Guidelines of the Luxembourg tax authorities on the limitation of interest deductions
January 22, 2021
ELVINGER HOSS PRUSSEN, société anonyme
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On January 8, 2021, the Luxembourg tax authorities issued the
Long awaited administrative circular (the
"Circular”) Instructions to
certain aspects of the withholding interest cap rule
(“IDLR”) Established in Article 168bis
of the Luxembourg Tax Act ("LITL”)
The Luxembourg law implementing ATAD was passed in 2018
11 in domestic tax law ("ATAD1
Law”) Introduced a new rule that the
Taxpayers' deductibility exceeds borrowing costs
30% of the taxable EBITDA or EUR 3 million. The excessive borrowing
Costs are defined as the deductible borrowing costs included in
Excess of taxable interest income and other taxable
economically equivalent income of the taxpayer.
The IDLR applies to Luxembourg companies and Luxembourg
Business premises of non-resident companies are reserved
Luxembourg corporation tax in respect of financial years
from or after January 1, 2019.
For more background information, see our previous articles on this
The circular contains the information from the Luxembourg tax authorities
Interpretation of IDLR rules and related concepts. Some of the
The points dealt with in the circular are summarized below:
DEFINITION OF "TRAINING COSTS"
- The circular states that only (i) operating costs that
are caused exclusively by the taxpayer in accordance with Article 45 LITL
and (ii) expenses directly for the purpose of
Acquiring, securing or maintaining income in accordance with Article 105 of
The LITL could be qualified as “borrowing costs” for
Purposes of the IDLR. As such, the circular indicates that it is hidden
Dividend payments could not be qualified as borrowing costs and
that other rules that may limit borrowing deductibility
Costs (such as the Luxembourg anti-hybrid mismatch rules,
Anti-Abuse Rules, Transfer Pricing Rules and Participation
Exemption) should apply before the IDLR.
- The circular recalls that "borrowing costs"
comprise three categories of costs (i) interest expenses for all
Forms of indebtedness, (ii) other costs that are economically equivalent to interest
and (iii) expenses related to financing and offering some
Clarifications to the non-exhaustive list of borrowing costs
contained in Article 168bis LITL, in particular:
- No deductions for impairment of bad debts
Cause borrowing costs in the hands of the creditor;
- For with-profits loans, include borrowing costs
the fixed and variable remuneration;
- Interest together with issue and redemption premiums due from the
Issuer of financial instruments such as zero coupon bonds or
Convertible bonds are considered a cost of debt;
- For capitalized interest that is included in the cost of
Assets on the taxpayer's balance sheet only apply the IDLR
at capitalized interest that will be deducted or likely
- Interest calculated on the basis of a nominal amount in the
Context of interest rate swaps or other derivatives / hedges
Tools relating to a company's credit are also available
covered by the IDLR;
- Exchange rate gains and losses related to loan interest
and finance-related instruments and included in the taxpayer
Income is called "borrowing costs" for the
Purposes of the IDLR. Conversely are foreign exchange gains and
Losses from the loan capital are not "loans"
- Funding agreement guarantee fees include:
mortgage-related fees and other guarantees
Financing operations. Fees and commissions charged by
Intermediaries such as notaries or experts involved in the financing
However, transactions are excluded if they are related to
the purchase price of an asset.
- No deductions for impairment of bad debts
In contrast to the term "exceeding the credit costs"
Article 168bis LITL does not provide a definition or example of
the term "interest income" or "other
economically equivalent taxable income ”despite their
Meaning in the context of the IDLR.
According to the circular, there should be a symmetrical approach
accepted. Hence for the purposes of IDLR if any cost
should be viewed as an interest or economically equivalent
Interest should be corresponding to the corresponding income
regarded as interest or economically equivalent to interest.
Applying the grandfathering rule is another important one
Aspect of guidance. According to the ATAD1 law, the cost of credit refers to
Loans completed before June 17, 2016 are from the
Application of the IDLR provided that no subsequent changes
to the loans are made.
According to the circular, the following will change, among others
others are considered "subsequent changes"
according to the grandfather rule:
- Change in the term of the loan on or after June 17, 2016,
if the change was not contractually foreseen before June 17th
- Changing the interest rate or calculating the interest
on or after June 17, 2016 when no such change was made
contractually planned before June 17, 2016;
- Change in amount borrowed on or after June 17th
- Change of one or more of the parties concerned on or after
June 17, 2016, when such a change was not contractually envisaged
before June 17, 2016.
Conversely, the following changes are not among others
as "later changes" for the
Purpose of the grandfather rule:
- Drawings on an existing credit facility after June 17, 2016 in
according to the contractually agreed terms and conditions
before June 17, 2016;
- Transfer of the seat or the head office of a company
Administration to Luxembourg that is party to a completed loan
before June 17, 2016, insofar as the terms and conditions of
Loans are not changed.
In this context it should be noted that the IDLR only applies to
the excessive borrowing costs resulting from the
STAND ALONE ENTITIES
According to the ATAD 1 law, an independent institution is exempt from the IDLR.
The ATAD 1 law defines an independent unit as a taxpayer
not part of a consolidated group for financial accounting purposes
and has no affiliated companies or permanent establishments in a
other country than Luxembourg.
The circular confirms that the term “associated
Company “is not limited to the organizations in which the
The taxpayer is involved, but also includes all organizations
and persons working as associates under the
Luxembourg CFC regulations (see Article 164ter (2) LITL). In addition, it is
indicates that the association link should be parsed by
an economic perspective.
The circular also contains explanations on a number of other points, such as:
as a presentation of the excess of borrowing costs and those not used
Interest capacity, the specific exemption for long-term
Infrastructure projects and the calculation of EBITDA.
However, the guidance in the circular is very welcome
Some questions remain open (especially the qualification of
Capital gains on bad or bad debt that
is a major concern for debt and securitization firms in
1 Relocation of Council Directive (EU) 2016/1164 of July 12, 2016
Rules against tax avoidance practices that directly affect the
Functioning of the internal market
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.
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