Luxembourg - Tax

On 11 December 2024, a package of tax measures, introduced through draft laws 8388 and 8414, was adopted by the Luxembourg parliament.

For detailed description of the adopted measures introduced, please read our quarterly update editions for Q2 and Q3 for 2024.

Before being voted on, draft law 8414 was amended, introducing certain clarifications in respect to the application of the Article 168bis of the Luxembourg Income Tax law (“LITL”) to Luxembourg interest deduction limitation rules. The amended draft introduces a notion of a single company worldwide group (“SCWG”).

The term SCWG encompasses entities that (i) are not part of a consolidated group for financial purposes and (ii) are not considered autonomous, stand-alone entities. In other words, these entities are not part of a consolidated group and they have one or more associated entities and/or a permanent establishment(s) outside of Luxembourg, within the meaning of article 164ter 2 LITL. For these SCWGs, the total of their exceeding borrowing cost is deductible if they can prove that the ratio of the single entity equity over its total assets is superior or equal to the same ratio of the group (or is lower than 2%). This exemption is applicable on the taxpayer’s request and is subject to specific anti-abuse rules.

This technical precision is welcomed by the Luxembourg capital markets and specifically with regard to securitisation companies financed with notes to third parties, as it is likely that these entities will not be considered affected by the interest deduction limitation rule (the “IDLR”), regardless of the assets they hold.

The updated IDLR will be applicable as from fiscal year 2024.

On 22 November 2024, the Luxembourg district court (Tribunal d’arrondissement) ruled on the VAT treatment of directors remuneration (tantième) received by a director of a Luxembourg company. This decision is in line with the European case law described in the quarterly updated edition Q4 of 2023. In summary, both decisions consider that the directors in the case at hand should be considered to be not acting independently in the absence of any personal liability and economic risk on the part of such directors. Since they are not considered independent service providers, their activities should fall outside the scope of VAT.

On 11 December 2024, following the decision of the Luxembourg district court, the Luxembourg VAT authorities issued an administrative circular (Circular 781-2, the “Circular”). While the Circular confirms that fulfilment of the conditions set out in the two above-mentioned decisions is to be analysed on a case-by-case basis, it also provided some welcome clarifications, such as:

• confirmation that the application is not limited to directors of the public limited companies, but it extends to companies with other legal forms as well;
• the rules are applicable to both individuals and legal persons;
• simplified regularisation process and pertaining guidance are already made available and the directors may benefit from them during the first half of 2025.

This is a very welcome decision as it ends a long lasting discussion and uncertainty with respect to the application of Luxembourg VAT to directors’ fees.