On January 29, 2025, the Luxembourg tax authorities published Circular L.I.R. No. 164/1, which replaces the previous version issued in 1998. This new regulation redefines the criteria for setting interest rates on shareholder current accounts, aligning them with 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 fixed rate of 5% that had been applied since 1998. With the new circular, rates must be determined based on market conditions, avoiding undue advantages for shareholders.
Interest Rates for Individual Shareholders’ Current Accounts
For individual shareholders, the circular establishes that the interest rate must be in accordance with the arm’s length principle. In other words, the company cannot grant more favorable conditions to a shareholder compared to what it would offer to a third party in similar circumstances.
As a practical guide, the circular allows interest rates to be calculated with reference to the consumer credit rates published by the Luxembourg Central Bank, provided that this is justified with adequate documentation.
Interest Rates in Transactions Between Related Companies
When the current account belongs to an associated company, the arm’s length principle also applies. The financial conditions should reflect what would be agreed between independent parties, guaranteeing that the interest rate is fair and in line with the market.
The circular emphasizes the importance of using appropriate methodologies to determine the interest rate in transactions between related companies. This includes consideration of factors such as the credit profile of the borrowing entity, the term of the financing and the reference rates available in the market.
In addition, it is emphasized that, in case of discrepancies between the applied rates and the market rates, the tax authorities may adjust the tax base of the companies involved. These adjustments are similar to those made in the area of Transfer Pricing, with the aim of preventing the erosion of the tax base through financial transactions that do not reflect the real market value.
Multinational companies and corporate groups should pay special attention to the documentation and justification of the interest rates applied in intercompany transactions to avoid potential questioning by the tax administration.
Conclusion
Circular L.I.R. No. 164/1 modernizes the treatment of interest rates in Luxembourg, eliminating obsolete criteria and establishing an approach based on market equity. Companies and shareholders must ensure that their financial structures comply with these new provisions to avoid tax risks and adjustments by the tax administration. Furthermore, the application of the arm’s length principle in these transactions is essential to guarantee transparency and alignment with international best practices in corporate taxation.