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ATAD 1 - Luxembourg tax authorities issue administrative guidance on application of Interest Limitation Rules


In brief

On 18 December 2018, the Luxembourg Parliament voted to approve the law implementing the EU Anti-Tax Avoidance Directive laying down rules against tax avoidance practices that directly affect the functioning of the internal market ("ATAD 1") into Luxembourg domestic law (the "ATAD 1 Law"). It notably set out, in article 168bis of the Luxembourg tax law ("LITL") new interest limitation rules ("ILR"), in line with Article 4 of ATAD 1.

The ATAD 1 Law came into force on 1 January 2019 and is largely applicable to tax years starting on or after 1 January 2019.

On 8 January 2021, the Luxembourg tax authorities issued an administrative circular ("the ILR Circular") providing some guidance on their interpretation of the ILR.

In detail

Article 168bis L.I.R. introduces a cap on the deduction of net financial costs, referred to as exceeding borrowing costs ("EBC"), up to a percentage of 30% of fiscal EBITDA, while providing for a de minimis financial threshold allowing full deduction of EBC up to a limit of 3,000,000 euros. 

The ILR Circular sets out the Luxembourg tax authorities’ interpretation and intended practical application of Article 168bis LITL. It notably covers the following items:

  • Concepts of borrowing costs and EBC: 

    • The law defines the concept of borrowing costs as interest expenses on all forms of debt, other costs economically equivalent to interest and expenses incurred in connection with the raising of finance and follows this with a non-exhaustive list of examples. The ILR Circular comments on each of the elements of the definition as well as on the examples, although without giving very exhaustive definitions;

    • The limitation of deduction is applicable to EBC, which are defined as the tax-deductible borrowing costs that are in excess of the taxable interest revenues and other economically equivalent taxable income of the taxpayer. Article 168bis LITL does not provide any definition or guidance for interpretation of what constitutes interest revenue and other economically equivalent taxable income under Luxembourg domestic law. The Circular confirms that a symmetrical approach should be followed, i.e. what is regarded as interest expenses on all forms of debt payable or other economically equivalent to interest shall be regarded as interest revenue and other economically equivalent revenues when accrued on all forms of debt receivables (and vice-versa);

    • The ILR Circular further confirms that the limitation on deduction only concerns items which remain deductible after application of other rules, including notably the anti-hybrid rules of ATAD 2, and the participation exemption "recapture" rules.

  • Fiscal EBITDA: the guidance reiterates that exempt income, and expenses connected to such exempt income, are not to be taken into account for the computation of EBITDA.

  • Grand-fathering rule: When determining the amount of exceeding borrowing costs, a taxpayer may exclude exceeding borrowing costs arising from debt concluded before 17 June 2016. The exclusion shall not extend to any subsequent modification of the debt.

    The ILR Circular provides some guidance on what should be considered or not as subsequent modification of the debt, and gives a series of examples of changes which are to be seen as amendments and changes which do not lead to an amendment. It notably states, amongst other examples, that:

    • additional draw-downs on an existing facility, within the limits of the terms and conditions of the facility as applicable before 17 June 2016, are not to be seen as a subsequent modification of the debt. Borrowing costs relating to these additional draw-downs are therefore not subject to the ILR;
    • modification of one or more of the parties concerned, post 17 June 2016, is to be seen as an amendment when such a modification was not contractually foreseen before 17 June 2016. However, restructuring such as mergers or divisions do not jeopardize the benefit of the grand-fathering rule to the extent, these operations, as such, do not generate any change in the initial conditions of the loan.

The ILR Circular also provides some guidance on rules linked to the carry forward of EBC, or of unused interest capacity, and to the specific exemption applicable to long-term infrastructure projects.

In conclusion

In the light of this further guidance, taxpayers should continue to assess their situation considering the potential impact of the interest limitation rules of ATAD 1 Law which are effective as from the tax years starting as from 1 January 2019. 

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