17 May 22

Luxembourg - Interest Limitation Rules

On 20 June 2016, the European Council adopted Directive (EU) 2016/164, known as the Anti-Tax Avoidance Directive (ATAD), which introduced rules against anti-tax avoidance practices within the internal market. The directive contains a number of legally binding anti-abuse measures which member states were required to apply from 1 January 2019.

Title
Controlled Foreign Company Rule (CFC)To prevent profit shifting across countries
Switchover RuleTo prevent double non-taxation of certain income
Exit TaxationTo prevent companies from avoiding tax when re-locating assets
Interest Limitation RuleTo discourage artificial debt arrangements designed to minimise taxes and to ensure all transactions are entered by way of a bargain at arm’s length
Anti-Hybrid RuleTo ensure no mismatch occurs where member states apply different characteristics to the same taxpayer
General Anti-Abuse RuleTo counteract aggressive tax planning when other rules don’t apply

Interest Limitation Rules (ILR) seek to restrict tax-deductible interest expenses to 30% of EBITDA in a given period.

ATAD provides for a number of exemptions from the scope of ILR:

  • A de minimis exemption for interest expenses below €3 million;

  • Standalone entities given that they do not make payments of interest to associated entities;

  • Legacy debt in place before 17 June 2016, to the extent that it has not be modified;

  • Loans used to fund long term public infrastructure projects;

  • Certain ‘financial undertakings’ such as pension schemes, banks, funds and insurance undertakings.

Securitisation Entities

ILR was transposed into Luxembourg legislation in Article 168bis of the Luxembourg Income Tax Law which took effect in respect of financial years starting on or after 1 January 2019 and applies to resident companies and domestic permanent establishments (PEs) of non-resident entities subject to Luxembourg corporate income tax.

Securitisation entities, as defined in Article 2(2) of the EU Securitisation Regulation, were added to the list of financial undertakings thereby excluding them from the scope of rules on interest limitation.

Response

On 14 May 2020, the European Commission issued a letter of formal notice to Luxembourg requiring it to correctly transpose the interest limitation rules into national law. The Commission stated that Luxembourg’s inclusion of securisation entities within the definition of ‘financial undertakings’ went beyond permitted exemptions of ATAD. In December 2021, the European Commission published a reasoned opinion in which is stated that the list of financial undertakings within ATAD 1 is to be understood as static, which cannot be extended to include regulated entities other than those already featured therein.

Update

On 9 March 2022, the Luxembourg Parliament introduced draft legislation which proposes to amend Article 168bis of the Luxembourg income tax law, excluding securitisation vehicles from the list of financial undertakings. If passed, the change in legislation will apply from the 1 January 2023.

Next Steps

With EU securitisation vehicles now firmly in scope of ATAD 1 interest limitation rules, Luxembourg vehicles which have to date benefitted from this exemption will need to engage tax advisors to assess the impact on their structures.

For further information, please contact Patrick Robinson.