Regulatory Transformation in Luxembourg
As of January 2025, Luxembourg has implemented new Transfer Pricing rules that significantly modify the treatment of intra-group transactions, particularly emphasizing the interest rates of current accounts between related companies and the implications for shareholders. This reform is a turning point in the country’s tax approach, aligning it with international standards and strengthening tax transparency.
Circular No.164/1, issued on January 29, 2025, distinguishes two cases: The first where the shareholder or partner is an individual and the second where this is a related company.
The Shareholder or Partner Is an Individual
Taxpayers must set the interest rate according to market conditions, i.e., those agreed by independent parties in a similar transaction. In addition, the Circular adopts a simplification measure by allowing the use of an interest rate based on the annual rate applied to consumer credits published by the Central Bank of Luxembourg.
The Shareholder or Partner Is a Related Company
The Circular emphasizes that the interest rate must be defined, following the Arm’s Length Principle established in Articles 56 and 56 bis of the Income Tax Law. In addition, it points out that the interest rate varies according to factors such as the currency of the receivable, the exchange risk, the type of refinancing, the term, and other relevant conditions.
Implications
Increased Scrutiny for Intercompany Accounts
Luxembourg now requires assessing whether the terms of these transactions reflect what independent third parties would have agreed, particularly in terms of interest charges and repayment deadlines. Thus, accounts receivable and payable can no longer be indefinitely maintained without economic support.
Direct Effects on Shareholders
Another key implication concerns that the new rules could generate tax adjustments that affect shareholders directly. If a company is deemed to have received non-Arm’s Length financing, the tax authorities could recharacterize these funds as an equity contribution, which would modify the tax treatment of the borrower and the shareholder.
Conclusions and Recommendations
Implementing these rules requires multinationals with transactions in Luxembourg to review their intra-group financial structures and reinforce Transfer Pricing documentation. It is crucial to be proactive to avoid unexpected tax adjustments.
Is Your Company Prepared for This Change?
At TPC Group, we assist global companies regarding new tax requirements. Contact us to assess the effects of these rules on your intra-group transactions and ensure Luxembourg tax compliance.
Source: International Tax Review / Ministère des Finances du Luxembourg, Circulaire LIR 164/1 du 29 janvier 2025