On 29 January 2025, the Luxembourg tax authorities issued Circular L.I.R. n° 164/1, replacing the previous circular dated 23 March 1998. The new circular introduces changes regarding the interest rates applicable to individual and corporate shareholder current accounts.
Determination of applicable interest rate where shareholder is an individual
The new circular abolishes the fixed 5% interest rate that had been in place since 1998. Now, the interest rate applicable to shareholder current accounts (i.e. current account receivables held by Luxembourg companies from their shareholders) must be determined in accordance with the arm's length principle.
In particular, a receivable will not be at arm's length if a shareholder directly or indirectly receives benefits from a company that they would not normally have obtained if they were not a shareholder.
As a simplification measure, the circular provides that the interest rate may be determined by reference to the annual consumer credit rates, provided that such an approach is supported by relevant evidence. In this context, the Luxembourg company may refer to the average of the monthly rates of the relevant financial period, as included in the statistics published by the Central Bank of Luxembourg regarding the interest rates applied by Luxembourg credit institutions to consumer loans.
The circular specifies the methods for calculating interest in general and in certain specific circumstances. It also reiterates that the administrative practice regarding the characterisation of shareholder current accounts (as receivable or hidden profit distribution) remains applicable.
Determination of applicable interest rate where shareholder is an associated enterprise
The circular clarifies that the arm's length principle remains the standard for determining interest rates between associated enterprises. The interest rate will depend on a number of factors, notably including the currency, the foreign exchange risk, the hedging risk, the refinancing interest rate and the maturity of the receivable.
Implications
Luxembourg companies are advised to review their internal transfer pricing policies and ensure compliance with these new guidelines.
Individual shareholders are also advised to review their tax position in the light of these developments.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
