The Luxembourg tax administration has issued Circular L.I.R. n° 164/1 on January 29, 2025, replacing the previous circular dated March 23, 1998. This update provides revised guidelines regarding the applicable interest rates for overdrawn current accounts held by shareholders or associates in entities subject to corporate income tax. 

Key changes and clarifications 

Shareholder or associate as a natural person 

  • The applicable interest rate must reflect market conditions that would be imposed on a similar loan agreed between independent parties under arm’s length principles, as per Article 164, paragraph 3 of the amended Income Tax Law of December 4, 1967. 
  • As a simplification measure, an interest rate aligned with annual consumer credit rates, evidenced through reliable sources, is deemed acceptable. 
  • Entities may refer to the average consumer credit rates published by the Central Bank of Luxembourg for the relevant financial year. 
  • Interest accrual is assumed to occur at the end of the fiscal year, calculated based on standard banking practices. 
  • If the current account remains overdrawn throughout the financial year, the interest can be calculated using the arithmetic average of the debit balances at the beginning and end of the year. 
  • If the account was not consistently overdrawn, or if significant fluctuations occurred, the arithmetic average of month-end balances should be considered. 
  • The provisions of Service Note L.I.R./N.S. n° 164/1 of June 9, 1993, remain applicable concerning criteria for a repayable overdrawn current account. 

Shareholder or associate as a related company 

  • For intercompany receivables arising from relationships between related entities, such as parent-subsidiary or group-affiliated entities, the interest rate must be determined on a case-by-case basis in accordance with the arm’s length principle, as outlined in Articles 56 and 56bis L.I.R. 
  • Factors influencing the interest rate include the currency of the receivable, exchange rate risks, hedging risks, refinancing costs, and the term of the receivable. 

Implications for businesses 

This revised circular underscores the Luxembourg tax administration’s commitment to applying arm’s length principles consistently across related-party transactions. Entities should ensure compliance by: 

  • Documenting the rationale for the applied interest rates. 
  • Monitoring published consumer credit rates for reference. 
  • Reviewing and adjusting intra-group financing arrangements to align with market conditions. 

Feel free to reach out to our team if you have any questions.