Modernisation of Luxembourg's Accounting Law: a new Draft Bill sets the tone!

Bottom-up approach 

Considering that small-sized undertakings represent a large majority of Luxembourg entities, the Draft Bill outlines a shift from the current top-down structure to a bottom-up approach in Luxembourg's accounting framework. This change aims to improve clarity and applicability by categorising the common regime for small entities as the norm, while additional obligations are layered for medium and for larger entities. Additionally, a list-based approach is suggested to specify the scope of accounting obligations.

Creation of a micro-entity regime and increased thresholds for small-sized entities 

The Draft Bill proposes to create a new category for micro-entities and to increase the thresholds for small-sized entities to the maximum allowed by the Accounting Directive (2013/34/EU). It should be noted that the Draft Bill excludes holding entities from such a micro-entity regime.

While the increased thresholds for small-sized entities will give a bit more flexibility and should reduce the administrative burden of several entities currently classified as medium-sized, the introduction of the micro-entity regime aims to fill the gap with neighbouring countries. 

This new regime aims to encourage entrepreneurship and reduce these smaller entities’ administrative burden. The most important exemption for these micro-entities is the cancellation of the notes to the accounts. These micro-entities will still be subject to the Luxembourg Standard Chart of Accounts and to the eCDF forms and will have the obligation to prepare their annual accounts following the historical cost convention. Solely limited information will have to be disclosed next to the balance sheet. 

Audit requirement for large holding companies

A concept of large holding companies has been introduced and defined as those whose balance sheet exceeds EUR 500 million. Such large holding companies will be subject to the obligation to have their financial statements audited annually by an independent auditor (Réviseur d’Entreprises Agréé).

Filing requirements for SCSp

The Draft Bill provides that Special Limited Partnership Companies (SCSp) are generally exempt from the obligation to prepare annual financial statements, provided that they annually submit their trial balances as outlined in the Luxembourg Standard Chart of Accounts (SCA). 

However, certain SCSp entities, namely those falling within the sector of insurance companies, credit institutions, and other SCSp subject to prudential supervision by the CSSF, as well as those preparing their annual financial statements according to IFRS, those with the status of securitisation companies not subject to prudential supervision by the CSSF, and those with the status of RAIF, are exempt from filing their trial balance under the SCA format but are required to establish financial statements in accordance with Title III of the New Law.

Abolition of the “Commissaire” (Supervisory auditor)

It has been assessed that the function of “Commissaire” (Supervisory auditor) is an outdated concept which tends to confuse foreign investors, lacks clear objectives, and risks damaging Luxembourg's credibility. To address this, the Draft Bill recommends abolishing the "Commissaire" (Supervisory auditor) role. This change aims to enhance clarity, reduce burdens, and modernise Luxembourg's regulations while allowing flexible financial oversight options for small-sized undertakings which can request a contractual audit on a voluntary basis if needed.

New requirements for entities in liquidation / dissolved 

The draft legislation clarifies that the general accounting principles continue to apply before and after dissolution with liquidation, with the necessary adaptations for the accounting principles and valuation methods that such operational discontinuity induced.

If the financial statements of a company dissolved in liquidation are not approved by the general meeting, companies in liquidation are required to prepare and file interim annual liquidation financial statements within 6 months of the end of the financial year or of the anniversary of the liquidation. Such information will be publicly available on the RESA for the companies which were required to publish their financial statements.

Upon the closure of the liquidation, the closing financial statements have to be filed with the Trade Register and, depending on the entity’s legal form, they must also be published in the RESA (e.g.: S.A. or S.à r.l.).

Introduction of the definition of control for consolidation purposes

The definition of control, a key concept for consolidation, has been introduced in the New Law as the power to decisively influence or to govern the management and financial policies of another company; specifically, control results exclusively from the following situations:

a) the parent undertaking has the majority of the voting rights as shareholders/partners of another undertaking; or

b) the parent undertaking has the right to appoint or dismiss the majority of the members of another undertaking’s administrative, management or supervisory body; or

c) the parent undertaking alone controls, by virtue of an agreement concluded with other shareholders or partners of this undertaking, the majority of the voting rights of the shareholders or partners of the latter.

It is specified in the comments on the Draft Bill that the concept of agent versus principal would apply in certain cases where there is competition between at least 2 of the 3 situations (e.g.: determination of control between general partner vs limited partner in certain partnership situations).

Some other changes

• The New Law has seen an increase in explanations for many provisions which has been done through the integration of the CNC recommendations directly in the Accounting Law, in particular regarding:
  • Presentation currency of the financial statements (Q&A 22/06);
  • Correction of errors (Q&A 21/025);
  • Change of accounting methods, valuation methods and accounting estimates (Q&A 21/024R);
  • Liquidation basis of accounting (Q&A 21/022)
  • Optional substance over form principle (Q&A 20/021);
  • Categorisation of undertakings, interpretation of the repetition criteria (Q&A 19/019)
  • Floating financial years (recommendation 14/003).

• The balance sheet and the income statement layout will be reintegrated in the Accounting Law. Currently, they are defined by the Grand Ducal Regulation dated 18 December 2015.
• Recognition of the possibility to record deferred tax assets on both a stand-alone and a consolidation basis when it is highly probable that the taxes will be recoverable in the foreseeable future. 
• Recognition of the possibility - in exceptional cases - to have intangible assets with indefinite useful life:  in the situation where it can be reliably estimated that the economic life of intangible assets is not limited in time, there is no longer a need to have systematic depreciation.  Such intangible assets will be subject to impairment tests, in line with IAS 36 or any other framework of a European Union Member State. The unlimited nature of the economic life should be properly disclosed and should be reassessed on a yearly basis.
• New rules regarding the financial year duration in line with the current market practice. If the general rule is that financial years cannot exceed 12 months, limited exceptions are now possible, such as for newly created undertakings, whose first financial year can go up to 18 months. For transitional financial years (when undertakings change their closing date), it is clarified that it cannot exceed 12 months. Finally, the floating financial years have also been incorporated in the New Law.
• The current article 27 of the Accounting Law allowing specific derogations from the Accounting Law by the Ministry of Justice will be restricted to align with the current practice. The new article will solely allow entities to ask the Ministry of Justice for a derogation for preparing consolidated accounts under a different accounting framework from the ones allowed by the law in Luxembourg (i.e. Lux GAAP or IFRS as endorsed by EU). The derogative framework will have to be recognised as equivalent by the EU Commission, i.e. in line with decision 2008/961/EC of the European Commission from 12 December 2008. 
• The concepts of significant influence and joint control have been defined.
• In order to align with the Accounting Directive’s usual terminology, there has been a change in the New Law to adapt the wording to the Accounting Directive; e.g., annual accounts have been replaced by financial statements and profit and loss by income statement.