Impact on Individual Shareholders
Under the previous circular letter, a flat interest rate of 5% was applicable to shareholder current accounts. The new circular aims to align the interest rate with the arm’s length principle already applicable to corporate shareholders, referring to independent parties acting on a free market, such as provided by article 164 paragraph 3 of the Luxembourg income tax law (“LITL”).
To simplify the approach, the new circular letter tolerates the taxpayer to refer to the average of monthly interest rates applicable to consumer credits as one of the benchmarks, instead of relying on a full transfer pricing study.
Impact on Corporate Shareholders
For corporate shareholders, the new circular letter does not introduce any significant changes in comparison with the old circular letter of March 23rd, 1998, that it replaces. It confirms the existing approach by explicitly referencing the transfer pricing rules outlined in Articles 56 and 56bis of the LITL, such as illustrated by article 164 paragraph 3 of LITL A case-by-case analysis complying with the arm’s length principle is thus required.
Observations
This replacement is the occasion to recall that the arm’s length principle is a very old practice in Luxembourg, followed by the LTA for more than 25 years and expressly confirmed by article 164 paragraph 3 LITL for any business relationships between a shareholder and its company.
The more recent articles 56 and 56bis LITL precise and elaborate these principles without representing a reform of the Luxemburg tax system governed by the arm’s length principle since many decades.
This new circular letter of January 29th, 2025, is thus a mere update, the only change brought by this letter being the abandonment of the flat interest rate of 5% for individual shareholders.
Should you wish to discuss your specific situation, please reach out to your usual contact at Tiberghien Luxembourg or any of the authors of this publication.
