On 29 January 2025, the Luxembourg Tax Authorities (“LTA”) issued a new Circular LITL No. 164/1 (the “New Circular”), replacing Circular LIR No. 164/1 dated 23 March 1998 (the “Previous Circular”) on the interest rates related to current account of associates or shareholders of entities subject to corporate income tax.
Key takeaways
The Previous Circular had established a fixed interest rate of 5% per annum for current accounts of natural person associates or shareholders of entities subject to corporate income tax, applicable from fiscal year 1998.
In contrast, the New Circular provides that the applicable interest rate is to be determined based on market conditions, reflecting the rate that would apply to a comparable loan agreed between independent operators in an open market, in line with the arm’s length principle. As a simplification measure however, the New Circular allows for an interest rate based on the annual rate applicable to consumer credits to be applied, provided it is supported by probative evidence. In this context, it is acceptable to refer to the monthly average rates published by the Central Bank of Luxembourg for credit institutions’ deposit and loan interest rates in euros for new contracts (taux d’intérêts appliqués par les établissements de credits luxembourgeois aux dépôts et credits en euros (nouveaux contrats de credits à la consummation)).
Beyond these updates, the New Circular retains the provisions from the Previous Circular, particularly regarding the interest calculation, but also the interest rate applicable when the associates or shareholders are related-party enterprises, where in such cases, the interest rate is determined on a case-by-case basis in accordance with the arm’s length principle and depends on certain factors.
The LTA’s position thus appears to align with the ruling of the Court of Appeal on 21 September 2023 (Case n° 48127C), which upheld BSP’s arguments that the application of the 5% rate under the Previous Circular was not legally binding and could not be automatically imposed on taxpayers, that mere reference to the Previous Circular does not demonstrate that the 5% rate reflects an arm’s length interest rate and accepted BSP’s approach of using the interest rate applicable to consumer credit as a valid comparable for determining an arm’s length interest rate on these current accounts. A few months later, on 14 November 2023 (Case n° 47754C), the Court reaffirmed its position, explicitly referencing the earlier case and denying the automatic application of the 5% rate by the LTA.
While the New Circular does not specify the fiscal year from which this new provision takes effect, tax inspectors (as opposed to taxpayers) are bound by the content of the Circular as soon as it is published,
Conclusion
In brief, the fixed 5% interest rate on current accounts for natural person associates or shareholders is no longer applicable. Instead, the interest rate must be determined in line with the arm’s length principle, with a simplification measure allowing reference to the interest rate applicable to consumer credit, as published by the Central Bank of Luxembourg, which for December 2024 stood at 4.82% for new contracts with a fixed rate for less than 5 years and 4.3% for new contracts with a fixed rate for more than 5 years.
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