On 8 January 2021 the Luxembourg tax authorities issued a circular (Circulaire du directeur des contributions L.I.R. n° 168bis/1 du 8 janvier 2021 – hereafter the “Circular”) aiming to clarify certain items in relation to the application of the article 168bis of the Luxembourg income tax law (“LITL”) on interest deduction limitation. The interest deduction limitation rule originates from article 4 of Council Directive (EU) 2016/1164 of 12 July 2016 establishing rules to combat tax avoidance practices which have a direct impact on the functioning of the internal market (“ATAD directive”). This rule is based, like other measures introduced by the ATAD Directive, on the results of the Organization for Economic Co-operation and Development (“OECD”) Project against Base Erosion and Profit Shifting (“BEPS”), and more specifically on the final report relating to Action 4 of the BEPS Action Plan which was made public at the beginning of October 2015.
The purpose of this rule is to limit the erosion of the tax base by resorting to the deduction of excessive amounts of interest on all debts that a taxpayer may incur. The rule limiting the deductibility of interest does not make a distinction as to whether costs are related to debts contracted at national level, at a EU member State level or in a third-country; nor does it distinguish as to whether interest is payable to unrelated or related undertakings. Essentially, article 168bis LITL introduces a cap on the deduction of net financial costs – referred to as the exceeding borrowing costs – being limited to up to a percentage of 30% of fiscal EBITDA, while providing for a de minimis financial threshold allowing full deduction of additional costs up to a limit of EUR 3,000,000.
The Circular provides, inter alia, further clarification on article 168bis LITL in:
- giving further guidance on the definitions of borrowing cost, exceeding borrowing cost, fiscal EBITDA, adding also some explanatory examples; and
- addressing particularities related to various other items such as the report of exceeding borrowing costs, unused interest deduction capacity, exclusion of certain exceeding borrowing costs (e.g. grandfathering clause and debts financing public infrastructure projects), exclusion of stand-alone entities and financial undertakings.
You can find the full version of the Circular (available only in French) here.
For additional information with respect to this newsletter and the Circular, please contact us:
Denis Van den Bulke Krasimir Kehayov
Partner Senior Associate
 Only available in French