On 8 January 2021, the Luxembourg tax authorities issued a new 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”).
Article 168bis of the LITL has transposed the Council Directive (EU) 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices (“ATAD 1”) into Luxembourg law and has been applicable since 1 January 2019. Since the Circular merely has clarifying character with regard to the interpretation of existing legal provisions and does not constitute a new legal basis itself, the IDLR shall be interpreted according to the Circular for all tax years from 2019.
This ATOZ Alert provides an overview of some selected key aspects provided by the Circular.
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 concerns 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 3mio or 30% of the tax EBITDA per fiscal year.