Luxembourg Tax Unity Regime

On 26 April 2019, the Luxembourg Parliament adopted Budget Law (Bill 7450) for the financial year 2019 (the "Law").

Amongst other tax measures included in the Law, one of the most salient concerns the reshaping of Article 164bis of the Luxembourg income tax law (the "LITL") providing for a tax unity (intégration fiscale) regime. This reshaping was prompted mainly by the option offered by the anti-tax avoidance directive ("ATAD")1 to apply the new interest limitation rule laid down in Article 168bis LITL at the level of the tax unity.

The Law was also the opportunity to codify into new article 164bis LITL provisions in relation to the tax unity contained until then in different sources, i.e. the Grand Ducal Regulation of 18 December 2015 (the "Regulation") and Circular L.I.R. No. 164bis/1 of 27 September 2004 of the Luxembourg direct tax authorities (the "Circular").

  1. Application of the interest limitation rule at the tax unity level

    As a new measure stemming from the ATAD, the deduction of the taxpayer's excess borrowing costs is limited to EUR 3 million or 30% of the taxpayer's EBITDA (i.e. taxable earnings before interest, tax, depreciation and amortisation), whichever is the higher. According to Article 168bis LITL, the taxpayer's borrowing costs are in excess if 'interest expenses on all forms of debt and other costs economically equivalent to interest and expenses incurred in connection with the raising of finance' ("Interest Expenses") exceed the 'interest revenues and other economically equivalent taxable revenues' ("Interest Income").

    With the Law, the above rule applies at group level in the case where a tax unity has been elected (unless the members decide to apply it on a standalone level, see below). Interestingly, Luxembourg did not take this option offered by ATAD when first implementing the interest deduction limitation rule into Luxembourg law2 in the event that the option provided for by the ATAD is not transposed, the calculation method on an isolated basis would in practice trigger unexpected adverse tax consequences for the tax consolidated group.. The new Article 164bis LITL opens up such a possibility in an endeavour to maintain Luxembourg's competitiveness within the European Union.

    As a result, the tax unity's exceeding borrowing costs will be determined at the level of the integrating company (i.e. the head of the tax unity). The Interest Expenses as well as the Interest Income of the integrating company will...

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