Luxembourg To Reduce Corporate Tax Rate And Amend Interest Limitation

; posted on
March 7th, 2019

The Ministry of Finance in Luxembourg presented the Budget 2019 to the parliament. Citing the need to remain competitive, the government of Luxembourg has proposed a 1 percent point reduction in the corporate tax rate and a more flexible interest expense limitation for consolidated corporate groups (fiscal unity).

Corporate Income Tax (CIT) Rate

Effective January 1, 2019, the standard corporate income tax rate will be reduced from 18% to 17%. As a result, the combined corporate income tax rate including the surcharge for the employment fund and the municipal business tax will be reduced from 26.01% to 24.94%.

The new rate will apply to taxable profits exceeding €200,000. However, profits not exceeding €175,000 will be taxed at a reduced rate of 15% and profits between €175,000 and €200,000, will be taxed at intermediary rate, corresponding to €26,250 plus 31% of the income exceeding €175,000.

In addition to the CIT rate, the proposal also addresses the Small Medium Enterprises (SMEs). The threshold for the application of the 15% rate for SMEs will be increased from EUR 25,000 to EUR 175,000.

Interest Limitation

From 1 January 2019, Luxembourg has implemented the interest deduction limitation of the European Union Anti-Tax Avoidance Directive (EU) 2016/1164 (2016) (ATAD 1 Directive). The maximum deduction is equal to 30% of the EBITDA or EUR 3 million.

In its budget bill, the Government provides the implementation of the group escape. As a result, the deduction rules can be applied at the level of the group. Group companies have a choice between applying the interest deduction limitation at the level of the individual entity or group. A choice made is binding for the whole duration of the fiscal unity.

To the extent the group companies elect for fiscal unity, it should be noted that the “all or nothing” principle applies, meaning that the application of the interest limitation rules on a stand-alone basis will concern all the companies belonging to the same fiscal unity, and not just some of them.

At the level of fiscal unity, the amount of borrowing costs will correspond to the sum of borrowing costs of all members incurred during the time such member belongs to the fiscal unity. Exceeding borrowing costs of the head of the fiscal unity will correspond to the excess of borrowing costs over interest income and other economically equivalent taxable revenues of all members of the fiscal unity. Only the head of the fiscal unity will be able to carry forward exceeding borrowing costs and unused interest capacity.

Source: Government of Luxembourg

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