Luxembourg: Accounting Reform In Luxembourg - Draft Law Submitted To Parliament

Luxembourg government launched the first step of a reform of the Luxembourg accounting legal framework. The main objective is to consolidate into one single law the Luxembourg accounting rules currently scattered across several different laws. At the same time, the government intends to clarify / modernize some of those provisions. This is the purpose of the Draft Law n°8286 deposited end of July before the Luxembourg Parliament.

Presentation

The purpose of the draft law n°8286 (the Draft Law) is to overhaul the Luxembourg accounting legal framework applicable to companies with the aim to make it "more readable and intelligible, better structured and correctly articulated". Currently, Luxembourg accounting legal basis are to a large extent included in the title II of the law 19 December 2002 but with large aspects being split over different laws, such as the Code of Commerce or the Company Law.

The Draft Law intends to gather all these rules in a new law, fully dedicated to accounting. The consolidation is however limited to general accounting rules: accounting rules relating to a particular sector would not be consolidated. The law also includes provisions of the draft law 8158 on communication by certain undertakings of information to their corporate income tax.

Given the importance of the matter and to facilitate future amendments of the law, the government has retained the so-called index method, instead of the continuous numbering, as it is already the case in the Company Law. Still with the aim to improve readability, each article of the law would now have a title.

One important change in the law is the bottom-up approach. The idea is that the rules would now be designed for the small undertakings and there are specific provisions for micro, medium-sized and large undertakings, when need be. As mentioned in the introduction of the Draft Law, 97% of undertakings filing annual accounts would qualify as small companies.

The provisions of the Draft Law are expected to enter into force for accounting years starting on or after 1^st January 2025.

Scope

As a consequence of the consolidation, the scope of companies subject to the law would no more be limited by the Code of Commerce and would then significantly increase. In addition to commercial companies (with or without legal personality), it will notably apply to civil companies, mutual funds but also individuals and branches of foreign companies.

The Draft Law maintains the distinction between small, medium-sized and large undertakings but introduces (1) the category of micro-undertakings and (2) new thresholds for these categories.

The creation of the category of micro-undertakings is allowed by EU Directive 2013/34/UE and motivated by the fact they are estimated to represent 37% of the undertakings filing annual accounts in Luxembourg. Their accounting regime is not simplified but they are authorised to not publish any notes to the accounts. The scope of this category is defined be reference to certain threshold (see below) but excludes certain activities, such as holding activities or RAIF.

Here are the thresholds applying for each undertaking. An undertaking should shift from one category to another once it exceeds two of the three thresholds listed below

Holding undertakings

Given their importance in Luxembourg, it was necessary to introduce some specific measures for holding undertakings. This has been addressed first by inserting a new definition of the holding undertaking, which now reads as an undertaking whose main activity is the holding, financing or management of financial participations or equivalent securities to be held on long term basis or in view of future disposal. Holding undertakings are not subject to any specific accounting regime apart that they are excluded from the regime of micro undertakings and they have to mention in the notes to the accounts information relating to the companies in which they hold a participation.

In a second step, the Draft Law introduces the concept of "large holding undertakings", defined as a holding undertaking with a balance sheet total of more than EUR 500 million. In addition to their other accounting obligations, these undertakings would be subject to a statutory audit of their annual accounts by an approved auditor.

Accounting principles

Luxembourg GAAP would remain based on traditional Luxembourg accounting principles, such as going concern, consistency in accounting principle and accounting methods, prudence, accrual accounting, intangibility of the balance sheet and reliability of financial information.

However, while the legal analysis of transactions, the principle of prudence and valuation at historical acquisition cost would remain the rule, some options resulting from the international accounting rules have also be maintained. This is the case of the valuation at fair value or substance approach on the representation of certain categories of transactions. To ensure a better consistency between these options and the international rules, direct references to the relevant IFRS provisions would be included in the law.

The rules on the valuation by the equity method (mise en equivalence) would also be maintained.

Finally, the Draft Law would also maintain the right for companies to prepare and present their annual and/or consolidated financial statements in IFRS.

Liquidation of companies

The Draft Law intends to fill a gap into the accounting regime of company liquidated or put in liquidation. Indeed, it is usually admitted that such entities are not subject to common accounting rules with the consequence that they usually do not draw up, audit, file or even publish annual accounts for the period of liquidation.

The Draft Law explicitly provides that ordinary accounting law continues to apply – with adaptations - to companies liquidated or in phase of liquidation. Those companies would then be have to prepare financial statements during the liquidation phase, at each year-end and on closing of the liquidation.

These statements would be published with the Luxembourg Trade Register after have been presented to the general meeting of shareholders. They should however not be approved by the general meeting.

Tax information

The draft law would also include provisions on the tax information to be reported by large groups. Such provisions were initially included in draft law 8158. These provisions are the implementation in Luxembourg of Directive (EU) 2021/2101, whose aim is to enable a more informed public debate on the level and location of taxes effectively paid by multinationals and groups operating in the EU.

These provision target groups or stand-alone entities based in Luxembourg, with activities in and outside Luxembourg, and showing a turnover of more than EUR 750 millions on a consolidated basis. These group should report in the Luxembourg Trade Register certain information on corporate taxes suffered in each Member State including, among others, their turnover, the profit or loss before taxes and the amount of corporate income taxes due. Similar obligations apply to certain subsidiaries of groups whose ultimate parent company is not resident in the EU.

Account 115

It is worth noting that the Draft Law does not contain any provision regarding the contribution non remunerated by shares (account 115 of the Luxembourg accounting plan).

Statutory auditor (commissaire aux comptes)

The Draft Law proposes to abolish the function of statutory auditor ("commissaire aux comptes"), which in the absence of framework defining the objectives and conditions for the exercise of this mission, has become obsolete in Luxembourg.