal classification between jurisdictions.
This is particularly relevant for Luxembourg partnerships (SCS, SCSp), which are tax-transparent domestically but may be treated as opaque elsewhere.
Managers must assess whether their fund vehicles or financing chains trigger hybrid outcomes, as these may lead to denied deductions or mandatory income inclusions.

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4. Substance Requirements and Economic Reality

BEPS and ATAD have elevated the importance of economic substance in Luxembourg structures.
Key expectations now include:

• Local decision-making capacity and active management by the board;

• Qualified directors resident in Luxembourg;

• Physical presence (office, employees, infrastructure) consistent with the entity’s activities;

• Demonstrable financial and operational functions performed in Luxembourg.

The Luxembourg tax authorities (ACD) and the Commission de Surveillance du Secteur Financier (CSSF) both emphasise that insufficient substance can lead to denial of treaty benefits, recharacterisation of arrangements, or even permanent establishment exposure.

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5. Impact on Fund Structures

Although most regulated funds remain outside the corporate tax scope, BEPS and ATAD indirectly affect:

• Investment holding structures (SOPARFIs) used by funds to hold portfolio companies;

• Special Purpose Vehicles (SPVs) in private equity, real estate, and debt funds;

• Hybrid financing chains using loans, convertibles, or preferred equity instruments.

Fund managers must now perform robust tax and substance analyses to ensure compliance with anti-hybrid and CFC rules and to document that the structure reflects genuine investment substance.

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6. Practical Steps for Fund Managers

To mitigate risks and ensure compliance with BEPS and ATAD, Luxembourg fund professionals should:

• Perform a substance review of all Luxembourg entities within the fund structure;

• Assess hybrid mismatch exposure, especially where partnerships interact with foreign investors or entities;

• Review financing arrangements to confirm that interest deductibility remains within ATAD limits;

• Document economic rationale for intercompany transactions, management functions, and cross-border flows;

• Monitor DAC6 and DAC8 reporting obligations, as aggressive tax arrangements may trigger disclosure duties;

• Engage early with tax advisors to anticipate the impact of further OECD Pillar Two and ATAD 3 measures.

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7. Looking Ahead: ATAD 3 and the Future of Substance

The upcoming ATAD 3 (Unshell Directive), expected to take effect in the coming years, will push substance requirements even further by targeting “shell” entities lacking sufficient local activity.
Although not yet in force, fund managers should anticipate these developments by enhancing documentation and ensuring all entities have credible people, premises, and purpose in Luxembourg.

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Conclusion

The implementation of BEPS and ATAD has significantly raised the bar for tax governance in Luxembourg’s fund industry.
While Luxembourg remains a highly attractive and stable domicile, the focus has shifted from tax arbitrage to substance-driven structuring and transparent compliance.

Investment funds and their managers should view these developments not as constraints but as an opportunity to reinforce operational credibility and investor confidence.
Early adaptation, thorough documentation, and sound governance will ensure that Luxembourg remains at the heart of global fund structuring in the post-BEPS era.