What has the US tax reform in store for European companies?

The US Tax Reform is now a reality. And this once-in-a generation tax event has massive implications. It includes several corporate tax provisions that have quite an effect on global companies. Find out what the US tax reform has in store for European companies.

Pulling the trigger on US tax reform: The European bang

As most of the proposed rules apply to American taxpayers, US corporates are likely to rethink how they operate abroad. One of the biggest changes concerns the taxation of the US foreign subsidiaries. Basically, repatriated profits won’t be subject to US corporate tax any longer. What’s more, companies which have not repatriated past earnings could repatriate at a reduced rate.

Under the “America first” label, the reform will impose a 20% “excise tax” on cross-border payments between affiliates of the same company. In other words, corporates will no longer have a tax incentive to expand abroad. On the contrary, there will be a tax penalty to purchase abroad. Europe could be faced with a number of potential challenges. Case in point: the loss of USD2.5 trillion that subsidiaries accumulate and invested offshore to a decline in trade with the US.

Luxembourg impact: Winners or losers?

With the presence of several international American corporate subsidiaries in Luxembourg, the economic impact on the local economy and finance could be serious.

According to the US Bureau of Economic Analysis, there are more than 200 American subsidiaries operating in Luxembourg. They have invested more than USD500 billion in the last two years alone.

What we think

 

The US tax reform may be more disruptive to business in Europe and Luxembourg in particular. And BEPS adds more complexity.  The EU policy makers will hopefully be successful in lobbying for changes. State aid claims towards US, although strictly speaking unrelated, do not help in this sensitive discussion. There are likely to be losers only.