On January 8, 2021, the Luxembourg tax authorities became
(LTA) provided eagerly awaited guidelines
in relation to the application of Article 168 bis of the Luxembourg income
Tax law (LITL), which was introduced in 2018
by transposing the EU directive into Luxembourg law
2016/1164 Anti-Tax Avoidance Directive 1.
According to Article 168 bis LITL, they are Luxembourg taxpayers
subject to restrictions on the interest deduction of
their taxable basis. The purpose of managing the LTA
Circular 168bis / 1 (the Circular) has to be clarified
some of the concepts and key aspects of this legislation,
through numerical examples.
As a reminder, in short, Article 168 bis LITL provides for this
Luxembourg fully taxable companies1 and Luxembourg permanent
Establishments of non-Luxembourg companies cannot withdraw
on their taxable basis, net borrowing costs exceed either
30% of their earnings before interest, taxes, depreciation and
Amortization (EBITDA) or EUR 3 million. The circular
explains important points related to Article 168 bis LITL (Carry
before the credit costs are exceeded, unused interest capacity,
Exclusion of loans to finance public infrastructure
Projects, exclusion of independent and financial companies
Companies). Below is an analysis of some of the key issues
addressed in the circular.
Determination of the "net credit costs"
First of all, the taxpayer concerned has to determine his borrowing
Costs that cover interest expenses for all types of debt,
other economically equivalent costs and expenses in
Relationship to borrowing (Point a.).
Then the amount of taxable income or other economic
Equivalent realized by the taxpayer should be calculated
(Point B.).
The next step is to calculate the net cost of borrowing.
Which are the positive results of: Point A – Point B. This
A positive result is then subject to the limit values mentioned above.
i.e. these net credit costs can be deducted from the
taxable profit of the company, however only up to the higher value of EUR
3 million or 30% of EBITDA.
And here is this administrative circular 168bis / 1 (das
Circular) comes into play: clarifying the
Method.
With regard to point A, the ADL first confirms that the
The final amount determined should exclude expenses or costs that
are not deductible according to other provisions of the LITL or the
Application of a double taxation agreement. As stated in the circular,
The following points would not be considered in the determination
the "credit costs":
- Expenses re-qualified as hidden dividend payments
- Costs that are economically associated with an exempted dividend
receive - Expenses for which the deductibility is denied according to the
Application of the anti-hybrid rules - Expenses for which deductibility must be asserted in another
Place of jurisdiction in accordance with a double taxation agreement signed by Luxembourg
The rule is that an expense for point A cannot be taken into account, though
Their deductibility is not permitted regardless and without consideration
the application of Article 168bis LITL.
On the other hand, all costs that result from a transfer price
An adjustment would be taken into account when determining the items
A.
With regard to point B, the circular confirms that the provision
of the relevant income follows in the sense of a symmetrical approach
that when an issue qualifies for point A in the hands of a payer,
The corresponding income counts as item B in the hands of a
Payee2. So there has to be consistency
for qualifying an amount paid by one company to another,
in terms of determining what constitutes the scope of
Point A and Point B.
The limitation thresholds
As stated in the law (see above), the withholding tax is the
The positive difference between point A and point B is then limited to
two thresholds: the higher of 30% of EBITDA
(Limit 1) or EUR 3 million (border
2).
For the purposes of Limit 1, EBITDA equals the sum
The annual net income determined for tax purposes increased by the amount of
Net borrowing cost (that is, the positive amount that results from: Item
A – item B) and other costs or expenses incurred by the
Base.
Therefore, when determining the amount of "revenue",
an income that (i) is not taxable as Luxembourg
is exempt under a relevant double taxation agreement or (ii) under a
domestic provision (for example dividends that fall within the scope of
the participation exemption system) should be ignored and
deducted from tax EBITDA. Correlative are issues that are
in connection with such exempted "revenue" must be added
to total net income. All other income and expenses are in
generally lie within the scope of such a tax EBITDA.
Limit 1 and Limit 2 each apply for a specific year
Circular clarifies that they would apply in full without any
Adjustment or pro rata to a financial year that is less than 12 years old
Months.
The grandfather clause
A key element of Article 168bis is its timing. according to
Under the grandfathering clause, the bonds were concluded before June 17th
In 2016, the provisions of Article 168 to LITL remain unaffected
as far as they were not subject to any
"subsequent change". Interestingly, the circular
explains this and gives a non-exhaustive list of
relevant changes:
- Loan maturity: such an event would
is not considered a "subsequent change" unless
it was contractually scheduled before June 17, 2016 and that no
Consent from one party is required - Interest rate and method of determining such
interest: such an event would not be considered a
"subsequent change", if this was provided for
contractually before June 17, 2016 - Nominal amount: a change in the borrowed
Amount after June 17, 2016 would be a "consequence
Modification" - Use of borrowing funds: such
Event would not be considered a "subsequent change"
provided that it was contractually planned before June 17, 2016
and within the limit of the facility amount - Identity of the borrower or lender: such event
would not be considered a "subsequent change"
that (i) it was contractually provided before June 17, 2016 or
(ii) it results from a restructuring (merger, split, …) - incoming transfer of the registered office or the head office
Management of one of the parties involved in the borrowing according to 17
June 2016: Such an event would not be a "follow-up event"
Change "provided that the other terms of the
Loan changed (see above)
The circular states that in the event of a "modified"
Borrowing (after June 17, 2016), the interest cap rules
Article 168 bis LITL would only cover provisions of the
The loan has been changed and not adapted to the original features
(and relevant financial consequences) of borrowing as they were
before June 17, 2016.
Footnotes
1 Other than financial or stand-alone companies
Entities within the meaning of Article 168bis LITL.
2. This would explain why the deduction of provisions for
Bad debts are not covered by the limitation in Article 168
to LTIL
The content of this article is intended to provide a general overview
Guide to the subject. Expert advice should be obtained
about your particular circumstances.