On January 29, 2025, the Luxembourg tax authorities published I.T.A. Circular No. 164/1, which replaces the previous version issued in 1998. This new regulation redefines the criteria for setting interest rates on shareholders’ current accounts, aligning them with the Arm’s Length Principles and more up-to-date methodologies.
Key Changes in the Determination of Interest Rates
One of the most significant changes is the elimination of the 5% fixed rate applied since 1998. The new circular forces the rates to be determined under market conditions, avoiding undue advantages for shareholders.
Interest Rates for Current Individual Shareholder Accounts
For individual shareholders, the circular establishes that the interest rate must be under the Arm’s Length Principle, i.e., the company may not grant more favorable conditions to a shareholder compared to what the former would offer to a third party in similar circumstances.
As a practical guide, the circular allows the calculation of interest rates according to the consumer credit rates published by the Central Bank of Luxembourg if justified by appropriate documentation.
Interest Rates in Related Party Transactions
When the current account belongs to an associated company, the Arm’s Length Principle also applies. The financial conditions must reflect the amount agreed among independent parties, ensuring that the interest rate is fair and under the market.
The circular emphasizes using appropriate methodologies to determine the interest rate in related party transactions. This includes considering factors such as the borrower’s credit profile, the term of the financing, and the benchmark rates available in the market.
In addition, for discrepancies between the rates applied and the market rates, the tax authorities may adjust the taxable base of the companies involved. These adjustments are similar to those performed in the Transfer Pricing area to prevent the erosion of the tax base through financial transactions that do not reflect the actual market value.
Multinational companies and corporate groups should focus on the documentation and support of interest rates applied in intercompany transactions to avoid potential questioning by the tax administration.
Conclusion
Circular I.T.A. No. 164/1 modernizes the treatment of interest rates in Luxembourg, eliminating obsolete criteria and establishing an approach based on market fairness. Companies and shareholders must ensure that their financial structures comply with these new provisions to avoid tax risks and adjustments by the tax administration. In addition, applying the Arm’s Length Principle in these transactions is essential to ensure transparency and alignment with international best practices in corporate taxation.
Source: Mondaq