Tax Update in Luxembourg Regarding Interest Rates for Shareholder Current Accounts

On 29 January 2025, the Luxembourg tax authorities published Circular L.I.R. n° 164/1 (Circular), which replaces the previous circular L.I.R. n° 164/1, dated 23 March 1998. The Circular updates the rules related to interest rates for shareholder current accounts.

The rules vary based on whether the shareholder current account is held by an individual or by an associated enterprise.

1. The shareholder current account is held by an individual

First, it should be noted that the fixed interest rate of 5% included in the circular of 23 March 1998 is no longer valid.

In line with continuous developments in transfer pricing matters, the Circular states that the interest rate applied to a shareholder current account held by an individual should be set based on free-market conditions that would have applied to a loan agreed upon between independent operators; this is in line with the arm’s length principle, reflected in article 164, paragraph 3, of the Luxembourg income tax law.

For simplicity’s sake, an interest rate corresponding to the annual rate for consumer credit is accepted. In this context, the rates published monthly by the Central Bank of Luxembourg on the interest rates applied by Luxembourg credit institutions to deposits and loans in euros (new consumer credit contracts) are applicable.

The Circular also states that interest is accrued in principle at the end of the financial year and calculated in accordance with standard banking practices.

2. The shareholder current account is held by an associated enterprise

The Circular states that the interest rate has to be determined on a case-by-case basis, in accordance with the arm’s length principle referred to in articles 56, 56bis, and 164, paragraph 3, of the Luxembourg income tax law.

The interest rate will be based on criterion such as currency, foreign exchange risk, hedging risk, refinancing interest rate, and maturity of the claim.

What’s Next?

This new guidance reinforces the necessity of having appropriate transfer pricing documentation to sustain the arm’s length principle of intra-group transactions. It is therefore important for taxpayers to assess the potential impact of this updated guidance on their accounts.

 

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