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.
|Controlled Foreign Company Rule (CFC)||To prevent profit shifting across countries|
|Switchover Rule||To prevent double non-taxation of certain income|
|Exit Taxation||To prevent companies from avoiding tax when re-locating assets|
|Interest Limitation Rule||To 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 Rule||To ensure no mismatch occurs where member states apply different characteristics to the same taxpayer|
|General Anti-Abuse Rule||To 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.
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.
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.
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.
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.