OUR INSIGHTS AT A GLANCE
- On 28 July 2021, the Luxembourg tax authorities issued a
Circular in order to provide guidance on the interpretation of the
interest deduction limitation rules laid down in Article 168bis of
the Luxembourg income tax law (through which the EU Directive
laying down rules against tax avoidance practices
(“ATAD 1“) has been transposed into
Luxembourg law). The Circular extends and replaces the former
Circulars dated 8 January 2021 (see https://www.atoz.lu/media/insights-march-2021)
and 2 June 2021. - The interest deduction limitation rules limit the interest
deductibility for tax purposes for Luxembourg corporate taxpayers
and Luxembourg permanent establishments of foreign taxpayers,
unless they qualify as financial undertakings or stand-alone
entities. The limitation applies to exceeding borrowing costs
(i.e., the amount by which the borrowing costs exceed the interest
income in a given year) and corresponds to the higher of EUR 3
million or 30% of the tax EBITDA per fiscal year. - Exceeding borrowing costs remain fully deductible if the equity
over total assets ratio of the Luxembourg taxpayer is (broadly)
equal to or higher than the equivalent group ratio
(“Group Escape Clause“).
Background
On 28 July 2021, the Luxembourg tax authorities issued Circular
n°168bis/1 (the “Circular”) in order to provide
guidance on the interpretation of the interest deduction limitation
rules (“IDLR”) laid down in Article 168bis of the
Luxembourg income tax law (“LITL”) (through which the
Council Directive (EU) 2016/1164 of 12 July 2016 laying down rules
against tax avoidance practices (“ATAD 1”) has been
transposed into Luxembourg law).
The Circular replaces the Circular dated 2 June 2021, which
previously extended and replaced the Circular dated 8 January 2021
to provide clarifications in relation to the Group Escape Clause
laid down in article 168bis §6 of the Luxembourg Income Tax
Law.
While the Circular of 2 June 2021 clarifies the conditions to be
met in order to benefit from the Group Escape Clause for Luxembourg
taxpayers who do not belong to a fiscal unity, the new Circular of
28 July 2021 includes some additional developments on how to apply
the Group Escape Clause in case of a fiscal unity which will only
be briefly outlined below. The IDLR have been applicable since 1
January 2019 and shall be interpreted according to the Circular for
all tax years from 2019 (the Circular merely has clarifying
character with regard to the interpretation of the existing legal
provisions).
The IDLR limit the interest deductibility for tax purposes for
Luxembourg corporate taxpayers and Luxembourg permanent
establishments of foreign taxpayers, unless they qualify as
financial undertakings or stand-alone entities. The limitation
applies to exceeding borrowing costs (i.e., the amount by which the
borrowing costs exceed the interest income in a given year) and
corresponds to the higher of EUR 3 million or 30% of the tax EBITDA
per fiscal year.
In a fiscal unity, the IDLR are, by default, applicable for the
entire group of fiscally integrated Luxembourg companies. Upon
request, the IDLR may also be applied at the level of each member
of the fiscal unity.
The IDLR provisions in Luxembourg tax law include a number of
definitions which are core to the practical application of the
limitations for taxpayers. Their interpretation has been the
subject of multiple discussions in the past years.
Based on the Group Escape Clause, upon request, exceeding
borrowing costs remain fully deductible if the equity over total
assets ratio of the Luxembourg taxpayer is (broadly) equal to or
higher than the equivalent group ratio (a tolerance of two
percentage points below the equivalent group ratio is
permissible).
This article provides an overview of the key aspects of the
Circular.
Conditions to be fulfilled
The Group Escape Clause goes beyond a mere comparison of the
equity over total asset ratios and requires a number of conditions
to be fulfilled.
The Luxembourg taxpayer requesting to benefit from the Group
Escape Clause must be a member of a consolidated group for
financial accounting purposes (due to a legal obligation or on a
voluntary basis). A fiscal unity is not required in this context.
However, in case of a fiscal unity with application of the interest
limitation rules at the level of the fiscal unity (i.e. not at the
level of each integrated company), each of the Luxembourg
integrated companies must be consolidated for financial accounting
purposes. In such case, the request to benefit from the Group
Escape Clause has to be made by the integrating company.
If several consolidated accounts exist, only those of the
ultimate consolidating entity serve as a basis for the Group Escape
Clause. The same applies in case of a voluntary consolidation
(here, the entity which would have been the ultimate consolidating
entity based on the applicable legislation in that country is to be
considered).
The consolidated accounts have to be prepared on the basis of
the full consolidation method (line-by-line) for financial
accounting purposes. Other methods such as the proportionate
consolidation and the equity method disqualify the taxpayer from
the application of the Group Escape Clause.
The consolidated accounts have to be prepared under a recognised
accounting standard of an EU member state, under IFRS (either as
published by the IASB or as adapted to EU law) or another
equivalent accounting standard (i.e., Japan, USA, the People’s
Republic of China, Canada or the Republic of Korea).
The consolidated accounts have to be audited by a licensed
auditor under Luxembourg or equivalent norms of the ultimate
consolidating entity in the frame of a statutory audit or a
contractual audit, as long as the applicable auditing standards in
the jurisdiction of the ultimate parent entity or under Luxembourg
auditing standards are respected.
The statutory financial statements of the Luxembourg taxpayer
requesting the benefit of the Group Escape Clause do not
necessarily need to be prepared under the same accounting standard
as the ultimate consolidating entity. However, in order to have the
same basis as a comparison, a stand-alone version under the same
accounting standards is required.
Adjustments to the consolidated accounts
Certain adjustments are required in order to achieve a
comparability of the different sets of accounts.
All assets and liabilities have to be valued according to the
same methods in the standalone accounts and in the consolidated
accounts. The Circular requires the stand-alone accounts of the
Luxembourg taxpayer to be adjusted if a different accounting
standard is used for the consolidated accounts. In other words,
this should not require an audit of the stand-alone accounts of the
Luxembourg taxpayer under the accounting standards of the
consolidated accounts.
Further, if the consolidated accounts comprise entities that are
merely proportionately consolidated or on the basis of the equity
method, such entities need to be excluded from the consolidated
accounts by way of corresponding adjustments prior to the
comparison of the equity over total asset ratios.
In a fiscal unity, the adjustments must, generally, be applied
by analogy, in particular as to a coherent valuation method of
assets and liabilities. In addition, all intra-group transactions
between the members of the fiscal unity have to be eliminated.
The above modifications come with some practical problems and
may be burdensome depending on the size of the group and the
availability of all relevant information.
Documentation requirements
The benefit of the Group Escape Clause is subject to certain
documentation requirements to be appended to the Luxembourg tax
return of the respective taxpayer. Such documentation should
comprise the following:
- Supporting evidence on all conditions with regard to the
application of the Group Escape clause (including the nature of the
integration, the firm in charge of auditing the accounts,
confirmation that the taxpayer is fully integrated into the
consolidated accounts, etc.); - A detailed computation of the equity over total asset ratio at
the level of the consolidated group and at the level of the
relevant taxpayer (including details of the adjustments made, if
any, and details of the equity and assets used for the
computation).
These rules apply by analogy for a fiscal unity. Where the IDLR
are applied at the fiscal unity level, the integrating company has
to provide all the relevant information and details together with
its tax returns.
The Luxembourg tax authorities may ask for additional
information upon request.
The notion of “equity”
The Circular does not provide any explicit definition of the
term equity (fonds propres) used in Article 168bis §6
LITL for the purpose of the Group Escape Clause and uses the French
word “capitaux propres” interchangeably.
Absent any clarification, the notion of “equity”
therefore tends to refer to the meaning of equity from an
accounting perspective in the widest sense, i.e., including any
equity accounts such as retained earnings and reserves. Since the
basis of the comparison is the financial statements, the tax
qualification of an instrument should be irrelevant.
Implications
Luxembourg taxpayers that potentially fall within the scope of
the Group Escape Clause have to carefully review their financial
accounting situations and compile all relevant information together
with their tax returns.
The number of requirements and conditions to be fulfilled sets
the bar quite high and underlines that the Group Escape Clause is
clearly to be seen as an exceptional carve-out rule from the IDLR
provisions.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.