The interest limitation rules have been implemented as part of the 2019 tax reform that transposed the AntiTax Avoidance Directive (“ATAD”) and other anti-Base Erosion and Profit Shifting (“BEPS”) measures into Luxembourg tax law. The interest limitation rules provided under ATAD have been largely inspired by the recommendations made in the Final Report on Action 4 of the OECD BEPS Project that aimed at developing guidance on limiting base erosion involving interest deductions and other financial payments.
The interest limitation rules rely on a fixed ratio rule as the general rule and a group-wide rule as carve-out from the general rule. The fixed ratio rule limits an entity’s net deductions for interest and payments that are economically equivalent to interest to a percentage of maximum 30% of its earnings before interest, taxes, depreciation and amortisation (“EBITDA”).
By adding a carve-out to the fixed ratio rule, the specific circumstances of capital-intensive industries and investments relying heavily on external funding should be considered. Exceeding borrowing costs up to an amount of EUR 3m may be deducted without any limitation (a safe harbour provision). The interest limitation rules further provide for several exceptions (entities and loans excluded from the scope) and carry-forward mechanisms that allow companies to carry forward both non-deductible interest and unused interest capacity. On 8 January 2021, the Luxembourg tax authorities released a tax circular (the “Circular”) on the interpretation of the interest limitation rules.